<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- - - - - - - - -
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended December 31, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from _ _ _ _ _ _ _ to _ _ _ _
Commission File Number 1-10492
EPITOPE, INC.
(Exact name of registrant as specified in its charter)
OREGON NO. 93-0779127
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
8505 SW Creekside Place
Beaverton, Oregon 97008-7108
(Address of principal executive offices) (Zip code)
(503) 641-6115
(Registrant's telephone number, including area code)
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 [ ]
Number of shares of Common Stock, no par value, outstanding as of
December 31, 1996: 13,713,565
===============================================================================
<PAGE>
PART I. FINANCIAL INFORMATION
PAGE NO.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
EPITOPE MEDICAL PRODUCTS
Condensed Combined Balance Sheets
at September 30, 1996 and December 31, 1996..................... 3
Condensed Combined Statements of Operations
for the three months ended December 31, 1996 and 1995 .......... 4
Condensed Combined Statements of Changes in Group Equity
for the three months ended December 31, 1996.................... 5
Condensed Combined Statements of Cash Flows
for the three months ended December 31, 1996 and 1995........... 6
AGRITOPE
Condensed Combined Balance Sheets
at September 30, 1996 and December 31, 1996..................... 7
Condensed Combined Statements of Operations
for the three months ended December 31, 1996 and 1995........... 8
Condensed Combined Statements of Changes in Group Equity
for the three months ended December 31, 1996.................... 9
Condensed Combined Statements of Cash Flows
for the three months ended December 31, 1996 and 1995.......... 10
EPITOPE, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
at September 30, 1996 and December 31, 1996..................... 11
Condensed Combined Statements of Operations
for the three months ended December 31, 1996 and 1995........... 12
Condensed Combined Statements of Changes in Group Equity
for the three months ended December 31, 1996.................... 13
Condensed Combined Statements of Cash Flows
for the three months ended December 31, 1996................... 14
Notes to Condensed Financial Statements............................. 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .......................................... 18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES........................................... 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 21
<PAGE>
EPITOPE MEDICAL PRODUCTS
CONDENSED COMBINED BALANCE SHEETS
12/31/96 9/30/96
(Unaudited) (Restated)
ASSETS
Current assets
Cash and cash equivalents (Note 2) ............... 1,811,767 $ 795,787
Marketable securities (Note 2) ................... 13,395,735 18,818,120
Trade accounts receivable, net ................... 1,564,322 1,147,599
Other receivables ................................ 460,420 174,083
Inventories (Note 2) ............................. 1,169,352 1,157,930
Prepaid expenses ................................. 352,577 89,518
------------ -------------
18,754,173 22,183,037
Property and equipment, net ...................... 1,502,091 1,542,757
Patents and proprietary technology, net .......... 614,720 601,234
Other assets and deposits ....................... 16,938 22,758
------------ -------------
$ 20,887,922 $ 24,349,786
LIABILITIES AND GROUP EQUITY
Current liabilities
Accounts payable ................................. 367,988 $ 449,170
Salaries, benefits and other accrued liabilities . 1,745,373 1,368,166
----------- -----------
2,113,361 1,817,336
Commitments and contingencies .................... - -
Group equity (Note 2)
Contributed capital .............................. 60,860,551 64,237,350
Accumulated deficit............................... (42,085,990) (41,704,900)
------------ ------------
18,774,561 22,532,450
$ 20,887,922 $ 24,349,786
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EPITOPE MEDICAL PRODUCTS
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
Revenues
Product sales .................................... $ 2,359,151 $ 834,877
Grants and contracts ............................. 281,610 389,663
----------- -----------
2,640,761 1,224,540
Costs and expenses
Product costs .................................... 969,258 485,959
Research and development costs ................... 803,973 716,277
Selling, general and administrative expenses...... 1,477,697 1,308,108
---------- ----------
3,250,928 2,510,344
Loss from operations ............................. (610,167) (1,285,804)
Other income (expense), net
Interest income................................... 229,139 223,615
Other, net........................................ (62) 795
-------------- -------------
229,077 224,410
Net loss ......................................... $ (381,090) $ (1,061,394)
Proforma net loss per share....................... $ (.03) $ (.08)
Proforma weighted average number of
shares outstanding .............................. 13,149,498 13,012,379
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<TABLE>
<CAPTION>
EPITOPE MEDICAL PRODUCTS
CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (UNAUDITED)
CONTRIBUTED ACCUMULATED
CAPITAL DEFICIT TOTAL
<S> <C> <C> <C>
Balances at September 30, 1996 (Restated)............ $ 64,237,350 $ (41,704,900) $ 22,532,450
Common stock issued upon
exercise of options .............................. 26,504 - 26,504
Common stock issued as
compensation ..................................... 11,693 - 11,693
Compensation expense for
stock option grants .............................. 147,624 - 147,624
Net assets transferred to Agritope .................. (3,562,620) (3,562,620)
Net loss for the period ............................. - (381,090) (381,090)
---------------- -------------- -------------
Balances at December 31, 1996 ....................... $ 60,860,551 $ (42,085,990) $ 18,774,561
</TABLE>
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<TABLE>
<CAPTION>
EPITOPE MEDICAL PRODUCTS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................................. $ (381,090) $ (1,061,394)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ......................................... 181,013 244,198
