SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended September 30, 1999
OR
[ ]Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to
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Commission File No. 1-10492
EPITOPE, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0779127
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
8505 S.W. Creekside Place
Beaverton, Oregon 97008
(Address of principal executive offices) (Zip code)
(503) 641-6115
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act: None Securities registered pursuant to
Section 12 (g) of the Act:
Common Stock, no par value
(Title of Class)
Preferred Stock Purchase Rights
(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. [X]
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant, as of December 1, 1999:
$74,793,338
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of December 1, 1999: Common Stock, no par value,
14,246,350 shares.
Documents Incorporated by Reference:
Definitive Proxy Statement for 1999 Annual Shareholders' Meeting: Part III
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TABLE OF CONTENTS
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PART I
Page
ITEM 1. Business 1
ITEM 2. Properties 15
ITEM 3. Legal Proceedings 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
PART II
ITEM 5. Market for Registrant's Common and Related Stockholder Matters 16
ITEM 6. Selected Financial Data 17
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 18
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 20
ITEM 8. Financial Statements and Supplementary Data 21
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
PART III
ITEM 10. Directors and Executive Officers of the Registrant 22
ITEM 11. Executive Compensation 22
ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22
ITEM 13. Certain Relationships and Related Transactions 22
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K 22
</TABLE>
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PART I
ITEM 1. BUSINESS.
Epitope, Inc. (Epitope or the Company) develops, manufactures and markets oral
specimen collection devices and diagnostic products using its proprietary oral
fluid technologies. These products are sold to public and private-sector clients
in the United States and certain foreign countries. The Company's primary focus
is on the detection of antibodies to the Human Immunodeficiency Virus (HIV), the
cause of Acquired Immune Deficiency Syndrome (AIDS). The Company's technology is
also being used to test for drugs-of-abuse and other analytes. Commercial
distribution of the Company's oral specimen collection device as part of a test
for five major drugs-of-abuse is scheduled to begin in calendar year 2000.
Epitope's lead product, the patented OraSure(R) collection device, is used in
conjunction with screening and confirmatory tests approved by the U.S. Food and
Drug Administration (FDA) to test for HIV-1 antibodies and other conditions. The
Company markets the device for use in screening life insurance applicants and
for public health use. The OraSure device consists of a small, treated
cotton-fiber pad on a nylon handle that is placed in a person's mouth for two
minutes. The device collects oral mucosal transudate (OMT), a serum-derived
fluid that contains higher concentrations of antibodies than saliva, including
HIV antibodies in people infected with the virus. As a result, OMT testing is a
highly accurate method for detecting HIV infection. Because OraSure uses a
noninvasive, needle-free collection method without need for privacy during the
collection process, the Company believes that oral fluid HIV testing has several
significant advantages over blood or urine-based testing systems for both
healthcare professionals and individuals being tested.
Epitope 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-specimen 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., an international chemical and pharmaceutical manufacturer based in
Arnhem, The Netherlands.
The OraSure HIV-1 Oral Specimen Collection device and the OraSure HIV-1 Western
blot and EPIblot confirmatory tests have all received clearance from the FDA for
sale to professional markets in the United States. The FDA granted clearance in
1998 for use of OraSure with enzyme immunoassays manufactured by STC
Technologies, Inc. (STC). In 1998, STC agreed to act as the exclusive
distributor of the OraSure device, using STC's trade name Intercept(TM) Drugs of
Abuse, for use with STC's substance abuse assays in the United States and much
of Europe. See "Products" and "Marketing and Customers."
BACKGROUND
HIV DISEASE. HIV attacks the immune system, slowly weakening the body's ability
to ward off infection and certain forms of cancer. When these complications
develop, the HIV infection has progressed to clinically diagnosed AIDS. HIV is
spread through sexual contact, blood transfusions, the sharing of intravenous
needles, accidental needle sticks, or contact between a mother and her child
during gestation, childbirth, or breast-feeding. There is currently no known
cure for HIV/AIDS. However, the introduction 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.
In 1998 UNAIDS, a program sponsored by the United Nations, estimated that since
the beginning of the HIV/AIDS epidemic, more than 47 million individuals had
contracted HIV. The death toll for HIV/AIDS in that same time span includes over
11 million adults and 3.2 million children. In 1998 alone, nearly 6 million
people became infected with HIV, and nearly 2 million adults and 510,000
children perished from it. HIV/AIDS continues to be one of the leading causes of
death in the world today with underdeveloped countries having the highest
occurrence. In North America, an estimated 890,000 people are living with HIV as
of December 1998.
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According to reports from the Centers for Disease Control and Prevention (CDC)
in August 1999, AIDS is now the leading cause of death in African Americans aged
25 to 44, affecting 1 in 50 African American males and 1 in 160 African American
females in that age group. A growing number of women in the United States are
also living with HIV/AIDS. In just over a decade, the proportion of all AIDS
cases reported in women has tripled, accounting for 23 percent of the total new
cases as of December 1998. The Global Strategic Business Report titled "HIV and
AIDS Testing" published in May 1999, estimated that in the United States $232
million would be spent on HIV/AIDS screening and confirmatory tests in 1999. By
2003, this figure is estimated to increase to over $445 million.
Currently, most HIV tests are performed by testing blood. There are a number of
blood tests for HIV, the most common of which is the enzyme immunoassay (EIA).
In order to reduce the possibility that an individual without HIV will be
diagnosed as having the virus (a false positive), most industrialized countries
require the re-testing 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-based testing, in situations other than blood
donation, 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, and
that the OraSure product overcomes these problems. The disadvantages of blood
testing include:
RISK OF HIV INFECTION. Blood tests involve the use of needles or lancets to
obtain blood. Healthcare professionals collecting blood risk contracting HIV
if accidentally stuck by the needle or lancet used to obtain blood from an
infected individual.
LIMITED ACCESS. Because blood must be collected by trained professionals,
collection can be 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 readily
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.
DISCOMFORT. Blood tests require the use of needles or lancets that are
uncomfortable for the individual being tested. In addition, individuals 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.
SUBSTANCE ABUSE. Although HIV disease and drug abuse are distinct illnesses,
each profoundly affects the other. According to the CDC, drug abuse is now the
leading factor in the spread of HIV infection in the United States with half of
all new infections in 1996 occurring among injecting drug users. According to
the National Institute on Drug Abuse (NIDA), many public health agencies
concerned about the spread of HIV are testing for both HIV and drugs-of-abuse.
With the development of OraSure and Intercept(TM) Drugs of Abuse, both HIV and
substance abuse testing may be done with a needleless, noninvasive orally
collected sample.
Currently, the most common means to test for substance abuse involves collecting
urine or blood samples, each of which may be considered either invasive or
inconvenient. Urine testing is susceptible to adulteration of samples unless
precautions are taken in the collection process.
The Company believes that oral fluid collection will be popular for substance
abuse testing because of its non-invasive nature and ease of maintaining a chain
of custody without embarrassment to the person being tested, as well as the lack
of requirement for specially prepared collection facilities. The availability of
an oral fluid test is intended to allow workplace administrators to test for
impairment on demand, eliminate scheduling costs, and streamline the testing
process.
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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 an oral specimen instead of
blood. The OraSure device, shaped like a small toothbrush, consists of a
cotton-fiber pad treated with a patented salt solution. The pad, which is
mounted on a nylon handle, is placed in the mouth between the lower cheek and
gum for two minutes. The pad collects oral mucosal transudate, a serum-derived
fluid that contains higher concentrations of antibodies than does saliva. The
OraSure sample contains approximately four times the amount of antibodies found
in saliva expectorated into a cup.
Following collection, the pad is sealed in a specimen vial containing a
proprietary non-toxic 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.
PRODUCTS
ORASURE-HIV. In December 1994, the Company received clearance from the FDA to
sell OraSure to professional markets for use with a laboratory-based EIA
screening test for HIV-1 antibody detection. The device is marketed by the
Company for use by the life insurance industry and public health programs in the
United States and a number of other countries. See "Marketing and Customers."
HIV-1 antibody detection using the OraSure oral specimen collection device
involves three steps: (i) collection of an oral specimen using OraSure, (ii)
screening of the specimen for HIV-1 antibodies at a laboratory with an EIA
screening test, and (iii) laboratory confirmation of any positive screening test
results with the FDA-approved OraSure Western blot kit. A trained healthcare
professional then conveys test results and provides appropriate counseling to
the individual who was tested.
The OraSure HIV-1 test represents a highly accurate alternative to traditional
blood-based tests. In clinical trials, 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 OraSure has several advantages over blood-based
tests, as outlined in the following table.
<TABLE>
Feature Blood Collection OraSure
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<S> <C> <C> <C>
Safety Poses risk of HIV infection Eliminates risk of needle-stick
through accidental needle sticks accidents
Invasiveness Requires use of a needle or lancet Uses noninvasive collection technique
Ease of use Requires blood collection by a Sample collection requires minimal
trained healthcare professional training
Portability Generally performed in a physician's Can be used rapidly and efficiently
office or other healthcare setting in almost any setting
Professional Cost Requires a nurse or other healthcare Eliminates the need for and costs
professional trained in phlebotomy associated with a healthcare professional
</TABLE>
In July 1999, an article was published by the Florida Bureau of HIV/AIDS titled
"OraSure Uncovers Higher Seroprevalence in Some Florida Counties." Florida began
providing testing programs throughout the state with the OraSure device in
February 1998. The testing programs were primarily for use in outreach settings,
to reach high-risk persons (e.g., homeless persons, drug abusers, youth, and
rural residents) who are less likely to access health care systems and less
accepting of conventional testing methods.
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Between February 1, 1998 and May 31, 1999, 30,328 OraSure tests were
administered in Florida. 650 of which were returned positive (2.1 percent). Of
the twenty-nine counties conducting tests during this period, fifteen found
higher relative positivity rates with OraSure as compared to blood-based tests.
Although OraSure tests accounted for less than 10 percent of the HIV testing in
Florida at the time the article was written, the use of OraSure as an outreach
tool was demonstrated in several counties. According to the article, anecdotal
evidence from the field suggested that the availability of OraSure has resulted
in increased test acceptance in a variety of outreach settings, including jails,
homeless shelters, and high risk youth programs. For some of those tested,
OraSure represents the opportunity to be tested safely and privately in
situations where a needle mark could result in suspicion of drug use or domestic
violence. Health care workers in Florida also appreciated the convenience,
flexibility, and safety of using OraSure in outreach settings.
ORASURE DRUGS-OF-ABUSE TESTING. The FDA granted clearances in 1998 for use of
OraSure with enzyme immunoassays manufactured by STC Technologies, Inc. to test
for cannabanoids (marijuana), amphetamines and methamphetamines, opiates, and
cocaine. In addition, the FDA has allowed the use of OraSure to test for
phencyclidine (PCP) under a "For Investigational Use Only" status in order to
collect clinical samples and generate data required for FDA review.
In May 1999, STC contracted with LabOne, Inc. (LabOne) to market and provide
oral fluid analysis for the Intercept(TM) Drugs Of Abuse product line in North
America for work-site drug testing. Product trials are expected to be completed
by December 1999 with product launch expected early in calendar year 2000.
The OraSure device has been approved in Japan for cotinine testing of life
insurance applicants. Cotinine is a derivative of nicotine that indicates
whether the tested subject is a smoker. The Finance Ministry of Japan announced
in February 1998 that life insurance companies could reduce premiums on new
nonsmoker policies by as much as thirty percent, effectively creating a larger
market for cotinine testing of life insurance applicants in Japan. The Company
also sells OraSure for cotinine testing of life insurance applicants in the
United States. Cotinine is not currently regulated by the FDA for insurance risk
assessment.
ORAL-BASED AND SERUM-BASED WESTERN BLOT CONFIRMATORY TESTS. The Company markets
an oral-based HIV-1 Western blot confirmatory test that received FDA clearance
in 1996. This test uses the original specimen collected with the OraSure oral
specimen collection device to confirm positive results of initial OraSure HIV-1
screening tests. The Company also markets EPIblot, a serum-based Western blot
HIV-1 confirmatory test kit. The kit is used to confirm the positive results of
initial blood-based screening tests for HIV-1 infection. Both Western blot
products are marketed under an exclusive arrangement with Organon Teknika.
PRODUCTS UNDER DEVELOPMENT
ORASURE. Oral mucosal transudate contains many constituents found in blood
serum, although in lower concentrations. The Company therefore believes OraSure
is a platform technology with a wide variety of potential applications beyond
HIV-1 and drugs-of-abuse testing. For example, the OraSure device may be useful
for the diagnosis of a variety of infectious diseases in addition to HIV-1, such
as viral hepatitis, syphilis, prostate specific antigen (PSA) and a number of
other diseases. 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.