Increase in accounts receivable and other receivables ................. (654,460) (135,345)
Increase in inventories ............................................... (11,422) (33,331)
Increase in prepaid expenses .......................................... (263,059) (307,265)
Increase (decrease) in accounts payable and accrued liabilities ....... 296,025 (885,871)
Common stock issued as compensation for services....................... 11,693 20,190
Compensation expense for stock option grants and
deferred salary increases .......................................... 147,624 289,442
Other, net ............................................................ 15 -
------------- ----------------
Net cash used in operating activities.................................. (673,661) (1,869,376)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities ................................... (8,211,809) (11,943,849)
Proceeds from sale of marketable securities ........................... 10,285,196 13,434,127
Additions to property and equipment ................................... (89,912) (9,622)
Expenditures for patents and proprietary technology ................... (63,922) (134,160)
Investment in affiliated companies .................................... 5,820 7,361
------------ ------------
Net cash provided by investing activities.............................. 1,925,373 1,353,857
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ................................ 54,194 270,915
Cash advances (to) from Agritope ...................................... (289,926) 241,395
----------- -----------
Net cash provided by (used in) financing activities.................... (235,732) 512,310
Net increase (decrease) in cash and cash equivalents .................. 1,015,980 (3,209)
Cash and cash equivalents at beginning of period ...................... 795,787 13,209
------------ -----------
Cash and cash equivalents at end of period............................. $ 1,811,767 $ 10,000
</TABLE>
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<TABLE>
<CAPTION>
AGRITOPE
CONDENSED COMBINED BALANCE SHEETS
12/31/96 9/30/96
(Unaudited) (Restated)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2) .................................... $ 452,942 $ 4,903,476
Marketable securities (Note 2) ........................................ 3,348,934 -
Trade accounts receivable, net ........................................ 5,539,843 3,123,172
Other receivables ..................................................... 24,608 32,337
Inventories (Note 2) .................................................. 5,479,307 6,570,187
Prepaid expenses ...................................................... 64,502 90,656
------------- ------------
14,910,136 14,719,828
Property and equipment, net ........................................... 2,981,290 2,658,655
Patents and proprietary technology, net (Note 2)....................... 1,105,542 510,244
Investment in affiliated companies (Note 3)............................ 773,849 2,651,294
Other assets and deposits ............................................. 196,397 321,011
------------ ------------
$ 19,967,214 $ 20,861,032
LIABILITIES AND GROUP EQUITY
Current liabilities
Bank line of credit (Note 4)........................................... $ 5,050,000 $ 4,125,000
Accounts payable ...................................................... 2,478,718 2,677,881
Subordinated notes (Note 4)............................................ - 2,236,628
Convertible notes due June 30, 1997 (Note 4)........................... 240,000 3,620,003
Current portion of long-term debt...................................... 67,594 98,368
Salaries, benefits and other accrued liabilities ...................... 1,445,902 1,208,136
----------- -----------
9,282,214 13,966,016
Long-term debt, less current portion................................... 434,724 527,973
Commitments and contingencies ......................................... - -
Minority interest in consolidated subsidiaries......................... 156,879 215,407
Group equity (Note 2)
Contributed capital ................................................... 44,787,505 36,736,343
Accumulated deficit.................................................... (34,694,108) (30,584,707)
------------- -------------
10,093,397 6,151,636
$ 19,967,214 $ 20,861,032
</TABLE>
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<TABLE>
<CAPTION>
AGRITOPE
CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
<S> <C> <C>
Revenues
Product sales ......................................................... $ 17,901,794 $ 12,891,201
Grants and contracts .................................................. 25,796 86,598
------------ ------------
17,927,590 12,977,799
Costs and expenses
Product costs ......................................................... 15,850,957 12,166,179
Research and development costs ........................................ 420,809 329,276
Selling, general and administrative expenses........................... 1,564,082 1,174,947
Costs of merger and the Agritope Stock Proposal (Notes 1 and 2)........ 823,163 -
------------ -----------
18,659,011 13,670,402
Loss from operations .................................................. (731,421) (692,603)
Other income (expense), net
Interest income........................................................ 90,195 69,237
Interest expense....................................................... (160,608) (199,563)
Valuation loss (Note 3)................................................ (1,900,000) -
Cost of debt conversion (Note 4)....................................... (1,216,654) -
Other, net............................................................. (190,913) (1,439)
------------- ----------
(3,377,980) (131,765)
Net loss .............................................................. $ (4,109,401) $ (824,368)
Proforma net loss per share............................................ $ (.63) $ (.13)
Proforma weighted average number of shares outstanding ................ 6,574,749 6,506,190
</TABLE>
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<TABLE>
<CAPTION>
AGRITOPE
CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (UNAUDITED)