Physicians may also find the OraSure device useful for monitoring the level of
certain drugs and hormones that must be maintained within narrow therapeutic
ranges. Monitoring of these substances currently requires frequent blood tests
to determine drug concentration. The Company believes that oral specimen testing
would eliminate the discomfort and inconvenience associated with this frequent
blood testing.
ORAQUICK. Epitope is developing OraQuick(R), a rapid-format oral specimen test
designed to provide results within fifteen minutes. The Company believes that
OraQuick has significant potential as a rapid test for professional use, and
possibly as an over-the-counter home-based test. Prototype OraQuick devices, to
be used for pre-clinical HIV testing, are in the final stages of development and
the Company is establishing manufacturing specifications for the device. One
patent is pending on this new technology and a second patent is in process. The
Company is also evaluating the regulatory hurdles and clinical trials required
to bring this product to market.
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Like OraSure, OraQuick provides a platform technology that can be modified for
detection of a variety of infectious diseases in addition to HIV, such as viral
hepatitis, syphilis, childhood infections and a number of other diseases. The
application of this technology to drugs-of-abuse testing appears promising and
is currently under investigation within the Epitope development group. The
Company will carefully analyze each application to determine the cost of
development and regulatory approval compared to the potential benefits of each
market and will focus its efforts on those with the best business return.
DNA FORENSIC TESTING. During 1998, the Company entered into a research agreement
with Analytical Genetic Testing Center (AGTC) to explore the use of OraSure for
DNA collection. Results of this research have been positive, demonstrating that
OraSure collects a high quality DNA sample. This sample is in addition to the
antibody sample that is used to test for HIV-1, making it possible to test for
antibodies and produce a DNA "fingerprint" with a single OraSure collection. The
Company is now developing a beta-site testing program with AGTC to evaluate the
use of OraSure in several key user settings. There are limited regulatory
requirements in this market. If the results of research continue to be
promising, a commercial launch of OraSure for DNA collection could be
accomplished soon after field testing and development are completed.
MARKETS
LIFE INSURANCE INDUSTRY. Epitope believes there is a significant need in the
life insurance industry for an easy-to-administer, noninvasive and
cost-effective HIV-1 testing system such as OraSure. In the United States,
approximately 7 million HIV tests were administered in 1997 by the life
insurance industry in connection with the issuance of about 11 million new
policies. In addition, data from the American Council of Life Insurance and the
Health Insurance Association of America indicate that approximately $1 billion
in AIDS-related death benefits were paid in 1997. The organizations also
cautioned that, due to difficulty in identifying all AIDS-related claims, the
data may significantly understate the financial impact of AIDS on the insurance
industry.
Traditional 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. The
cost of collecting and processing a blood sample is approximately $70 per test
versus a cost of $15 for an agent-collected OraSure test. As a result of the
higher cost of collecting blood samples, insurance companies have generally
limited HIV testing to policies with face amounts of $100,000 or more. Based on
industry statistics, Epitope estimates that in 1997 approximately 8.9 million
policies were issued for face amounts of less than $100,000, representing 80
percent of all policies issued. The Company believes that the use of OraSure can
significantly reduce the cost of HIV-1 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. Insurance companies and testing laboratories expect the market for
oral fluid testing of applicants to grow by at least 50 percent over the next
several years .
Epitope also believes that the use of OraSure 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. The Company believes that the
adoption of OraSure by a number of insurance companies, and the current
availability of an over-the-counter HIV blood test, may increase the incidence
of anti-selection. By allowing insurance companies to lower the policy level at
which HIV testing is cost-effective, using OraSure may allow insurance companies
to reduce their exposure to losses from anti-selection and thereby lower overall
claims costs.
Insurance companies have also been using the same OraSure specimen collected for
HIV-1 testing to identify smokers and users of cocaine. Cotinine, a metabolite
of nicotine, and cocaine can be detected using OraSure. In a presentation at the
105th annual meeting of The American Academy of Insurance Medicine in 1997, a
major life insurance company reported results of the use of the OraSure device
for tests in Canada and the Bahamas from 1992 to 1995. The life insurance
company reported that OraSure sample collection by agents significantly reduced
its testing costs per policy. During the four-year study period, the insurer
found it saved $1.7 million using OraSure for HIV-1 and cocaine testing. In
addition, the life insurance company determined it realized $1.6 million in
increased
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premiums as a result of identifying smokers who claimed on their applications
that they were nonsmokers. In another study presented to the same Academy, Crown
Life of Canada reported five-year savings from OraSure testing for cocaine,
cotinine and HIV-1 of approximately $1.4 million.
JAPANESE INSURANCE MARKET. The Japanese life insurance market is served by 44
companies which sold approximately 35 million policies in 1996, of which about
one-third were new ordinary life policies. Whole life policy applicants are most
likely to be tested for smoking and other risk factors. While non-smoker
policies have been available in the U.S. insurance market since the mid-1960s,
it was only in early 1998 that Japanese regulators allowed premium reductions
for non-smokers. Some insurance companies have begun the process of applying for
new premium schedules and are using OraSure to test for evidence of smoking for
these policies. Although many of the insurance companies in Japan are currently
experiencing financial difficulties, the number of companies using OraSure has
increased in the past year from five to eight. Epitope will continue to service
this market, but does not anticipate any significant increases in sales for the
next year.
PHYSICIAN AND PUBLIC HEALTH CLINICAL MARKET. The physician market consists
primarily of individual doctors' offices, which are supplied through the
physicians' supply house network. Selling to this market requires a substantial
sales force to call on the many offices throughout the country, each making its
own purchasing decisions. Epitope has chosen not to focus on this market at this
time because of the high cost of selling to these customers. The product is
currently available to this customer base through various physicians' office
supply channels. The Company has begun a pilot program to determine the
feasibility of implementing a direct telemarketing program to further serve this
market.
The public health market is more concentrated than the physician market, with
typically more purchasing power in each decision maker. The customers consist of
a broad range of clinics and laboratories and includes states, counties,
colleges and universities, correctional facilities and the military. There are
also a number of smaller organizations in the public health market such as AIDS
Service Organizations and various community-based organizations set up for the
primary purpose of encouraging and enabling HIV-1 testing to combat the spread
of AIDS. The OraSure device has received a warm welcome in the public health
market because of its accuracy, ease of use, reliability, and noninvasive
nature.
INTERNATIONAL. In light of the worldwide scope of the HIV epidemic, Epitope
believes there are significant opportunities for sale of OraSure and OraQuick in
international markets. The Company believes that the ease of use, portability,
and increased safety of OraSure, and aversion to blood draw in certain cultures
will provide significant advantages for oral fluid testing over blood tests in
international markets.
During the second quarter of fiscal 1999 the Company received approval for the
sale of the OraSure HIV-1 device in Europe. Approval to use the CE mark, which
is required to sell the OraSure device in all fifteen countries of the European
Economic Community, was received following an inspection of Epitope's facilities
and processes by representatives of the European Notified Body. The OraSure
collection device has been registered under European regulations as a Class III
medical device, the classification requiring the highest degree of scrutiny for
CE mark approval. Epitope distributors are actively marketing the device in
England, Ireland and Greece. The Company expects to begin product shipments to
Europe under the new CE mark approval in fiscal 2000.
DRUGS-OF-ABUSE MARKET. The analytical testing portion of the United States
drugs-of-abuse testing market is estimated to be over $725 million, with
approximately 42 million tests performed in 1998. Testing is concentrated on a
set of commonly abused drugs called the NIDA-5, consisting of cocaine,
methamphetamines, opiates, marijuana and PCP.
According to an Office of National Drug Control Policy report on drug abuse in
America, October 1999, the social cost of illicit drug abuse is nearly $110
billion each year. There are more than one million drug arrests each year and
half of all those arrested test positive for illicit drug use.
Results from the 1994 and 1997 National Household Survey on Drug Abuse released
by the Substance Abuse and Mental Health Services Administration (SAMHSA) showed
that the percent of workers who reported that their workplaces had any type of
drug testing program increased significantly between 1994 and 1997 (from 44
percent to 49 percent). The study found that 70 percent of illicit drug users,
age 18-49, are employed full-time. Among full-
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time workers, there were 6.3 million illicit drug users and 6.2 million heavy
alcohol users. The study further revealed that 1.6 million of these workers were
both heavy alcohol and illicit drug users. The overall rate of current illicit
drug use among full time employees had fallen from 17.5 percent in 1985 to 7.4
percent in 1992, but had risen to 7.7 percent by 1997.
Comprehensive workplace programs that combine drug testing, access to treatment,
and employee education have proven to increase workplace safety and
productivity, reduce absenteeism and theft, and reduce the human and economic
effects of substance abuse. See "Marketing and Customers."
OTC MARKET. The over-the-counter (OTC) market for HIV testing currently is
served by only one product, distributed by Home Access Health Corp., which uses
a dried blood spot to provide the patient's sample. This sample is then sent to
a laboratory for testing and test results are communicated to the customer via
an 800 number. In July 1997, citing lower sales than expected and lower market
estimates, Johnson & Johnson dropped its Confide HIV test from the OTC market.
Epitope is not currently pursuing this market, but has not ruled out doing so in
the future.
MARKETING AND CUSTOMERS
LIFE INSURANCE INDUSTRY. Epitope currently markets the OraSure device for use in
screening life insurance applicants to test for three of the most important
underwriting risk factors: HIV-1, cocaine, and cotinine (a derivative of
nicotine). Epitope sells the devices to insurance testing laboratories, which in
turn provide the devices to insurance companies, usually in combination with
testing services. The Company maintains a direct sales force that promotes use
of OraSure directly to insurance companies. Insurance companies then make their
own decision regarding which laboratory to use to supply their collection
devices and testing services. The major laboratories currently using the OraSure
device include LabOne, Inc., Osborn Group, Inc., Clinical Reference Laboratory,
and Heritage Labs International, LLC (Heritage Labs).
As of August 1999, more than 150 U.S. ordinary life insurance companies were
using OraSure to varying degrees for testing applicants for life insurance.
These 150 companies included seven of the top ten U.S. life insurance companies;
the ten accounted for 21 percent of ordinary life insurance policies issued in
the U.S. in 1998. According to Best's Review (July 1999), the top 100 companies
represented 79 percent of newly issued business and 81 percent of in-force
business. In 1998, ordinary life insurance issued climbed 8.5 percent to $1.48
trillion, while ordinary life insurance in force grew by 12.8 percent
industry-wide to $12.9 trillion.
Because insurance companies are in various stages of their adoption of OraSure,
there exists a wide range of policy limits where the product is being applied.
Some insurance companies have chosen to extend their testing to lower policy
limits where they did not test at all before, while others have used OraSure to
replace some of their blood-based testing. Epitope's sales force continues to
encourage additional insurance companies to use OraSure and to extend the use of
the product by existing customers. Several companies have expanded use of
OraSure in "Preferred" products in addition to the $1 million and higher dollar
policy amounts. This expansion is attributable to several factors, including
increasing comfort with oral fluid testing following its successful use, the low
cost of oral fluid testing relative to blood tests, and the ease of use of
OraSure.
PHYSICIAN AND PUBLIC HEALTH CLINICAL MARKET. As explained above under "Markets,"
Epitope is not currently focusing sales efforts on the physician market because
of the high cost of selling to the large number of independent entities involved
in making purchasing decisions. OraSure is currently available to the physician
market through various physicians' office supply channels. The Company has begun
a pilot program to determine the feasibility of implementing a direct
telemarketing program to further serve this market.
Epitope sales personnel sell its products directly to customers in the public
health market. To better serve this market, Epitope entered into agreements with
LabOne and Heritage Labs to provide prepackaged OraSure test kits, with prepaid
laboratory testing and specimen shipping costs included. These OraSure test kits
represented nearly half of the Company's revenues from this market in 1999.
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FEDERAL SUPPLY SCHEDULE CONTRACT. Epitope received approval to be listed in the
General Services Administration (GSA) Federal Supply Schedule during the second
quarter of fiscal 1999. Government agencies are encouraged to purchase from the
Federal Supply Schedule, which offers the best pricing for approved products.
This schedule applies to various federal agencies, including the Veteran's
Administration, the military, the Federal Bureau of Prisons, Job Corp, the
Federal Aviation Administration, the National Institutes of Health, and many
others. Market studies indicate that the number of HIV tests associated with GSA
contracts is currently about 2 million per year. The Company reorganized its
public health field sales force during fourth quarter 1999 to place more
emphasis on selling to the large customers represented by this market.