CONTRIBUTED ACCUMULATED
CAPITAL DEFICIT TOTAL
<S> <C> <C> <C>
Balances at September 30, 1996 (Restated)............ $ 36,736,343 $ (30,584,707) $ 6,151,636
Common stock issued upon
exercise of options .............................. 27,690 - 27,690
Common stock issued as
compensation ..................................... 7,561 - 7,561
Compensation expense for
stock option grants .............................. 10,416 - 10,416
Common stock issued upon exchange of
convertible notes................................. 4,442,875 - 4,442,875
Net assets transferred from
Epitope Medical Products.......................... 3,562,620 - 3,562,620
Net loss for the period ............................. - (4,109,401) (4,109,401)
----------------- -------------- -------------
Balances at December 31, 1996 ....................... $ 44,787,505 $ (34,694,108) $ 10,093,397
</TABLE>
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<TABLE>
<CAPTION>
AGRITOPE
CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................................. $ (4,109,401) $ (824,368)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization ......................................... 130,626 111,347
Increase in accounts receivable and other receivables ................. (2,408,942) (1,723,788)
Decrease in inventories ............................................... 1,090,880 294,002
Decrease in prepaid expenses .......................................... 26,154 64,721
Increase (decrease) in accounts payable and accrued liabilities ....... 38,603 125,487
Common stock issued as compensation for services....................... 7,561 -
Compensation expense for stock option grants and
deferred salary increases .......................................... 10,416 57,291
Minority interest in subsidiary operating results...................... (58,528) -
Valuation loss......................................................... 1,900,000 -
Non-cash portion of cost of debt conversion............................ 1,149,054 -
Other, net............................................................. (2,057) 3,351
-------------- -------------
Net cash used in operating activities.................................. (2,225,634) (1,891,957)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment ................................... (439,069) (10,475)
Expenditures for patents and proprietary technology ................... (606,847) -
Investment in affiliated companies .................................... (33,259) (107,780)
------------- -------------
Net cash used in investing activities.................................. (1,079,175) (118,255)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under bank line of credit............................... 925,000 1,150,000
Principal payments on long-term debt................................... (124,023) (35,927)
Borrowings under notes payable......................................... - 655,764
Principal payments on borrowings from shareholders..................... (2,236,628) (15,498)
Cash advanced from (to) Epitope Medical Products ...................... 289,926 (241,395)
----------- -------------
Net cash provided by (used in) financing activities.................... (1,145,725) 1,512,944
Net decrease in cash and cash equivalents ............................. (4,450,534) (497,268)
Cash and cash equivalents at beginning of period ...................... 4,903,476 4,246,688
---------- -----------
Cash and cash equivalents at end of period............................. $ 452,942 $ 3,749,420
</TABLE>
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<TABLE>
<CAPTION>
EPITOPE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
12/31/96 9/30/96
(Unaudited) (Restated)
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents (Note 2) .................................... $ 2,264,709 $ 5,699,263
Marketable securities (Note 2) ........................................ 16,744,669 18,818,120
Trade accounts receivable, net ........................................ 7,104,165 4,270,771
Other receivables ..................................................... 485,028 206,420
Inventories (Note 2) .................................................. 6,648,659 7,728,117
Prepaid expenses ...................................................... 417,079 180,174
------------ ------------
33,664,309 36,902,865
Property and equipment, net............................................ 4,483,381 4,201,412
Patents and proprietary technology, net (Note 2)....................... 1,720,262 1,111,478
Investment in affiliated companies (Note 3)............................ 773,849 2,651,294
Other assets and deposits ............................................. 213,335 343,769
------------ ------------
$ 40,855,136 $ 45,210,818
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank line of credit ................................................... $ 5,050,000 $ 4,125,000
Accounts payable ...................................................... 2,846,706 3,127,051
Subordinated notes (Note 4)............................................ - 2,236,628
Convertible notes due June 30, 1997 (Note 4)........................... 240,000 3,620,003
Current portion of long-term debt...................................... 67,594 98,368
Salaries, benefits and other accrued liabilities ...................... 3,191,275 2,576,302
----------- -----------
11,395,575 15,783,352
Long-term debt, less current portion................................... 434,724 527,973
Commitments and contingencies ......................................... - -
Minority interest in consolidated subsidiaries......................... 156,879 215,407
Shareholders' equity (Note 2)
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
13,713,565 and 13,457,383 shares issued and outstanding,
respectively........................................................ 105,648,056 100,973,693
Accumulated deficit.................................................... (76,780,098) (72,289,607)
------------- -------------
28,867,958 28,684,086
$ 40,855,136 $ 45,210,818
</TABLE>
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<TABLE>
<CAPTION>
EPITOPE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
<S> <C> <C>
Revenues
Product sales ......................................................... $ 20,260,945 $ 13,726,078
Grants and contracts .................................................. 307,406 476,261
------------ ------------
20,568,351 14,202,339
Costs and expenses
Product costs ......................................................... 16,820,215 12,652,138
Research and development costs ........................................ 1,224,782 1,045,553
Selling, general and administrative expenses........................... 3,041,779 2,483,055
Costs of merger and the Agritope Stock Proposal (Notes 1 and 2)........ 823,163 -
------------ -----------
21,909,939 16,180,746
Loss from operations .................................................. (1,341,588) (1,978,407)
Other income (expense), net
Interest income........................................................ 319,334 292,852
Interest expense....................................................... (160,608) (199,563)
Valuation loss (Note 3)................................................ (1,900,000) -
Cost of debt conversion (Note 4)....................................... (1,216,654) -
Other, net............................................................. (190,975) (644)
------------- -----------
(3,148,903) 92,645
Net loss .............................................................. $ (4,490,491) $ (1,885,762)
Net loss per share..................................................... $ (.34) $ (.14)
Weighted average number of shares outstanding ......................... 13,149,498 13,012,379
</TABLE>
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<TABLE>
<CAPTION>
EPITOPE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY (UNAUDITED)
COMMON STOCK ACCUMULATED
SHARES DOLLARS DEFICIT TOTAL
<S> <C> <C> <C> <C>
Balances at September 30, 1996 (Restated)... 13,457,383 $ 100,973,693 $ (72,289,607) $ 28,684,086
Common stock issued upon
exercise of options ..................... 4,094 54,194 - 54,194
Common stock issued as
compensation ............................ 1,721 19,254 - 19,254
Compensation expense for
stock option grants ..................... - 158,040 - 158,040
Common stock issued upon exchange of
convertible notes........................ 250,367 4,442,875 - 4,442,875
Net loss for the period .................... - - (4,490,491) (4,490,491)
---------------- ----------------- -------------- -------------
Balances at December 31, 1996 .............. 13,713,565 $ 105,648,056 $ (76,780,098) $ 28,867,958
</TABLE>
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<TABLE>
<CAPTION>
EPITOPE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31 1996 1995
(Restated)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .............................................................. $ (4,490,491) $ (1,885,762)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization ......................................... 311,639 355,545
Increase in accounts receivable and other receivables ................. (3,063,402) (1,859,133)
Decrease in inventories ............................................... 1,079,458 260,671
Increase in prepaid expenses .......................................... (236,905) (242,544)
Increase (decrease) in accounts payable and accrued liabilities ....... 334,628 (760,384)
Common stock issued as compensation for services....................... 19,254 20,190
Compensation expense for stock option grants and
deferred salary increases .......................................... 158,040 346,733
Minority interest in subsidiary operating results...................... (58,528) -
Valuation loss......................................................... 1,900,000 -
Non-cash portion of cost of debt conversion............................ 1,149,054 -
Other, net............................................................. (2,042) 3,351
-------------- -------------
Net cash used in operating activities.................................. (2,899,295) (3,761,333)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in marketable securities ................................... (8,211,809) (11,943,849)
Proceeds from sale of marketable securities ........................... 10,285,196 13,434,127
Additions to property and equipment ................................... (528,981) (20,097)
Expenditures for patents and proprietary technology ................... (670,769) (134,160)
Investment in affiliated companies .................................... (27,439) (100,419)
------------- -------------
Net cash provided by investing activities.............................. 846,198 1,235,602
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under bank line of credit............................... 925,000 1,150,000
Borrowings under notes payable......................................... - 655,764
Principal payments on long-term debt................................... (124,023) (35,927)
Principal payments on borrowings from shareholders..................... (2,236,628) (15,498)
Proceeds from issuance of common stock ................................ 54,194 270,915
------------ ------------
Net cash provided by (used in) financing activities.................... (1,381,457) 2,025,254
Net decrease in cash and cash equivalents ............................. (3,434,554) (500,477)
Cash and cash equivalents at beginning of period ...................... 5,699,263 4,259,897
----------- -----------
Cash and cash equivalents at end of period............................. $ 2,264,709 $ 3,759,420
</TABLE>
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NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 engaged in the business of growing, marketing, selling, and distributing
produce. 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 Company's common stock will
be redesignated Epitope Medical Products common stock and the Company will issue
to the holders of existing common stock of the Company the equivalent shares of
Agritope common stock on the basis of one-half share of Agritope common stock
for each one share of Epitope common stock. Holders of rights to acquire common
stock of the Company will receive equivalent rights to acquire shares of
Agritope common stock in the same one-half to one ratio. Epitope Medical
Products will include the medical products business conducted by the Company.