INTERNATIONAL. Epitope markets to international customers primarily through
distributors with knowledge of their local market. The distributor's expertise
is supplemented by Epitope's contacts with testing companies to assist in
registering the necessary tests in each country, and Epitope's assistance with
training and support materials. Epitope's international marketing program
features direct assistance to distributors in establishing OraSure programs that
include laboratory services, cooperation from screening test manufacturers, and
provision of Western blot confirmatory kits when necessary. Epitope has marketed
OraSure in the United Kingdom (UK), Ireland, Thailand, Argentina, Brazil, South
Africa, Greece, the Philippines, Taiwan, Mexico and Colombia. Canadian insurance
customers are served primarily through their United States-based affiliated
insurance testing laboratories. The recent addition of a new Director of
International Sales and Marketing will greatly improve the Company's ability to
expand its international sales of OraSure. See "Personnel."
The Company entered into a distribution agreement in September 1998 with Altrix
Healthcare, plc, a UK-based health diagnostic service provider, for the sale and
distribution of OraSure to the life insurance, public health, and laboratory
markets in the UK and Ireland. The agreement contemplates optional expansion of
the relationship to other European countries.
In September 1999, Epitope signed an exclusive distribution arrangement with
Medical Products, Ltd., a Greece-based medical products distributor selected to
replace the Company's former distributor in that country. The Company's former
distributor has protested the termination of its agreement and attempted to
disrupt the sales process in Greece. Epitope has responded and will take legal
action, if necessary, to preserve its rights in establishing a new distributor.
OraSure has been recently selected by the Greek government for a planned
multi-year program for widespread HIV testing of the Greek population. The
Company will begin shipping product when the Greek government gives all required
approvals and issues a purchase order.
Epitope participates in a joint venture in Japan which markets both the OraSure
device and STC's cotinine test to the Japanese life insurance market. Epitope
holds exclusive distribution rights in Japan for STC's laboratory-based test for
cotinine, sold for use in insurance risk assessment. Epitope has the option to
expand its exclusive distribution rights for the cotinine test worldwide,
excluding the U.S.
The Argentinean Society of AIDS organized an HIV virus and detection campaign
called "Seven Days of Life" in Rosario, Argentina during late November 1999.
This campaign was presented to stimulate and facilitate the testing of the
general population using Epitope's OraSure device. In addition, the Company is
actively pursuing a clinical trial supported by Argentina's Ministry of Health;
however, recent government elections in that country have slowed that process.
In 1998, OraSure was used to test patients for Hepatitis in Argentina. The
Company is also exploring opportunities to distribute OraSure in Brazil.
DRUGS-OF-ABUSE MARKET. In November 1998, the Company entered a supply and
distribution agreement with STC, its research partner in the drugs-of-abuse
market. Under the terms of the agreement, Epitope will act as the exclusive
supplier of oral fluid collection devices using STC's trade name Intercept(TM)
Drugs of Abuse for use with STC's laboratory-based, NIDA-5 drugs-of-abuse tests
in the U.S. and Europe, excluding the U.K. and Ireland. STC will act as the
exclusive distributor of the OraSure device for drugs-of-abuse testing in the
same territory. The agreement provides for Epitope to sell oral fluid collection
devices to STC for a per-unit price plus a royalty based on STC's gross revenue
from the sale of the devices and STC's oral fluid drugs-of-abuse test. The
agreement also covers any additional laboratory-based drugs-of-abuse tests that
STC may market, including those STC is now developing using up-converting
phosphor technology. The agreement will remain in effect for a minimum term of
five years. STC has contracted with LabOne to provide oral fluid laboratory
analysis for STC's drugs-of-abuse product line in the North American work-site
testing market.
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WESTERN BLOT DISTRIBUTION. Epitope has exclusive supply and distribution
agreements with Organon Teknika Corporation for Epitope's Western blot products.
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 and to market them worldwide. The supply and
distribution agreements between Epitope and Organon Teknika were recently
extended to March 31, 2001.
CUSTOMER CONCENTRATION. In fiscal 1999, the Company's sales to LabOne, Inc.,
Osborn Group, Inc., Clinical Reference Laboratory, Heritage Labs and Organon
Teknika accounted for over 70 percent of product revenues. The Company believes
that its relationship with each of these customers is strong and believes that
they will purchase comparable or increasing volumes of the Company's products
for the foreseeable future. There can be no assurance, however, that sales to
these customers will not decrease or that these customers will not choose to
replace the Company's products with those of competitors. The loss of any of
these customers or a significant decrease in the volume of products purchased by
them would have a material adverse effect on the Company.
COMPETITION
Competition in the market for HIV testing is intense and is expected to
increase. The Company believes that the principal competition will come from
existing laboratory-based blood tests, point-of-care whole blood rapid tests,
urine-based assays, or other oral fluid-based tests that may be developed.
Epitope's 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. 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's oral-based HIV-1 test impractical, uneconomical
or obsolete. There can be no assurance that Epitope's competitors will not
succeed in developing or marketing technologies and products that are more
effective than those developed by Epitope or that would render its technologies
or products obsolete or otherwise commercially unattractive. In addition, there
can be no assurance that competitors will not succeed in obtaining regulatory
approval for these products, or in introducing or commercializing them before
Epitope. Such developments could have a material adverse effect on the Company's
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 approved home collection kits for HIV blood testing
developed by Direct Access Diagnostics (a division of Johnson & Johnson) and by
Home Access Health Corp. In July 1997, Direct Access Diagnostics withdrew its
HIV home-test from the market, citing weak sales. Direct Access and ChemTrak are
no longer in business, leaving only Home Access active in this market.
Calypte, Inc., BioRad Laboratories, Inc. and Genetic Systems Corp. manufacture
HIV Western blot confirmatory tests, and Waldheim Pharmazeutika manufactures
immunofluorescent HIV confirmatory tests, which compete with Epitope's EPIblot
HIV-1 Western blot serum-based confirmatory test kits. Calypte, Inc. acquired
the Western blot manufacturing facilities and rights of Cambridge Biotech
Corporation in December 1998.
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 expects the
number of devices competing with its OraSure device to increase as the benefits
of oral specimen-based testing become more widely accepted. The Company expects
that FDA approval of the OraSure device will also encourage potential
competitors to develop oral diagnostic products. No such devices have yet been
approved by the FDA for HIV-1 testing. See "Government Regulation."
The FDA has approved an HIV-1 screening test for use with a urine sample. In
June 1998, the FDA notified Cambridge Biotech Corp. (acquired by Calypte, Inc.
in December 1998) that it had approved the use of its HIV-1 Western Blot
confirmatory test for use with urine samples. Although the sensitivity and
specificity are less than blood-based or oral fluid tests, urine testing will
compete in the same markets as the Company's products. The
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Company believes that urine collection can be logistically more difficult,
inconvenient and potentially embarrassing for the individual being tested, and
that privacy and chain-of-custody issues are further impediments to routine use
of urine-based HIV tests. The Company cannot predict the impact of the
availability of urine-based tests on the HIV testing market or on sales of the
Company's products.
GOVERNMENT REGULATION
GENERAL. Most of Epitope's existing and proposed diagnostic products are
regulated by the FDA, other state and local agencies, and comparable bodies in
other countries. This regulation governs almost all aspects of development,
production, and marketing, including product testing, authorizations to market,
labeling, promotion, manufacturing, and recordkeeping. All of Epitope's
FDA-regulated products require some form of action by the FDA before they can be
marketed in the United States, and, after approval, Epitope must continue to
comply with other FDA requirements applicable to marketed products. Both before
and after approval, failure to comply with the FDA's requirements can lead to
significant penalties.
PRODUCT APPROVALS. Most of Epitope's diagnostic products are regulated as
medical devices. The Western blot confirmatory test is regulated as a biologic
product.
There are two review procedures by which medical devices can receive FDA
clearance or approval. Some products may qualify for clearance under a Section
510(k) procedure, in which the manufacturer provides a premarket notification
that it intends to begin marketing the product, and shows that the product is
substantially equivalent to another legally marketed product (i.e., that is has
the same intended use and is as safe and effective as a legally marketed device
and does not raise different questions of safety and effectiveness). In some
cases, the submission must include data from human clinical studies. Marketing
may commence when the FDA issues a clearance letter finding such substantial
equivalence.
If the medical device does not qualify for the 510(k) procedure (either because
it is not substantially equivalent to a legally marketed device or because it is
a Class III device required by the statute and the FDA's implementing
regulations to have an approved application for premarket approval), the FDA
must approve a premarket approval application (PMA) before marketing can begin.
PMAs must demonstrate, among other matters, that the medical device is safe and
effective. A PMA is typically a complex submission, including the results of
preclinical and clinical studies. Preparing a PMA is a detailed and
time-consuming process. Once a PMA has been submitted, the FDA's review may be
lengthy and may include requests for additional data.
Biologic products must be the subject of an approved biologics license
application (BLA) before they can be marketed. The FDA approval process for a
biologic is similar to the PMA approval process, involving a demonstration of
the product's safety and effectiveness based in part on both preclinical and
clinical studies.
Epitope has received several FDA approvals and clearances. The first approval,
in March 1991, was a BLA for the EPIblot HIV-1 serum-based confirmatory Western
blot confirmatory test. Since then, Epitope's approvals have involved oral
specimen-based diagnostic tests. In 1994, the FDA approved Epitope's PMA for use
of the OraSure device in HIV-1 screening. The FDA also has issued several 510(k)
clearances for non-HIV uses of the OraSure device. In June 1996, the FDA
approved Epitope's PMA for use of the OraSure and oral-specimen-based Western
blot confirmatory test for HIV-1 diagnosis.
Obtaining FDA approval for either medical devices or biologic products requires
substantial time, effort, and expense. Epitope cannot assure that it will be
able to obtain any additional approvals or clearances on a timely basis, or at
all. Approvals and clearances limit the indications for which a product may be
marketed; accordingly, Epitope may market its existing and future approved
products only for the indications that the FDA has approved or cleared. Even
after approvals are obtained, the FDA may suspend or revoke approvals if
problems are identified.
MANUFACTURING REQUIREMENTS. Every company that manufactures biological products
or medical devices distributed in the United States must comply with the FDA's
Good Manufacturing Practices ("GMP") Regulations. These regulations govern the
manufacturing process, including design, manufacture, testing, release,
packaging, distribution, documentation, and purchasing. Compliance with GMPs is
generally required before the FDA will approve a PMA or BLA, and these
requirements also apply to marketed products.
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POSTAPPROVAL REQUIREMENTS. Companies are also subject to other post-market and
general requirements, including compliance with restrictions imposed on marketed
products, compliance with promotional standards, recordkeeping, and reporting of
certain adverse reactions. The FDA regularly inspects companies to determine
compliance with GMPs and other post-approval requirements. Failure to comply
with statutory requirements and the FDA's regulations can lead to substantial
penalties, including monetary penalties, injunctions, product recalls, seizure
of products, and criminal prosecution.
WARNING LETTER. Epitope received a warning letter from the FDA in June 1998,
asserting that the Company has not fully adhered to FDA's Good Manufacturing
Practice Regulations. The FDA made similar observations during an inspection in
January 1999. Epitope has cooperated with the FDA to address the issues
identified, has aggressively implemented enhanced quality control procedures,
and has retrained personnel. The Company has also hired a new Vice President of
Quality Assurance and Regulatory Affairs to assist in bringing the Company's
systems into compliance. See "Personnel."
INTERNATIONAL. Epitope is also subject to regulations in foreign countries
governing products, human clinical trials and marketing. 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 that might arise from future legislative or
administrative action cannot be predicted. Epitope will pursue approval only in
those countries that have a significant market opportunity.
In the second quarter of fiscal 1999 Epitope received approval to use the CE
mark which is required to sell the OraSure device in all fifteen countries of
the European Economic Community. The Company received approval to sell OraSure
as a Class III medical device, the classification requiring the highest degree
of scrutiny for the CE mark, following an inspection of Epitope's facilities and
processes by representatives of the European Notified Body. Epitope distributors
are actively marketing the device in England, Ireland and Greece. The Company
has begun shipments to Europe under the new CE mark approval.
OTHER. epitope is also subject to regulation by the Occupational Safety and
Health Administration and may be subject to regulation by the U.S. Environmental
Protection Agency (EPA) under the Toxic Substances Control Act (TSCA), the
Resource Conservation and Recovery Act, and other legislation.
SUPPLIES
The HIV-1 antigen needed to manufacture Epitope's 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's
requirements for antigen for the term of its distribution agreement with
Epitope, which has recently been extended to March 31, 2001. If for any reason
Organon Teknika should no longer be able to supply the Company's antigen needs,
management believes Epitope would be able to obtain its own supply of antigen at
a competitive cost, although a change in the antigen would require FDA approval.
Epitope has obtained a license from the National Technical Information Service
which is required for the production of the HIV-1 antigen currently used in the
Company's Western blot test kits. It is unlikely that Epitope would choose to
manufacture its own antigen because of its availability from other suppliers.
Other materials used by Epitope in manufacturing, production, and research and
development are widely available from a variety of sources.