Agritope will include the agribusiness and agricultural biotechnology operations
of the Company.
The interim condensed financial statements included herein are unaudited;
however, in the opinion of the Company, the interim data include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of the results of operations for the interim periods. These
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's 1996 Annual Report on
Form 10-K. Results of operations for the period ended December 31, 1996 are not
necessarily indicative of the results of operations expected for the full fiscal
year.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying combined financial statements of Epitope
Medical Products and Agritope 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% to Epitope Medical Products and 20% to
Agritope. Cash advanced and allocated by the Company to business units of
Agritope has been reflected as contributed capital in the combined financial
statements.
On December 12, 1996, the Company completed a merger with Andrew and Williamson
Sales, Co. (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.
Patents and Proprietary Technology. On November 11, 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 who is an officer of the
Company relinquished all rights to future compensation under the agreement in
exchange for a one-time cash payment of $590,000. The amount 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.
Income Taxes. 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. Beginning with fiscal 1997, A&W will be
taxed as a C-Corporation and will join with the Company in filing a consolidated
federal income tax return. 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.
- 15 -
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<TABLE>
<CAPTION>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Inventories.
12/31/96 9/30/96
(Unaudited) (Restated)
<S> <C> <C>
EPITOPE MEDICAL PRODUCTS
Raw materials.......................................................... $ 525,398 $ 522,824
Work-in-process ....................................................... 455,008 389,642
Finished goods ........................................................ 131,862 192,882
Supplies .............................................................. 57,084 52,582
----------- -----------
$ 1,169,352 $ 1,157,930
AGRITOPE
Work-in-process and growing crops...................................... $ 4,844,492 $ 4,466,880
Finished goods ........................................................ 613,451 1,740,689
Supplies .............................................................. 21,364 362,618
------------ -----------
$ 5,479,307 $ 6,570,187
CONSOLIDATED
Raw materials ......................................................... $ 525,398 $ 522,824
Work-in-process and growing crops...................................... 5,299,500 4,856,522
Finished goods ........................................................ 745,313 1,933,571
Supplies .............................................................. 78,448 415,200
------------ -----------
$ 6,648,659 $ 7,728,117
</TABLE>
Net Loss Per Share. Net loss per share has been computed using the weighted
average number of shares of common stock outstanding during the period. Common
stock equivalents were excluded from the computation because their effect is
anti-dilutive.
The weighted average number of shares has been adjusted retroactively to reflect
the issuance of 520,000 additional shares issued in conjunction with the merger
with A&W as if the shares had been outstanding on the first day of the earliest
period presented. Net 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 common stock as Epitope Medical
Products common stock pursuant to the Agritope Stock Proposal had occurred on
the first day of the earliest period presented.
NOTE 3 INVESTMENT IN AFFILIATED COMPANIES
The Company's investment in affiliated companies includes its 9% interest in
UAF, Limited Partnership (UAF), which was formed to combine the Company's fresh
flower distribution operations in Charlotte, North Carolina, with those of
Universal American Flowers, Inc., and its 19.5% interest in Petals USA, Inc.
(Petals), an affiliate of a Canadian fresh flower wholesaler.
Based on information available on December 26, 1996, and due to continued
operating losses experienced by UAF in the four months ended October 31, 1996, a
shortfall in sales and larger operating loss than expected at Petals in the
fourth quarter of calendar 1996, and expected operating losses in fiscal 1997 at
both companies, the Company believes that the value of its investment in
affiliated companies has more than temporarily declined. Accordingly, the
Company recorded a non-cash charge to results of operations of $1.9 million in
the first quarter of fiscal 1997, reflecting the permanent impairment in the
value of its investment in these companies.