GRANTS AND CONTRACTS
In September 1999, the National Institutes of Health (NIH) and the National
Institute of Allergy and Infectious Diseases (NIAID) approved a grant to Epitope
under the Small Business Innovation Research Program Fast-Track Initiative for
the development of syphilis assays based on an oral fluid sample. Under the
Fast-Track Initiative, both Phase I and Phase II requests were reviewed and
approved. This approval means that if agreed-upon benchmarks are met at the end
of Phase I work, the award of the Phase II funding can be made based on the
recommendation of the project's steering committee. Phase I funding amounting to
$117,674 has already been approved and an additional $992,373 has been requested
for Phase II.
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Epitope has received funding in the past from the NIAID, for work in developing
a rapid test to detect HIV antibodies in oral fluid specimens, and from the
National Cancer Institute (NCI), to fund research for the treatment of cancer by
exploiting a deficiency of certain compounds in cancer cells. The Company
regularly makes applications for new grants, but there is no assurance that
additional grant support can be obtained.
PATENTS AND PROPRIETARY INFORMATION
Epitope has obtained patents in the United States and certain foreign countries
for the OraSure device and related technology. Epitope has applied for
additional patents, both in the United States and in certain foreign countries,
on the OraSure collection device and a number of other technologies and
products. 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.
Much of the technology developed by the Company is subject to trade secret
protection. To reduce the risk of loss of trade secret protection through
disclosure, the Company requires its employees and consultants to enter into
confidentiality agreements.
Although important, 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
William D. Block was named Vice President of Sales and Marketing on May 16,
1999. Mr. Block was hired following a nationwide search to replace Edward V.
Collom, Jr., who resigned in March 1999 for health reasons. Prior to accepting
the position at Epitope, Mr. Block held a variety of sales and management
positions with companies in the medical field, including McKesson Automated
Pharmacy Solutions (a division of McKesson HBOC, Inc.), Allegiance Healthcare
Corp., Baxter Healthcare Corp., and Biotronics Enterprises, Inc.
Rob Ngungu was named to the newly created position of Vice President of Quality
Assurance and Regulatory Affairs on October 25, 1999. Mr. Ngungu has more than
17 years of quality assurance and regulatory affairs experience with medical
companies such as Baxter Diagnostics (a former division of Baxter Healthcare
Corp.) and Johnson & Johnson Ultrasound (a former division of Johnson & Johnson,
Inc.). He was most recently employed by McGhan Medical Corporation, a Santa
Barbara, California- based medical device company, where he was Vice President,
Quality Systems and was responsible for overseeing five departments within the
regulatory and compliance sector.
Paul D. Slowey, Ph.D. was appointed Director of International Sales and
Marketing on October 1, 1999. Dr. Slowey has over 16 years experience in medical
products and diagnostics and was most recently Vice President, Sales and
Marketing and Chief Operating Officer of Saliva Diagnostics Systems, Inc., a
Vancouver, Washington-based maker of rapid saliva and blood tests for HIV and H.
Pylori. Before joining Saliva Diagnostics, he worked six years at Incstar
Corporation, a Minneapolis-based medical systems and diagnostics subsidiary of
American Standard Companies. While there, Dr. Slowey became Director,
International Sales, where he managed a $22 million unit, appointing
international distributors and establishing strategic partnerships.
On September 30, 1999, John W. Morgan notified the Company of his resignation as
President and Chief Executive Officer. Mr. Morgan remains a member of the
Epitope board of directors. Charles E. Bergeron, Chief Financial Officer, is
serving as Interim President until a new Chief Executive Officer is hired. The
Company has retained an industry-focused executive search firm to assist in the
search for a permanent Chief Executive Officer. A committee of the board of
directors is overseeing the search.
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At September 30, 1999, the Company had 83 full-time employees, including 16
persons in research and product development, 28 in administration and marketing,
30 in manufacturing and production, and 9 in regulatory affairs and quality
assurance. The Company considers its relations with its employees to be
excellent. None of its employees are represented by labor unions.
The Company employs 6 persons holding Ph.D. degrees with specialties in the
following disciplines: virology/molecular biology, biochemistry, microbial
physiology, microbiology and organic chemistry. 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 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 Daniel Malamud, Ph.D., Professor and Chair, Department of Biochemistry,
University of Pennsylvania School of Dental Medicine; J. Richard George, Ph.D.,
Chief Scientific Officer of Epitope; James I. Mullins, Ph.D., Professor of
Microbiology and Medicine, University of Washington; Wayne R. Wecksler, Ph.D.,
General Manager, Esoteric Testing Center, SmithKline Beecham Clinical
Laboratories, Van Nuys, CA; and John V. Parry, Ph.D., Deputy Director, Hepatitis
and Retrovirology Laboratory, Central Public Health Laboratory, Virus Reference
Division, London, England.
FORWARD-LOOKING STATEMENTS; RISK FACTORS
Statements in this report regarding future events or performance are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The Company's actual results could be quite
different from those expressed or implied by the forward-looking statements.
Factors that could affect results include the risk factors discussed below,
those discussed in Item 7, and those described elsewhere in this Annual Report
on Form 10-K. Although forward-looking statements help to provide complete
information about the Company, readers should keep in mind that forward-looking
statements are much less reliable than historical information. Readers are
cautioned not to place undue reliance on the forward-looking statements.
LOSS OF KEY PERSONNEL. The Company depends to a large extent on the abilities
and continued participation of its executive officers and scientific personnel.
The loss of key personnel could have a material adverse effect on the Company's
business, financial condition, and results of operations. Competition for
management and scientific staff in the medical products field is intense. No
assurance can be given that the Company will be able to continue to attract and
retain personnel with sufficient experience and expertise to satisfy the
Company's needs.
REGULATORY COMPLIANCE. The Company can manufacture and sell the OraSure device
and other regulated products, both in the U.S. and in some cases abroad, only if
it complies with regulations of government agencies such as the FDA. The Company
has implemented quality assurance and other systems that are intended to comply
with applicable regulations. The FDA has issued warning letters, to which the
Company has responded, stating that the Company is not in compliance with the
FDA's regulations. Although the Company believes that it has satisfactorily
addressed the points raised by the FDA, the FDA could force the Company to stop
manufacturing products if the FDA concludes that the Company is out of
compliance with applicable regulations. In addition, until the FDA agrees that
the Company has resolved all points raised in the warning letters, the Company
may not be able to obtain regulatory clearance certificates needed in certain
foreign countries.
INTERNATIONAL MARKETING OBSTACLES. The Company is devoting significant resources
to international sales of its products. In addition to economic and political
issues, a number of factors can slow or prevent international sales. In the
past, Epitope has had little direct experience with the governmental regulatory
agencies in many countries that control sale of the Company's products. The
Company's new Director of International Sales and Marketing, however, has
substantial experience dealing with these agencies. See "Personnel." The
Company's recent experience with extended delays in obtaining approvals to make
sales in Argentina demonstrates that compliance with foreign regulatory
requirements can be difficult and can impede international marketing efforts.
Epitope must
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rely on the cooperation of distributors to market its products in foreign
countries and to register and provide technical support for the laboratory tests
which may be used with OraSure. Changes in distributor relationships can
interfere with the sales process because registrations may be in the name of the
former distributor.
LOSS OR IMPAIRMENT OF SOURCES OF CAPITAL. Although the Company has made
significant progress in the last two fiscal years toward controlling expenses
and increasing product revenue, the Company has historically depended to a
substantial degree on capital raised through the sale of equity securities to
fund its operations. The Company's future liquidity and capital requirements
will depend on numerous factors, including the costs and timing of expansion of
manufacturing capacity, the success of product development efforts, the costs
and timing of expansion of sales and marketing activities, the extent to which
existing and new products gain market acceptance, competing technological and
market developments, and the scope and timing of strategic acquisitions. If
additional financing is needed, the Company may seek to raise funds through the
sale of equity securities. There can be no assurance that financing through the
sale of equity securities, or otherwise, will be available on satisfactory
terms, if at all.
ABILITY OF THE COMPANY TO DEVELOP PRODUCT DISTRIBUTION CHANNELS. The Company has
marketed most of its products by collaborating with pharmaceutical and
diagnostic companies and distributors. For example, the Company's EPIblot and
OraSure Western blot confirmatory tests are distributed through Organon Teknika,
the OraSure collection device is distributed to the insurance industry through
major insurance testing laboratories, and the Company has entered an agreement
with STC to distribute the OraSure device for drugs-of-abuse testing. Except in
the public health market, the Company does not maintain a substantial sales or
marketing force. Accordingly, the Company's sales depend to a substantial degree
on its ability to develop product distribution channels and on the marketing
abilities of the companies with which it collaborates.
ABILITY OF THE COMPANY TO DEVELOP NEW PRODUCTS. The Company's OraSure collection
device is becoming recognized in the insurance and public health markets as part
of a reliable, effective testing alternative. The Company's long-term strategy
is based on continued expansion of markets for OraSure and the development of
new products. OraQuick and other planned products are in various stages of
development. In some cases, the Company will be required to achieve difficult
scientific or technical objectives before the commercial or technological
feasibility of new products can be demonstrated. There can be no assurance that
products under development will perform in accordance with expectations, that
necessary regulatory approvals will be obtained, or that the products can be
successfully and profitably manufactured, distributed, and sold.
DEVELOPMENT OF COMPETING PRODUCTS. Competition in the medical products business
is intense and will likely increase. The Company believes that the principal
competition for OraSure will come from blood-based and urine-based assays, and
could also come from other oral-fluid testing systems. New testing methods could
be developed in the future that render the Company's products uneconomical or
obsolete. Most of the Company's competitors have significantly greater
financial, manufacturing, technical, research, marketing, sales, distribution
and other resources than those of the Company. There can be no assurance that
the Company will not experience competitive pressures, particularly with respect
to pricing, that could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Competition" above for
additional information.
MARKET ACCEPTANCE OF ORAL TESTING PRODUCTS. The Company has made significant
progress in gaining acceptance of oral testing for HIV in the insurance and
public health markets. The Company also expects that oral testing for
drugs-of-abuse will be accepted in employment testing. Other markets,
particularly the physician market, may resist the adoption of oral testing as a
replacement for other testing methods in use today. There can be no assurance
that the Company will be able to expand use of its oral testing products in
these markets.
CHANGES IN FEDERAL OR STATE LAW OR REGULATIONS. As described more fully above
under "Government Regulation," many of the Company's proposed and existing
products are subject to regulation by the FDA and other governmental agencies.
The process of obtaining required approvals from these agencies varies according
to the nature of and uses for the product and can involve lengthy and detailed
laboratory and clinical testing, sampling activities, and other costly and
time-consuming procedures. Changes in government regulations could require the
Company to undergo additional trials or procedures, or could make it impractical
or impossible for the Company to market its products for certain uses, in
certain markets, or at all. Other changes in government regulations, such as the
adoption of the FDA's Quality System Regulation, may not affect the Company's
products directly but may
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nonetheless adversely affect the Company's financial condition and results of
operations by requiring that the Company incur the expense of changing or
implementing new manufacturing and control procedures.
The previous discussion of the Company's business should be read in conjunction
with the Consolidated Financial Statements and accompanying notes included in
Item 14 of this Annual Report on Form 10-K.
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. The lease for the Company's primary office, manufacturing and
laboratory space of 30,500 square feet has been renewed through January 31,
2005. The remaining lease for 5,100 square feet of excess office space will not
be renewed at expiration. The Company also leases 2,265 square feet of warehouse
space to store inventory and equipment under a lease expiring September 30,
2002. Each lease calls for fixed monthly payments over its term plus an
allocation of common area charges and taxes. The total amount of the Company's
base lease obligation through the term of these leases is $2,030,025.
ITEM 3. LEGAL PROCEEDINGS.
Not applicable.
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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed for trading on the National Market tier of
The Nasdaq Stock Market (NASDAQ) under the symbol EPTO. High and low sales
prices reported by NASDAQ during the periods indicated are shown below.
SALES PRICES PER SHARE
<TABLE>
<S> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30 1999 1998
HIGH LOW HIGH LOW
First Quarter.................................. $ 6.500 $ 2.500 $ 8.125 $ 4.250
Second Quarter................................. 8.375 4.500 7.188 4.750
Third Quarter.................................. 6.125 3.688 6.875 4.563
Fourth Quarter................................. 7.500 4.875 7.000 2.875
</TABLE>
On December 1, 1999, there were 873 holders of record of the Common Stock, and
the closing price of the Common Stock was $5.25. 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.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected consolidated operating results and
balance sheet data of Epitope, Inc. and its subsidiaries. The balance sheet data
at September 30, 1999 and 1998 and the operating results data for the years
ended September 30, 1999, 1998 and 1997 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, 1997, 1996, and
1995 and operating results data for the years ended September 30, 1996 and 1995
have been derived from audited Consolidated Financial Statements and notes
thereto not included in this Annual Report on Form 10-K. This information should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included in Item 14 and Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPARATIVE FINANCIAL DATA
(In thousands, except per share data)
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
OPERATING RESULTS
Revenues......................................... $ 10,073 $ 9,792 $ 9,360 $ 5,594 $ 2,856
Operating costs and expenses..................... 13,555 12,042 14,323 10,881 14,464
Other income, net................................ 276 322 882 6,388(1) 1,157
(Loss) income from continuing operations......... (3,206) (1,928) (4,081) 1,101 (10,451)
Discontinued operations.......................... - - (18,359) (2,501) (8,045)
Net loss......................................... (3,206) (1,928) (22,440) (1,400) (18,496)
(Loss) income per share from continuing
operations..................................... (0.23) (0.14) (.30) .08(2) (.88)
Net loss per share............................... (0.23) (0.14) (1.67) (.11) (1.56)
Shares used in per share
calculations.................................... 13,957 13,529 13,404 12,661(2) 11,886
BALANCE SHEET DATA
Working capital.................................. $ 6,887 $ 6,510 $ 9,538 $ 24,793 $ 20,686
Total assets..................................... 10,694 10,357 17,012 29,784 26,142
Accumulated deficit.............................. (106,251) (103,046) (95,426) (72,985) (71,585)
Shareholders' equity............................. 8,576 8,274 15,014 27,967 22,347
</TABLE>
(1) Includes one-time licensing fee of $5.0 million.
(2) 13,440,000 shares used in calculation of income per share from continuing
operations due to common stock equivalents.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Statements below regarding future events or performance are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The Company's actual results could be quite different from those
expressed or implied by the forward-looking statements. Factors that could
affect results include: loss of key personnel; failure to comply with
regulations of the FDA or other regulatory agencies; obstacles to international
marketing of the Company's products; loss or impairment of sources of capital;
ability of the Company to develop product distribution channels; ability of the
Company to develop new products; development of competing products; market
acceptance of oral testing products; changes in federal or state law or
regulations; and uncertainties related to customers' and suppliers' ability to
achieve year 2000 compliance. These factors are discussed more fully under
"Forward-Looking Statements; Risk Factors" in Item 1, under "Year 2000
Readiness" in this Item 7, and elsewhere in this Annual Report on Form 10-K.
Although forward-looking statements help to provide complete information about
the Company, readers should keep in mind that forward-looking statements are
much less reliable than historical information. Readers are cautioned not to
place undue reliance on the forward-looking statements.
RESULTS OF OPERATIONS
The table below shows the amount (in thousands) and percentage of Epitope's
total revenue contributed by each of its principal products and by grants and
contracts.
<TABLE>
FISCAL YEAR 1999 1998 1997
Product Sales
<S> <C> <C> <C> <C> <C> <C>
Oral specimen collection devices.................. $7,762 77% $7,195 74% $6,279 67%
Western blot HIV confirmatory tests............... 2,133 21 2,370 24 1,791 19
Other product sales............................... 178 2 214 2 14 -
------ --- ------ --- ------ ---
10,073 100% 9,779 100% 8,084 86%
Grants and contracts................................. - - 13 - 1,276 14
------ --- ------ --- ------ ---
$10,073 100% $9,792 100% $9,360 100%
</TABLE>
REVENUES. Product sales increased by $294,000 or 3 percent from 1998 to 1999 and
by $1.7 million or 21 percent from 1997 to 1998 primarily as a result of
expanded sales volume of Epitope's lead product, the OraSure oral specimen
collection device. Approximately 30 percent of 1999 sales were attributable to
shipments in the fourth quarter. The increase in sales volume of the OraSure
device is primarily due to increased purchases of the device by the Company's
distributors for the life insurance testing market.
Sales of the Company's OraSure device increased by $567,000 or 8 percent from
1998 to 1999 and increased by $916,000 or 14.6 percent from 1997 to 1998.
OraSure device sales into the international market decreased $314,000 or 68
percent in 1999 reflecting the economic problems of many countries after
increasing $438,000 or 246 percent in 1998. The Company's total product sales
into foreign markets, including cotinine test devices and product components,
represented 3 percent, 6 percent and 2 percent of total sales in 1999, 1998 and
1997, respectively.
OraSure device sales into the public health markets in 1999 totaled $2.5 million
or 25 percent of total product sales which were the same as 1998. The life
insurance testing market contributed $5.1 million or approximately 51 percent of
total 1999 product sales, an increase of $884,000 or 21 percent over 1998.
Although sales are anticipated to continue rising in fiscal 2000, they may be
affected by seasonality and ordering patterns of customers in certain market
segments such as insurance. Expectations for future sales are based primarily on
forecasts provided to the Company by individual customers rather than firm
orders, as many of the customers in the public health market do not have
contractual arrangements with the Company.
Sales of the Company's Western blot HIV confirmatory test decreased by $237,000
or 10 percent from 1998 to 1999 and increased by $579,000 or 32 percent from
1997 to 1998. Sales in 1999 were negatively affected by a reduction in orders
from the Company's exclusive distributor for this product as the distributor
began to experience both an overall decline in the demand for Western blot
products and increased price competition.
18
<PAGE>
As of September 30, 1999, the Company had firm orders and contractual
commitments for delivery within 90 days of OraSure devices and Western blot HIV
confirmatory tests totaling approximately $715,000 and $362,000, respectively,
as compared to firm orders for delivery within 90 days of $940,000 and $570,000,
respectively, as of September 30, 1998.
Grant and contract revenues decreased by $13,000 or 100 percent from 1998 to
1999 and decreased $1.3 million or 99 percent from 1997 to 1998. The decrease in
1998 was due to the termination of the Company's development, license and supply
agreement with Smithkline Beecham, plc in July 1997. The Company received two
grants for the development of an oral fluid test for syphilis, as described in
Part I, the majority of which is anticipated to be received in fiscal 2000.
Grant applications for additional funding are also being considered.
GROSS MARGIN. The gross margin on product sales was 62 percent in 1999, 62
percent in 1998, and 57 percent in 1997. Although gross margin on the OraSure
device improved in 1999, it was offset by a decline in the gross margin of
Western blot products due to declining production volumes.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses increased
by $1.1 million or 36 percent from 1998 to 1999 and decreased by $1.2 million or
30 percent from 1997 to 1998. The increase in 1999 was primarily the result of
continued work on the OraQuick device, process improvements for OraSure,
Intercept(TM) Drugs of Abuse development, obtaining the European CE mark, and
FDA regulatory compliance. R&D expenses for 2000 are expected to exceed the 1999
level as funding for the syphilis test and clinical trials for OraQuick are
planned.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by $296,000 or 5 percent from 1998 to 1999 and
decreased by $1.2 million or 18 percent from 1997 to 1998. The increase in 1999
was primarily a result an accrual for costs related to the search for a new CEO
and increased costs in the development of international markets. The decrease in
1998 was primarily attributable to cost containment and a reduction in
compensation expense. 2000 sales and marketing expenses are expected to increase
over 1999 as a result of additional advertising and promotion to support
expansion in all markets and an increase in direct sales efforts in the
international area. Selling, general and administrative expenses were reduced by
$1.4 million in 1997 for amounts allocated to Agritope, Inc. See Note 3 to the
Consolidated Financial Statements under Item 14.
OTHER INCOME (EXPENSE), NET. Interest income decreased in 1999, primarily due
to lower levels of invested funds.
YEAR 2000 READINESS
The Company has completed its planned systems upgrades and replacements, as part
of a regular ongoing upgrade program, during fiscal 1999. Upgraded or
replacement systems have all been certified Year 2000 (Y2K) compliant. Responses
to inquiries or other sources of information regarding Y2K compliance have been
received from substantially all vendors, suppliers, and customers, the
interruption of whose businesses would have a material effect on the Company. A
contingency plan has been completed and testing of the plan has been completed
to the extent possible. The Company has incurred $133,000 in costs to date for
Y2K compliance and does not anticipate incurring any other material costs to
resolve issues relating to the Y2K problem internally. Such costs were funded by
available cash and cash equivalents.
At the current time, the Company believes that all essential products and
internal systems and equipment are now Y2K compliant. This belief is based on
the representations made by vendors and, where possible, by testing. In
addition, Epitope has not investigated Y2K compliance of third parties that are
either not critical or significant to the Company's operations or are not
currently vendors, suppliers, or customers of the Company. Any failure of the
Company or its vendors, suppliers, customers, or any third party governmental or
business entities to be Y2K compliant could materially affect the business,
results of operations, financial conditions and prospects of Epitope, the impact
of which cannot be quantified at this time.
This section captioned "Year 2000 Readiness" is a "Year 2000 Readiness
Disclosure" pursuant to the Year 2000 Information and Readiness Disclosure Act.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 9/30/99 9/30/98
Cash and cash equivalents....................... $1,076 $1,164
Marketable securities........................... 4,533 4,455
Working capital................................. 6,887 6,510
Net cash flows used in operating activities increased by $867,000 from 1998 to
1999. Cash and cash equivalents had a net decline of $88,000 from 1998 to 1999.
The decline would have been much greater without the exercise of options to
purchase common stock which represented the primary sources of funds for meeting
the Company's requirements for operations, working capital and business
expansion in 1999. The Company received proceeds of $3.2 million, $448,000, and
$1,668,000 from the exercise of options to purchase common stock in 1999, 1998
and 1997, respectively.
Research grant funding from strategic partners was $0, $13,000, and $1.3 million
in 1999, 1998 and 1997, respectively. The acquisition of capital equipment for
manufacturing, research and development, and computer system upgrades used
$646,000, $141,000, and $197,000 in 1999, 1998 and 1997, respectively. In 1998
and 1997 the funding of the Company's discontinued operations, required $2.1
million and $7.7 million, respectively. See Note 3 to the Consolidated Financial
Statements under Item 14.
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 to support growth. The Company
believes that its operating liquidity requirements for the foreseeable future
can be met by existing resources, including marketable securities and cash
generated by operations. The Company may also receive funds through the exercise
of outstanding stock options and warrants as well as research grants. There can
be no assurances however that such funds will be available.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not hold material amounts of derivative financial instruments,
other financial instruments, or derivative commodity instruments, and
accordingly has no material market risk to report under this item. See Note 2 to
the Consolidated Financial Statements included under Item 14.
20
<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.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(In thousands, except (loss) income per share)
The following table presents summarized quarterly results of operations for each
of the fiscal quarters in the Company's fiscal years ended September 30, 1999
and 1998. 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 data should be read in conjunction with the Consolidated
Financial Statements and related notes thereto included in Item 14 of this
Annual Report on Form 10-K.
<TABLE>
<S> <C> <C> <C> <C> <C>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
YEAR ENDED SEPTEMBER 30, 1999
Revenues........................................... $ 2,244 $ 2,073 $ 2,688 $ 3,068 $ 10,073
Operating costs and expenses....................... 3,003 2,976 3,517 4,059 13,555
Other income, net.................................. 59 70 65 82 276
Net loss........................................... (700) (833) (764) (909) (3,206)
Basic and diluted net loss per share............... (.05) (.06) (.05) (.07) (.23)
YEAR ENDED SEPTEMBER 30, 1998
Revenues........................................... 1,603 2,103 2,783 3,303 9,792
Operating costs and expenses....................... 2,653 2,921 3,109 3,360 12,043
Other income, net.................................. 95 84 66 78 323
Net income (loss).................................. (955) (734) (260) 21 (1,928)
Basic and diluted net loss per share............... (.07) (.05) (.02) 0.00 (0.14)
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE>
PART III
The Company has omitted from Part III the information that will appear in the
Company's definitive proxy statement for its 1999 annual meeting of shareholders
(the Proxy Statement), which will be filed within 120 days after the end of the
Company's fiscal year pursuant to Regulation 14A.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference to the
information under the captions "Election of Directors," "Executive Officers,"
"Compensation Committee Interlocks and Insider Participation," and "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference to the
information under the caption "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference to the
information under the caption "Principal Shareholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) and (a)(2) Consolidated Financial Statements and Schedules.
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS Page
Report of Independent Accountants.............................................24
Consolidated Balance Sheets at September 30, 1999 and 1998....................25
Consolidated Statements of Operations for years ended
September 30, 1999, 1998, and 1997.........................................26
Consolidated Statements of Changes in Shareholders' Equity for years ended
September 30, 1999, 1998, and 1997.........................................27
Consolidated Statements of Cash Flows for years ended
September 30, 1999, 1998, and 1997.........................................28
Notes to Consolidated Financial Statements....................................29
No schedules have been presented because they are either not required or the
information is in the consolidated financial statements.