- 16 -
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4 DEBT
Bank Line of Credit. 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 line of credit will be extended
until February 5, 1998, and will bear interest at prime or LIBOR plus 2.5% at
the Company's option. The new line will be secured by A&W's accounts receivable,
inventory and equipment and will be guaranteed by Epitope. 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. The Company has
continued to operate under the terms of the old line of credit pending execution
of a definitive agreement for the extension.
Subordinated Notes. At September 30, 1996, the Company had notes payable to
the former A&W shareholders which were subordinated to the claims of its bank.
These notes were due on demand and bore interest at 10%. The Company paid these
notes in full in December 1996.
Convertible Notes. In November 1996, the Company exchanged $3,380,000 principal
amount of Agritope convertible notes for 250,367 shares of common stock of the
Company at a reduced exchange price of $13.50 per share. Accordingly, the
Company recognized a charge to results of operations of $1.2 million in the
first quarter of fiscal 1997 representing the conversion expense.
- 17 -
<PAGE>
ITEM 2. 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 in the
Company's 1996 Annual Report on Form 10-K and with the Financial Statements and
Notes thereto included in this Form 10-Q. Certain statements set forth below
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 changes in market conditions or customer orders,
unexpected interruption of supply or manufacturing operations, changes in
insurance industry practices, unexpected delays or changes in the Company's
business strategy, adverse growing conditions affecting crops, and other risks.
Given these uncertainties, readers are cautioned not to place undue reliance on
the forward-looking statements.
EPITOPE MEDICAL PRODUCTS
RESULTS OF OPERATIONS
Revenues. Total revenues increased by $1,416,000 or 116% in the current quarter
as compared to the first quarter of fiscal 1996. Revenues by product line are
shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT %) 1996 1995
DOLLARS PERCENT DOLLARS PERCENT
<S> <C> <C> <C> <C>
Product sales
Oral collection device................................. $ 1,900 72% $ 491 40%
Western blot HIV confirmatory test..................... 459 17 344 28
------ ---- ------ ----
2,359 89 835 68
Grants and contracts...................................... 282 11 390 32
------ ---- ------ ----
$ 2,641 100% $ 1,225 100%
</TABLE>
Sales of the Company's oral collection device increased by $1,409,000 or 287% in
the current quarter as compared to the first quarter in fiscal 1996. The
increase is attributable to increased use of the device for insurance testing
purposes following approval of the device by the Food and Drug Administration
(FDA) in June 1996 for use in conjunction with an oral-based confirmatory test.
As of December 31, 1996, the Company had firm orders for the device totaling
$1,456,000 scheduled for shipment before March 31, 1997.
Sales of the Company's Western blot HIV confirmatory test increased by $115,000
or 33% in the current quarter as compared to the first quarter in fiscal 1996.
Sales in the prior year quarter were negatively affected by a reduction in
orders from the Company's exclusive distributor for this product as they lowered
inventory safety stock levels. As of December 31, 1996, the Company had firm
orders for the confirmatory HIV test totaling $518,000 scheduled for shipment
before March 31, 1997.
Grant and contract revenues decreased by $108,000 or 27% in the current quarter
as compared to the first quarter of fiscal 1996 primarily due to fluctuations in
research and development projects conducted in conjunction with the Company's
strategic partner, SmithKline Beecham plc (SB). These research projects are
directed at developing new applications for the oral collection device, and to
making improvements to the device. The Company has entered into several research
and development contracts with SB whereby SB funds a portion of the cost of such
projects in exchange for distribution rights to any resulting new products.
Revenue from such projects can vary significantly from quarter to quarter as new
projects are started while other projects may be extended or completed. As of
December 31, 1996, the Company had deferred revenue of $546,000 included in
"Salaries, benefits and other accrued liabilities" related to these projects.
- 18 -
<PAGE>
Gross Margins improved from 42% of sales in the first quarter of fiscal 1996 to
59% of sales in the current quarter. The improvement in gross margins is
attributable to increased sales volume of the oral collection device which
resulted in lower per unit costs and to the shift in product mix towards the
oral collection device which carries a higher gross margin than does the
confirmatory HIV test.
Research and development costs increased by $88,000 or 12% as a result of
increased research and development expenses incurred under contracts with SB and
for other projects conducted by the Company. Expenditures for these projects can
vary significantly from quarter to quarter as new projects are started while
other projects may be extended or completed.
Selling, general and administrative expenses increased by $170,000 or 13% in the
current quarter as compared to the first quarter in fiscal 1996 primarily as a
result of increased selling and marketing efforts. These expenses include
charges for corporate overhead allocation of shared services of $764,000 and
$829,000, respectively, for the current and prior year quarters.
LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 12/31/96 9/30/96
Cash and cash equivalents......................... $ 1,812 $ 796
Marketable securities............................. 13,396 18,818
Working capital................................... 16,641 20,366
During the current quarter, proceeds from the sale of marketable securities
represented the primary source of funds for meeting the Company's requirements
for operations and business expansion. Accounts receivable increased during the
quarter by $417,000 or 36% as a result of increased sales as compared to quarter
ended September 30, 1996.
AGRITOPE
RESULTS OF OPERATIONS
Revenues. Total revenues increased by $4,950,000 or 38% in the current quarter
as compared to the first quarter of fiscal 1996. Revenues by product line are
shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31 (IN THOUSANDS, EXCEPT %) 1996 1995
DOLLARS PERCENT DOLLARS PERCENT
<S> <C> <C> <C> <C>
Fresh and frozen produce sales............................ $ 17,902 100% $ 12,891 99%
Grants and contracts...................................... 26 - 87 1
--------- ----- ---------- ----
Total revenues......................................... 17,928 100% 12,978 100%
</TABLE>
Fresh and frozen produce sales increased by $5,011,000 or 39% in the current
quarter as compared to the first quarter in fiscal 1996. Sales in the prior year
quarter were negatively impacted by significant disease damage to the vine ripe
tomato crop at one of the Company's largest contract growers. No such comparable
damage was experienced in the current quarter. In addition, sales in the current
quarter were positively affected by the addition of new contracts for vine ripe
tomato and pepper crops with another of the Company's major growers, partially
offset by a reduction in melon sales. Fresh and frozen produce sales are
affected by seasonality and other factors and can vary significantly from
quarter to quarter. There were no current quarter sales in the Company's grape
plant propagation subsidiary (Vinifera) as such sales are highly seasonal and
generally occur in the spring and summer planting seasons. As of December 31,
1996, Vinifera had firm orders totaling $821,000 for delivery in the spring and
summer of 1997.
- 19 -
<PAGE>
Gross margins improved in the current quarter to 11.5% as compared to 5.6% in
the comparable quarter of fiscal 1996. The prior year gross margin reflected a
$750,000 charge to product costs for a lower of cost or market adjustment to
inventory primarily related to the vine ripe tomato crop failure referred to
above. There was no such adjustment in the current quarter. Gross margins can
vary significantly from quarter to quarter and are affected by weather and other
growing conditions, as well as market conditions of supply and demand.
Research and development costs increased by $92,000 or 28% in the current
quarter as compared to the first quarter in fiscal 1996. The higher research
and development costs in the current quarter reflect increased efforts to
develop and propagate crops containing the Company's patented ethylene control
technology as well as research and development efforts conducted at Vinifera.
Vinifera was acquired by the Company in August 1996 and therefore its results
are not included in the first quarter of fiscal 1996.
Selling, general and administrative expenses increased by $1,212,000 or 103% in
the current quarter as compared to the first quarter in fiscal 1996. The
increase was attributable to several factors including expenses of $812,000
related to the merger with A&W and the Agritope Stock Proposal, $243,000 of
expenses incurred by Vinifera, which was not part of the combined group in the
first quarter of fiscal 1996, and increased selling and distribution expenses
(primarily labor) incurred by A&W as a result of increased sales volumes. These
expenses include charges for corporate overhead allocation of shared services of
$270,000 and $257,000, respectively, for the current and prior year quarters.
Other income (expense), net was impacted by two significant non-recurring
charges in the current quarter. First, based on information available on
December 26, 1996, and due to continued operating losses experienced by UAF,
Limited Partnership (UAF) in the four months ended October 31, 1996, a shortfall
in sales and larger operating loss than expected at Petals USA, Inc. (Petals) in
the fourth quarter of calendar 1996, and expected operating losses in fiscal
1997 at both companies, the Company believes that the value of its investment in
affiliated companies has been permanently impaired. Accordingly, the Company
recorded a non-cash charge to results of operations of $1,900,000 in the current
quarter, reflecting the permanent impairment in the value of its investment in
these companies. Secondly, conversion of $3,380,000 principal amount of the
Agritope convertible notes at a reduced exchange price resulted in a charge to
results of operations of $1,217,000 in the current quarter.
LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 12/31/96 9/30/96
Cash and cash equivalents............................... $ 453 $ 4,903
Marketable securities................................... 3,349 -
Working capital ........................................ 5,628 754
Working capital increased significantly as a result of the conversion of
$3,380,000 principal amount of Agritope notes into common stock of the Company.