23
<PAGE>
PRICEWATERHOUSECOOPERS [logo]
PRICEWATERHOUSECOOPERS LLP
1300 SW Fifth Avenue
Suite 3100
Portland OR 97201-5638
Telephone (503) 478 6000
Facsimile (503) 478 6099
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Epitope, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statement of operations, of changes in shareholders' equity, and of
cash flows present fairly, in all material respects, the financial position of
Epitope, Inc. and its subsidiaries at September 30, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States, 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.
/s/ PriceWaterhouseCoopers LLP
November 12, 1999
24
<PAGE>
EPITOPE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
SEPTEMBER 30 1999 1998
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 1,075,898 $ 1,164,275
Marketable securities.................................................. 4,532,594 4,455,044
Trade accounts receivable, net (Note 2)................................ 1,489,884 1,519,652
Other accounts receivable.............................................. 73,356 47,818
Inventories (Note 2)................................................... 1,504,050 1,092,577
Prepaid expenses....................................................... 329,958 313,941
--------- ---------
Total current assets................................................... 9,005,740 8,593,307
Property and equipment, net (Note 4)................................... 1,030,595 819,095
Patents and proprietary technology, net (Note 2)....................... 487,085 596,169
Other assets and deposits.............................................. 170,895 348,733
---------- ----------
$ 10,694,315 $ 10,357,304
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable....................................................... $ 474,713 $ 566,894
Salaries, benefits and other accrued liabilities ...................... 1,643,573 1,516,395
------------ ----------
Total current liabilities.............................................. 2,118,286 2,083,289
Commitments and contingencies (Note 9)................................. - -
Shareholders' equity (Note 5)
Preferred stock, no par value - 1,000,000 shares authorized; no
shares outstanding................................................... - -
Common stock, no par value - 30,000,000 shares authorized; 14,245,097
and 13,577,319 shares issued and outstanding, respectively........... 114,827,231 111,319,573
Accumulated deficit.................................................... (106,251,202) (103,045,558)
------------- -------------
8,576,029 8,274,015
$ 10,694,315 $ 10,357,304
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
<TABLE>
<S> <C> <C> <C>
EPITOPE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30 1999 1998 1997
Revenues
Product sales............................................... $10,072,961 $ 9,778,930 $ 8,083,606
Grants and contracts........................................ 59 12,652 1,276,454
-------------- ------------ -----------
10,073,020 9,791,582 9,360,060
Costs and expenses
Product costs............................................... 3,847,444 3,684,702 3,512,054
Research and development costs.............................. 3,972,096 2,917,742 4,156,996
Selling, general and administrative expenses................ 5,735,408 5,439,743 6,654,553
---------- ----------- -----------
13,554,948 12,042,187 14,323,603
Loss from operations........................................ (3,481,928) (2,250,605) (4,963,543)
Other income (expense), net
Interest income............................................. 278,889 362,694 885,583
Interest expense............................................ (989) (8,868) (8,165)
Other, net.................................................. (1,616) (31,229) 4,861
------------ ------------ ------------
276,284 322,597 882,279
Net loss from continuing operations......................... (3,205,644) (1,928,008) (4,081,264)
Discontinued operations (Note 3)
Loss from discontinued operations; Agritope................. - - (9,890,599)
Income from discontinued operations; A&W.................... - - 170,646
Estimated loss on disposal of A&W........................... - - (8,639,054)
------------ ------------ -----------
- - (18,359,007)
Net loss.................................................... $(3,205,644) $ (1,928,008) $(22,440,271)
Basic and diluted loss per share from continuing operations. $ (0.23) $ (.14) $ (.30)
Basic and diluted loss per share............................ $ (0.23) $ (.14) $ (1.67)
Weighted average number of shares
outstanding................................................ 13,956,512 13,528,596 13,404,402
The accompanying notes are an integral part of these statements.
</TABLE>
26
<PAGE>
EPITOPE, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C>
COMMON STOCK ACCUMULATED
SHARES DOLLARS DEFICIT TOTAL
BALANCES AT SEPTEMBER 30, 1996.............. 12,937,383 $100,952,282 $(72,985,262) $27,967,020
Common stock issued upon
exercise of options....................... 16,124 168,211 - 168,211
Common stock issued as
compensation.............................. 41,088 323,938 - 323,938
Compensation expense for
stock option grants....................... - 489,668 - 489,668
Common stock issued upon exchange
of convertible notes (Note 3)............. 250,367 4,529,009 - 4,529,009
Equity issuance costs....................... - (86,134) - (86,134)
Capital contributed in rescission (Note 3).. - 1,820,000 - 1,820,000
Common stock issued for cash................ 209,368 1,500,000 - 1,500,000
Minority interest investment in Vinifera.... - 742,752 - 742,752
Net loss for the year....................... - - (22,440,271) (22,440,271)
---------- ----------- ------------ ------------
BALANCES AT SEPTEMBER 30, 1997.............. 13,454,330 110,439,726 (95,425,533) 15,014,193
Common stock issued upon
exercise of options....................... 91,278 411,052 - 411,052
Common stock issued under the Employee
Stock Purchase Plan....................... 14,451 54,814 - 54,814
Common stock issued as
matching savings plan contributions....... 17,260 80,740 - 80,740
Compensation expense for
stock option grants....................... - 333,241 - 333,241
Spin-off of Agritope ....................... - - (5,692,017) (5,692,017)
Net loss for the year....................... - - (1,928,008) (1,928,008)
---------- ----------- ------------- -----------
BALANCES AT SEPTEMBER 30, 1998.............. 13,577,319 111,319,573 (103,045,558) 8,274,015
Common stock issued upon
exercise of options....................... 632,580 3,028,576 3,028,576
Common stock issued as
compensation.............................. 6,233 29,996 29,996
Common stock issued under the Employee
Stock Purchase Plan....................... 16,002 59,697 59,697
Common stock issued as
matching savings plan contributions....... 12,963 75,475 75,475
Compensation expense for
stock option grants....................... - 313,914 313,914
Net loss for the year....................... - - (3,205,644) (3,205,644)
---------- ----------- ------------- -----------
BALANCES AT SEPTEMBER 30, 1999.............. 14,245,097 $114,827,231 $(106,251,202) $8,576,029
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
EPITOPE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30 1999 1998 1997
Cash flows from operating activities
Net loss.................................................. $ (3,205,644) $ (1,928,008) $ (22,440,271)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss from discontinued operations......................... - - 18,359,007
Depreciation and amortization............................. 663,388 669,839 729,970
Loss on disposition of property........................... 7,081 31,290 17,888
Decrease (increase) in receivables........................ 4,230 (510,474) 264,686
(Increase) decrease in inventories........................ (411,473) 232,070 (166,717)
(Decrease) increase in prepaid expenses................... (16,017) (235,701) 11,278
Increase (decrease) in other assets and deposits.......... 195,273 (292,544) (32,340)
Increase in accounts payable and accrued
liabilities............................................. 34,997 85,179 180,773
Common stock issued as compensation for services.......... 29,996 - 323,938
Compensation expense for stock option grants and
deferred salary increases............................... 313,914 431,482 489,668
---------- ---------- -----------
Net cash used in operating activities..................... (2,384,255) (1,516,867) (2,262,120)
Cash flows from investing activities
Investment in marketable securities....................... (11,173,092) (13,524,782) (20,106,837)
Proceeds from sale of marketable securities............... 11,095,542 16,213,797 31,783,317
Additions to property and equipment....................... (645,508) (140,903) (196,910)
Proceeds from sale of property............................ - 37,629 -
Expenditures for patents and proprietary technology....... (127,377) (157,063) (265,435)
Investment in affiliated companies........................ (17,435) (1,090) (6,702,299)
------------ ----------- -----------
Net cash (used in) provided by investing activities....... (867,870) 2,427,588 4,511,836
Cash flows from financing activities
Proceeds from issuance of common stock.................... 3,163,748 448,365 1,668,211
Cash to Agritope (Note 3)................................. - (2,129,291) (7,682,710)
----------- ----------- -----------
Net cash provided by (used in) financing activities....... 3,163,748 (1,680,926) (6,014,499)
Net decrease in cash and cash equivalents................. (88,377) (770,205) (3,764,783)
Cash and cash equivalents at beginning of year............ 1,164,275 1,934,480 5,699,263
----------- ----------- -----------
Cash and cash equivalents at end of year.................. $ 1,075,898 $ 1,164,275 $ 1,934,480
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 THE COMPANY
Epitope, Inc. (Epitope or the Company) develops, manufactures and markets oral
specimen collection devices and diagnostic products using its proprietary oral
fluid technologies. These products are sold to public and private-sector clients
in the United States and certain foreign countries. The Company's primary focus
is on the detection of antibodies to the Human Immunodeficiency Virus (HIV), the
cause of Acquired Immune Deficiency Syndrome (AIDS). The Company's technology is
also being used to test for drugs-of-abuse and other analytes. Commercial
distribution of the Company's oral specimen collection device as part of a test
for five major drugs-of-abuse is scheduled to begin in calendar year 2000.
See Note 3, Discontinued Operations, below.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Company and its wholly and majority owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS; MARKETABLE SECURITIES. 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, 1999, 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.
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," the Company has categorized
all of its investments as available-for-sale securities and, accordingly,
unrealized gains and losses on such investments, if material, are carried as a
separate component of comprehensive income. Such unrealized gains and losses
were immaterial as of September 30, 1999 and 1998.
TRADE ACCOUNTS RECEIVABLE. Accounts receivable are stated net of an allowance
for doubtful accounts of $50,000 and $49,513, respectively, at September 30,
1999 and 1998.
INVENTORIES. Inventories are recorded at the lower of standard cost (which
approximates actual cost on a first-in, first-out basis) or market. Inventory
components are summarized as follows:
SEPTEMBER 30 1999 1998
Raw materials...................... $ 360,806 $ 238,916
Work-in-process.................... 441,952 627,503
Finished goods..................... 701,292 211,703
Supplies........................... - 14,455
--------- ---------
$ 1,504,050 $ 1,092,577
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 using the
straight-line method over the estimated lives of the related assets (three to
seven years). Leasehold improvements are generally amortized over the shorter of
estimated useful lives or the terms of the related leases. When assets are sold
or otherwise disposed of, cost and the related accumulated depreciation or
amortization are removed from the accounts and any resulting gain or loss is
included in operations.
29
<PAGE>
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.
<TABLE>
<S> <C> <C> <C> <C>
Amortization and accumulated amortization are summarized as follows:
1999 1998 1997
Amortization expense for the year ended September 30.... $ 236,463 $ 218,381 $ 209,180
Accumulated amortization at September 30................ 1,285,134 1,048,671 830,290
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amounts for cash equivalents,
accounts receivable, and accounts payable approximate fair value because of the
immediate or short-term maturity of these financial instruments.
REVENUE RECOGNITION. Product revenues are generally derived from the sale of
products and are recognized as revenue when the related products are shipped.
Grant and contract revenues include funds received under research and
development agreements with various entities. Such revenues are recognized in
accordance with the contract terms.
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.
SHARED SERVICES. For the year ended September 30, 1997 certain corporate
overhead services were provided by Epitope on a centralized basis for the
benefit of the Company's subsidiaries (Shared Services). The related
subsidiaries' operating results are included in discontinued operations. See
Note 3, Discontinued Operations. Selling, general and administrative expenses
have been reduced by the cost of Shared Services allocated to the discontinued
operations of $1,402,895 for the year ended September 30, 1997.
INCOME TAXES. The Company accounts for certain revenue and expense items
differently for income tax purposes than for financial reporting purposes. The
Company accounts for income taxes under the asset and liability method for
accounting for income taxes whereby 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. See Note 8,
Income Taxes.
STOCK-BASED COMPENSATION. Statement of Financial Accounting Standards No. 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 accounting rules specified in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), but with additional
financial statement disclosure. The Company has elected to continue to account
for its stock-based compensation under APB 25. See Note 5, Shareholders' Equity.
INCOME (LOSS) PER SHARE. Basic income (loss) per share has been computed using
the weighted average number of shares of common stock outstanding during the
period. Diluted income (loss) per share includes the effect of potential common
stock, unless its effect is anti-dilutive. Potential common stock consists 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 such exercise. Basic and diluted net income
(loss) per share are the same for the years ended September 30, 1999, 1998 and
1997. On September 30, 1999, 1998 and 1997, the weighted average shares
outstanding were 13,956,512, 13,528,596 and 13,404,402, respectively. Shares of
potential common stock on September 30, 1999, 1998 and 1997, of 6,075,376,
6,206,279 and 4,428,141, respectively, were not included in the calculation of
diluted loss per share as they were anti-dilutive.
30
<PAGE>
STATEMENT OF CASH FLOWS. Cash paid for interest approximated interest expense in
1999, 1998 and 1997. No cash was paid for income taxes in 1999, 1998, or 1997.
Compensation expense amounted to $343,910, $431,482 and $813,606 in 1999, 1998
and 1997, respectively, related to the issuance of compensatory equity
securities which also represent non-cash transactions.
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.
COMPREHENSIVE INCOME. On June 15, 1997 the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130). SFAS No. 130 is effective for all fiscal
quarters of all fiscal years beginning after December 15, 1997 (October 1, 1998
for the Company). Since the Company adopted this pronouncement there have been
no items of other comprehensive income (loss) that are required to be reported.
NOTE 3 DISCONTINUED OPERATIONS
On December 30, 1997, the Company distributed all of its shares of Agritope,
Inc. (Agritope) common stock through a stock dividend to Epitope shareholders of
record as of December 26, 1997. Epitope no longer owns or controls any shares of
Agritope stock. The costs of the spin-off and Agritope's operating losses
through December 30, 1997 were estimated and accounted for in fiscal year 1997.
Fiscal 1997 also included the loss from discontinued operations of Agritope and
Andrew and Williamson Sales, Co. (A&W).
AGRITOPE. Agritope's results of operations are presented as discontinued
operations in the accompanying consolidated financial statements for the period
ended September 30, 1997. All intercompany loans from Epitope to Agritope were
deemed to be terminated and reflected as capital contributions to Agritope as of
the spin-off date consistent with the separation agreement between Epitope and
Agritope dated December 1, 1997. The 1997 loss from discontinued operations of
Agritope includes an accrual of $1.2 million for Agritope's operating losses,
from October 1, 1997 to December 1, 1997, and costs of the spin-off of Agritope
which occurred on December 30, 1997 in accordance with Accounting Principles
Board Opinion No. 30, "Reporting the Effects of Disposal of a Portion or Segment
of a Business." This amount is not included in the table below. All net expenses
of Agritope subsequent to December 1, 1997, were borne by Agritope.
ANDREW AND WILLIAMSON SALES, CO. On December 12, 1996, a subsidiary of the
Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a fruit
and vegetable producer and wholesale distributor. The merger was rescinded on
May 27, 1997. Epitope received A&W preferred stock in the rescission which
carries no value on the accompanying balance sheet based upon management's
estimate of fair value on the date it was received. A&W's results of operations
for the period from December 13, 1996 through May 27, 1997 and the total
estimated loss on disposal are presented in the accompanying financial
statements as discontinued operations.
The summarized Statement of Operations for Agritope and subsidiaries is as
follows:
SEPTEMBER 30 1997
Revenue............................................... $ 1,551,190
Operating costs and expenses.......................... 6,088,883(1)
Other income (expense), net........................... (4,427,275)
Minority interest in subsidiary net loss.............. 274,369
----------
Net loss from operations $(8,690,599)
(1) Does not include $1.2 million of accrued operating losses and spin-off costs
for the period of October 1, 1997 to December 1, 1997. Such operating losses and
spin-off costs have been reflected in the consolidated statement of operations
in 1997.
31
<PAGE>
NOTE 4 PROPERTY AND EQUIPMENT
<TABLE>
<S> <C> <C>
Property and equipment are summarized as follows:
SEPTEMBER 30 1999 1998
Research and development laboratory equipment.............. $ 1,117,817 $ 1,014,015
Manufacturing equipment.................................... 1,590,723 1,423,580
Office furniture and equipment............................. 1,785,422 1,753,455
Leasehold improvements..................................... 1,155,862 1,102,895
Construction in progress................................... 234,714 63,503
---------- ----------
5,884,538 5,357,448
Less accumulated depreciation and amortization............. (4,853,943) (4,538,353)
----------- -----------
$ 1,030,595 $ 819,095
</TABLE>
NOTE 5 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.
On December 15, 1997, Epitope's Board of Directors approved a Shareholder Rights
Plan that would allow the Company to protect shareholders' interests in the
event of an attempted takeover of the Company. A dividend distribution of one
Right for each outstanding share of common stock was issued to shareholders of
record at the close of business on December 26, 1997. Each Right entitles the
registered holder to purchase from Epitope 1/1000 of a share of Series A Junior
Participating Cumulative Preferred Stock at a price of $60 per share subject to
adjustment. The Rights become exercisable in the event a person or group of
affiliated or associated persons (other than the Company or its employee benefit
plans) acquires or obtains the right to acquire 15 percent or more of the
outstanding shares of common stock. With certain exceptions, if any person
becomes the beneficial owner of 15 percent or more of the Company's common
stock, each of the Rights (other than Rights held by that person and certain of
its transferees, all of which will be voided) entitles the holder to acquire
shares of the Company's common stock having a value equal to twice the Right's
exercise price. The Rights will expire on the earliest of the close of business
on December 26, 2007, upon exchange by the Company for common stock, or upon
redemption at the option of the Company for $0.01 per Right.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE. As of September 30, 1999, the
following shares of the Company's common stock were reserved for future
issuance, as more fully described below:
PURPOSE SHARES
Outstanding stock options................................. 3,448,094
Outstanding warrants...................................... 2,537,307
Employee Stock Purchase Plan subscriptions................ 82,712
---------
6,068,113
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.
Options issued to employees under the ISOP were issued at prices not less than
the fair market value of a share of common stock on the date of grant. These
options generally expire ten years from the date of grant.
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 incentive option may be
exercised is ten years from the date of grant. To date, options have generally
been granted with four-year vesting schedules. The options
32
<PAGE>
are generally exercisable after one year from the date of grant at the rate of
25 percent after one year and the balance at 1/36th monthly thereafter.
The 1991 Plan also provides 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.
SFAS 123 requires the following financial statement disclosure:
Options granted and outstanding under the Company's stock option plans are
summarized as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997
SHARES PRICE SHARES PRICE SHARES PRICE
Outstanding at
beginning of period .... 3,630,727 $1.29 - 18.17 3,499,865 $3.50 - 20.38 3,365,726 $3.50 - 24.00
Granted..................... 650,793 2.41 - 6.84 4,237,156 1.29 - 18.17 2,801,403 3.50 - 14.81
Exercised................... (632,580) 3 54 - 6.31 (91,278) 2.79 - 5.04 (16,124) 7.25 - 14.81
Canceled.................... (200,846) 3.06 - 18.17 (4,015,016) 3.50 - 20.38 (2,651,140) 3.50 - 24.00
---------- ------------ ----------- ------------ ----------- ------------
Outstanding at end of period 3,448,094 1.29 - 18.17 3,630,727 1.29 - 18.17 3,499,865 $3.50 - 20.38
Exercisable................. 2,386,856 1.29 - 18.17 2,621,613 1.29 - 18.17 2,474,623 $3.50 - 20.38
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Number of Weighted Average Remaining
Exercise Price Range Shares Average Price Contractual Life
- -------------------- ------ ------------- ----------------
$1.29 - $ 4.04 684,706 3.16 8.40
4.17 - 4.17 625,000 4.17 6.27
4.22 - 4.97 318,083 4.48 20.59
5.04 - 5.04 1,413,817 5.04 9.16
5.75 - 18.17 406,489 7.84 9.30
</TABLE>
Options exercisable at September 30, 1999 totaled 2,386,856 shares at a weighted
average exercise price of $4.97. Options available for grant at September 30,
1999 totaled 379,858.
Pursuant to the 1991 Plan, 2478 shares of common stock were also awarded to
consultants and members of the Company's scientific advisory committees during
1998. No shares were awarded in 1999 or 1997.
COMMON STOCK WARRANTS. As of September 30, 1999, the following warrants to
purchase shares of common stock were outstanding:
EXERCISE
SHARES PRICE EXPIRATION DATE
September 26, 1991..... 159,150 5.91 September 30, 2000
December 23, 1992..... 988,390 5.91 September 30, 2000
July 20, 1993......... 375,000 5.91 September 30, 2000
August 1, 1993......... 200,000 5.91 September 30, 2000
October 17, 1994....... 50,000 5.91 September 30, 2000
November 22, 1994...... 228,100 5.91 September 30, 2000
May 15, 1998......... 416,667 5.91 December 30, 2000
September 30, 1998..... 120,000 6.13 September 30, 2008
---------
2,537,307
EMPLOYEE STOCK PURCHASE PLAN. In 1993, the shareholders approved the Company's
adoption of the 1993 Employee Stock Purchase Plan (1993 ESPP). The plan, as
subsequently approved and amended by the Company's shareholders, covers a
maximum of 500,000 shares of common stock for subscription over established
offering periods. The Executive Compensation Committee of the Board of Directors
determines the number of offering
33
<PAGE>
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. The purchase price for stock purchased under the 1993 ESPP for each
subscription period is 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 the 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.
As of September 30, 1999, 82,712 shares of common stock were subscribed for
through two offerings under the 1993 ESPP. Shares subscribed for under these
1993 ESPP offerings may be purchased over 24 months and had initial subscription
prices of $6.99 and $2.74 per share. The subscription prices for the offering
prior to December 30, 1997 were adjusted in fiscal 1998 as a result of the
spin-off of Agritope from $6.99 to $4.78 per share. During the year ended
September 30, 1999, 16,002 shares were issued at prices ranging from $2.74 to
$4.78 under the 1993 ESPP.
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. No shares were issued under a
Special Offering Subscription during 1999, 1998 or 1997.
The Company has elected to account for its stock-based compensation under the
provisions of APB 25. However, as required by SFAS No. 123, the Company has
computed for pro forma disclosure purposes the value of options granted during
1999, 1998 and 1997 using the Black-Scholes option pricing model. The weighted
average assumptions used for stock option grants for 1999, 1998 and 1997 were a
risk-free interest rate of 5.1, 5.7 and 5.9 percent, respectively, no expected
dividend yield, an expected life of 3.8, 3.9 and 4.3 years, respectively, and an
expected volatility of 66, 60 and 53 percent, respectively. Options were assumed
to be exercised upon vesting for purposes of this valuation. Adjustments are
made for options forfeited prior to vesting. For the years ended September 30,
1999, 1998 and 1997, the total value of the options granted was computed to be
$1,705,940, $6,861,799 and $9,096,600, respectively, which would be amortized on
the straight-line basis over the vesting period of the options.
The weighted average assumptions used for 1993 ESPP rights for 1999, 1998 and
1997 were a risk-free interest rate of 5.8, 5.6 and 6.1 percent, respectively,
no expected dividend yield, an expected life of 1.0, 2.0, and 2.0 years,
respectively, and an expected volatility of 69, 69 and 63 percent, respectively.
The weighted-average fair value of ESPP rights granted in 1999, 1998 and 1997
were $141,397, $55,066 and $248,700, respectively.
If the Company had accounted for these plans in accordance with SFAS 123, the
Company's net loss and pro forma net loss per share would have been reported as
follows:
YEAR ENDED SEPTEMBER 30 1999 1998
BASIC AND BASIC AND
DILUTED DILUTED
NET LOSS NET LOSS NET LOSS NET LOSS
PER SHARE PER SHARE
As reported................ $(3,205,664) $(0.23) $(1,928,008) $(0.14)
Pro forma.................. $(5,467,219) $(0.39) $(4,957,178) $(0.37)
The effects of applying SFAS 123 in providing pro forma disclosure for 1999 and
1998 are not likely to be representative of the effects on reported net income
and earnings per share for future years since options vest over several years
and additional awards are made each year.
34
<PAGE>
NOTE 6. 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 1999, 1998 and 1997, respectively, the Company contributed
$75,475 (12,963 shares), $80,741(17,260 shares) and $101,737 (11,459 shares,
totaling $101,721 and the remainder in cash). As of September 30, 1999, 38,325
shares of Epitope common stock are held by the plan.
NOTE 7 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 maintains 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 Western blot HIV
confirmatory tests on a worldwide basis. The agreements have been extended to
March 31, 2001 and continue to renew each year thereafter unless prior notice of
cancellation is given by the Company or Organon Teknika. The distribution
agreement includes 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, 1999, 1998 and 1997, respectively,
revenues generated from sales of Western blot tests to Organon Teknika were
$2,132,920, $2,371,135 and $1,791,290, including export sales of $0, $1,250 and
$15,750.
LabOne, Inc. (LabOne) 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, 2005,
with an automatic five-year renewal, unless either party notifies the other of
intent not to renew at least 180 days prior to the expiration date. In 1998, the
Company entered into an additional agreement with LabOne to provide a
prepackaged OraSure test kit with prepaid testing and sample shipment to LabOne
via Airborne Express. This product package is sold directly to the public health
customers by the Epitope sales force. For the years ended September 30, 1999,
1998 and 1997, respectively, revenues generated from product sales to LabOne
were $2,768,971, $2,773,351, and $3,194,698, including export sales of $0,
$402,150 and $597,000.