Accounts receivable increased by $2,417,000 and inventories decreased by
$1,091,000 as a result of the increase in sales in the current quarter as
compared to sales in the quarter ended September 30, 1996. Expenditures for
property and equipment were $439,000, largely as a result of expansion of
greenhouse capacity at Vinifera. During the current quarter, Agritope made a
one-time cash payment of $590,000 in exchange for all rights to future
compensation to a co-inventor of Agritope's ethylene control technology.
Agritope's investment in affiliated companies was reduced by a non-cash charge
of $1,900,000 reflecting the permanent impairment in the value of these
investments. Borrowings under the A&W bank line of credit increased by $925,000.
Subordinated notes of A&W outstanding at September 30, 1996 were paid in full in
December 1996.
- 20 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Not applicable
(b) Not applicable
(c) Recent sales of unregistered securities
On December 12, 1996, the Company issued 520,000 shares of common stock, no par
value, to the four former shareholders of Andrew and Williamson Sales, Co.
("A&W") in connection with the acquisition of A&W by merger of a Company
subsidiary with and into A&W. As a result of the merger, the Company became the
sole shareholder of A&W.
The shares were issued in reliance on Rule 506 of Regulation D promulgated under
the Securities Act of 1933, as amended. The former A&W shareholders are
accredited investors, as defined in Regulation D. The Company has filed a Form
D regarding issuance of the shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibits are listed on the attached exhibit index following the signature page
of this report.
(b) Reports on Form 8-K
During the period covered by this report, the Company filed the following
Current Reports on Form 8-K:
(1) On October 11, 1996, a report dated September 17, 1996, reporting
under Items 5 and 7 the issuance of a press release regarding events of
interest to shareholders.
(2) A report dated November 6, 1996, reporting under Items 5 and 7 an
agreement for a merger with Andrew and Williamson Sales, Co. ("A&W"),
and a proposal to create, subject to shareholder approval, two classes
of common stock.
(3) A report dated November 14, 1996, reporting under Items 7 and 9 the
exchange of $3,380,000 in principal amount of Agritope 4% Convertible
Notes due 1997 for 250,367 shares of the Company's common stock,
pursuant to Regulation S under the Securities Act of 1933, as amended.
(4) A report dated December 12, 1996, reporting under Items 2 and 7 the
completion of the merger with A&W. The report included the following
financial statements of A&W:
Independent Auditors' Report
Audited Financial Statements:
Balance Sheets at September 30, 1996, and 1995
Statements of Operation for the years ended September 30, 1996, 1995,
and 1994
Statements of Changes in Stockholders' Equity for the years ended
September 30, 1996, 1995, and 1994
Statements of Cash Flows for the years ended September 30, 1996, 1995,
and 1994
Notes to Financial Statements
- 21 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EPITOPE, INC., an Oregon corporation
February 14, 1997 ADOLPH J. FERRO, PH.D.
Date Adolph J. Ferro, Ph.D.
President, Chief Executive Officer and Director
(Principal Executive Officer)
February 14, 1997 GILBERT N. MILLER
Date Gilbert N. Miller
Executive Vice President, Chief Financial Officer
(Principal Financial Officer)
February 14, 1997 MARK V. ALLRED
Date Mark V. Allred
Controller
(Principal Accounting Officer)
- 22 -
<PAGE>
EXHIBIT INDEX
27. Financial Data Schedule
- 23 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains
summary financial
information extracted from
the condensed consolidated
financial statements
included herein and is
qualified in its entirety
by reference to such
financial statements.
<MULTIPLIER> 1
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<PERIOD-TYPE> 3-MOS
<CASH> 2,264,709
<SECURITIES> 16,744,669
<RECEIVABLES> 7,175,608
<ALLOWANCES> 71,443
<INVENTORY> 6,648,659
<CURRENT-ASSETS> 33,664,309
<PP&E> 10,248,458
<DEPRECIATION> (5,765,077)
<TOTAL-ASSETS> 40,855,136
<CURRENT-LIABILITIES> 11,348,700
<BONDS> 240,000
0
0
<COMMON> 105,694,931
<OTHER-SE> (76,780,098)
<TOTAL-LIABILITY-AND-EQUITY> 40,855,136
<SALES> 20,260,945
<TOTAL-REVENUES> 20,568,351
<CGS> 16,820,215
<TOTAL-COSTS> 21,909,939
<OTHER-EXPENSES> (3,148,903)
<LOSS-PROVISION> (1,900,000)
<INTEREST-EXPENSE> (160,608)
<INCOME-PRETAX> (4,490,491)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,490,491)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> 0
</TABLE>