NOTE 8 INCOME TAXES
As of September 30, 1999, the Company had net operating loss carryforwards to
offset federal and state taxable income of approximately $52.4 million and $49.5
million, respectively. Approximately $8.3 million of the Company's net operating
loss carryforwards were generated as a result of deductions related to the
exercise of stock options. If 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 Epitope's deferred tax asset were as follows:
SEPTEMBER 30 1999
Net operating loss carryforwards.................. $20,123,000 $ 18,532,000
Stock compensation................................ 1,945,000 1,829,000
Research and experimentation credit carryforwards. 1,121,000 1,026,000
Accrued expenses.................................. 350,000 269,000
Other............................................. 687,000 779,000
----------- ----------
Gross deferred tax assets......................... 24,226,000 22,435,000
Valuation allowance............................... (24,226,000) (22,435,000)
------------ -----------
Net deferred tax asset............................ $ - $ -
35
<PAGE>
No benefit for these assets has been reflected in the accompanying consolidated
financial statements as they do not satisfy the recognition criteria set forth
in SFAS 109. Accordingly, a valuation allowance of $24.2 million, representing a
$1.8 million increase since the prior fiscal year end, has been recorded.
The tax benefit of approximately $1.1 million for the year ended September 30,
1999, calculated using the statutory tax rate, has been increased by
approximately $141,000 for the effect of state and local taxes (net of federal
impact) and $559,000 for other permanent and temporary differences, and is
reduced by approximately $1.8 million for the effect of the increase in the
valuation allowance.
NOTE 9 COMMITMENTS AND CONTINGENCIES
The Company leases office, manufacturing, warehouse and laboratory facilities
under operating lease agreements which require minimum annual payments as
follows:
YEAR ENDING SEPTEMBER 30
2000....................................... $ 361,423
2001....................................... 375,867
2002....................................... 388,743
2003....................................... 380,628
2004 and after............................. 523,364
---------
$ 2,030,025
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, taxes 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 $435,569, $433,002 and $409,970 for
the years ended September 30, 1999, 1998 and 1997, respectively. There were no
items considered as contingencies at September 30, 1999.
NOTE 10 SEGMENT AND GEOGRAPHIC AREA INFORMATION
The following disclosures are required by the Statement of Financial Accounting
Standards No. 131, "Segment Disclosures and Related Information" (SFAS 131):
The Company's products are all included in the medical products industry
segment. See Note 1 for a description of the Company's business. The Company's
products are sold principally in the United States, Canada, Asia and Latin
America. Operating loss represents revenues less operating expenses. No
operating income or loss is reflected for geographic areas other than the United
States and Asia as all revenues for other geographic areas are exports from the
United States. Most sales to Canada are for the life insurance market and have
been made through U.S. laboratories since third quarter 1998.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS
GEOGRAPHIC REVENUES OPERATING LOSS IDENTIFIABLE ASSETS
AREAS 1999 1998 1997 1999 1998 1997 1999 1998 1997
United
States.... $9,771 $8,774 $8,569 $(3,499) $(2,264) $(4,935) $10,694 $10,357 $17,012
Canada....... 10 415 608 - - - - - -
Asia......... 251 341 130 17 13 (29) - - -
Latin
America.... 7 202 4 - - - - - -
Europe....... 29 59 49 - - - - - -
Other........ 5 1 - - - - - - -
------- ------ ------ -------- -------- -------- ------- ------- -------
$10,073 $9,792 $9,360 $(3,482) $(2,251) $(4,964) $10,694 $10,357 $17,012
</TABLE>
In addition to those customers discussed in Note 7, Osborn Group, Inc. and
Clinical Reference Laboratory accounted for 11 percent ($1,139,750) and 10
percent ($1,042,375) of the Company's fiscal 1999 sales, respectively. In 1998
and 1997 no customers accounted for more than 10% of the Company's sales except
as discussed in Note 7.
36
<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.
37
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on December 23, 1999.
EPITOPE, INC.
By *CHARLES E. BERGERON
--------------------------------
Charles E. Bergeron
Interim President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed on December 23, 1999, by the following persons on behalf of the
Registrant and in the capacities indicated.
SIGNATURE TITLE
/S/ CHARLES E. BERGERON Interim President and Chief Financial Officer
Charles E. Bergeron (Principal Executive Officer and Principal
Financial Officer)
/S/ THEODORE R. GWIN Controller
Theodore R. Gwin (Principal Accounting Officer)
*W. CHARLES ARMSTRONG Director
W. Charles Armstrong
*ANDREW S. GOLDSTEIN Senior Vice President and Director
Andrew S. Goldstein
*MARGARET H. JORDAN Director
Margaret H. Jordan
*JOHN W. MORGAN Director
John W. Morgan
*MICHAEL J. PAXTON Director
Michael J. Paxton
*ROGER L. PRINGLE Director
Roger L. Pringle
*G. PATRICK SHEAFFER Director
G. Patrick Sheaffer
*ROBERT J. ZOLLARS Director
Robert J. Zollars
* /S/ CHARLES E. BERGERON
Charles E. Bergeron
(Attorney-in-Fact)
38
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INDEX TO EXHIBITS
Exhibit
Number Exhibit
3.1 Restated Articles of Incorporation, as amended, of Registrant.
Incorporated by reference to Exhibit 3 to the Registrant's
Registration Statement on Form 8-A filed December 26, 1997
(Registration Statement No. 000-15337).
3.2 Restated Bylaws of Registrant. Incorporated by reference to
Exhibit 3.2 to the Registrant's Annual Report on Form 10-K for
the year ended September 30, 1997 (the 1997 10-K).
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 Warrant Purchase Agreement dated as of November 25, 1992,
between certain investors and Registrant. Copies of the
agreements with individual investors shall be filed with the
Commission upon request pursuant to Item 601, Instruction 2.
Incorporated by reference to Exhibit 4.5 to the Registrant's
Annual Report on Form 10-K for the year ended September 30,
1992 (the 1992 10-K).
4.4 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).
4.5 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.
4.6 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.
4.7 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 12, 1997.
4.8 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 12, 1997.
4.9 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 12, 1997.
39
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4.10 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 12, 1997.
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 1997 10-K.*
10.3 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.
10.4 Fourth Amendment dated May 20, 1994, to Lease dated July 17,
1990, among Registrant, Koll Woodside Associates, a California
general partnership, and Petula Associates, Ltd., an Iowa
corporation. Incorporated by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended June 30, 1994 (June 1994 10-Q).
10.5 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.
10.6 Lease dated October 25, 1999 between PS Business Parks, L.P.,
a California Limited Partnership, and Registrant.
10.7 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.
10.8 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.
10.9 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).*
10.10 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.*
10.11 Employment Agreement dated January 19, 1998, between Charles
E. Bergeron and Registrant. Incorporated by reference to
Exhibit 10.21 to Amendment No. 1 to the 1997 10-K (the 1997
10-K Amendment).*
10.12 Employment Agreement dated January 13, 1998, between J.
Richard George, Ph.D. and Registrant. Incorporated by
reference to Exhibit 10.22 to the 1997 10-K Amendment.*
10.13 Business Protection Agreement dated April 28, 1988, between
Mr. Goldstein and Registrant.
10.14 Business Protection Agreement dated April 17, 1995, between
Dr. George and Registrant.
10.15 Employment Agreement dated May 16, 1999, between William D.
Block and Registrant.
10.16 Form of Business Protection Agreement entered into between Mr.
Block dated April 20, 1999, and Rob Ngungu, Vice President of
Quality Assurance and Regulatory Affairs, dated October 25,
1999, and Registrant.
40
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10.17 Separation Agreement between Registrant and Agritope, Inc.
("Agritope"), dated December 1, 1997. Incorporated by
reference to Exhibit 2.3 to the 1997 10-K.
10.18 Amended and Restated Employee Benefits Agreement between
Registrant and Agritope, dated December 19, 1997. Incorporated
by reference to Exhibit 10.24 to the 1997 10-K.*
10.19 Transition Services and Facilities Agreement between
Registrant and Agritope, dated December 1, 1997. Incorporated
by reference to Exhibit 10.25 to the 1997 10-K.
10.20 Tax Allocation Agreement between Registrant and Agritope,
dated December 1, 1997. Incorporated by reference to Exhibit
10.26 to the 1997 10-K.
23. Consent of PricewaterhouseCoopers LLP.
24. Powers of Attorney.
27. Financial Data Schedule.
* Management contract or compensatory plan or arrangement
MODIFIED TRIPLE NET LEASE
Lease Preparation Date: September 30, 1999
Lessor: PS Business Parks, L.P., A California Limited Partnership
Lessee: Epitope, Inc., An Oregon Corporation
Guarantor:
--------------------------------------------------------------
1. LEASE TERMS
1.01 Premises: The leased Premises located within the Project as
indicated on Exhibit "A1" contains Approximately 30,499 rentable square feet.
The address of the leased Premises is: 8505 S.W. Creekside Place, Beaverton,
Oregon 97008.
1.02 Building: The Premises is located in the Building indicated
on Exhibit"A-2" and contains 30,499 rentable square feet and is part of the
Project.
1.03 Project: The Project, as indicated on Exhibit A-3, which
consists of all buildings on the Property, of which the Premises is a part is
commonly referred to as: Creekside Corporate Park, Phase 1, Building 6 or 03083
and contains approximately 155,765 Rentable square feet.
1.04 Property: The Premises, the Project, and all Lessor's land
thereunder or appurtenant thereto as described in Exhibit Property.
1.05 Lessee's Notice Address: Lessee's Notice Address is the
address of the leased Premises as stated in Paragraph 1.01 above unless
otherwise specified here: N/A
1.06 Lessor's Notice Address: Lessor's Notice Address is: 8905 SW
Nimbus Avenue, Suite 155, Beaverton, OR 97008.
1.07 Lessee's Permitted Use: Lessee and Lessor agree that Lessee
may only use the Premises for the following purpose(s): General office use,
research and development, manufacturing, storage, and distribution of products.
1.08 Lease Term: The Lease Term commences on February 1, 2000 and
ends on January 31, 2005 (60 months, and 0 days).
1.09 Base Rent: During the original term of this Lease, Base Rent
shall be paid monthly, in lawful money of the United States, the amounts
specified below, during the applicable periods noted:
Base Rent Applicable Period
$29,279.00 Beginning February 1, 2000 Ending January 31, 2001
$30,194.00 Beginning February 1, 2001 Ending January 31, 2002
$31,109.00 Beginning February 1, 2002 Ending January 31, 2003
$32,024.00 Beginning February 1, 2003 Ending January 31, 2004
$32,939.00 February 1, 2004 January 31, 2005
1.10 Security Deposit: $22,875.00 payable in lawful money of the
United States of America and held by Lessor from previous lease of the same
premises.
1.11 Lease Documentation Fee: $ None.
<TABLE>
<S> <C> <C> <C>
1.12 Initial Monthly Rent Charges: Base Rent (1.09) $29,279.00
CAM (1.13) $ 6,099.00*
Taxes (1.13) $ 6,099.00*
Insurance (1.13) $ 6,099.00*
Total initial monthly payment $35,378.00
</TABLE>
1.13 Proportionate Share: Lessee's Proportionate share of the
Project, which represents the approximate Proportionate Share of the Premises to
the Project is 19.6%. Lessee's Proportionate Share of the Building within which
it is located, which represents the approximate proportionate share of the
Premises to the Building is 100%. Proportionate Share may be adjusted during the
Lease Term if the size of the Project, Premises or Building changes.
1.14 Operating Expense Estimate: Lessee's Operating Expense
Estimate is *6,099.00.
1.15 Broker(s): Mark McFarland, Trammel Crow Company
1.16 Additional Attachments: Addendums #1-#3, Exhibit A-1, Exhibit
A-2, Exhibit B, Exhibit C, Exhibit D.
*Or the then prevailing rate.
1
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2. Letting; Condition; Possession
2.01 Lessor leases to Lessee, and Lessee leases from Lessor, the
Premises, as indicated in Paragraph 1.01 in consideration of Lessee's payment of
Base Rent and other payments hereunder subject to all of the terms, covenants
and conditions of this Lease and all recorded matters, laws, ordinances and
governmental regulations and orders. Lessee's possession and occupancy of the
Premises constitutes Lessee's acknowledgment that it has satisfied itself with
respect to the overall condition of the Premises, the present and future
suitability of the Premises for Lessee's intended use and the substantial
completion of Lessor constructed Lessee Improvements, if any, consistent with
Paragraph 10 below and specifically set forth in Exhibit "B".
2.02 Lessee shall only use the Premises for its permitted use.
Lessee shall not occupy or use the Premises or any part thereof for other than
its permitted use and not for any use or purpose which is unlawful or deemed by
Lessor to be disreputable in any manner or dangerous to life, limb or property.
2.03 Unless otherwise provided herein, any statement of square
footage set forth in this Lease is an approximation which Lessor and Lessee
agree is reasonable for all purposes and shall be the basis for this Lease.
Lessor reserves the right to change Lessee's proportionate share to reflect any
increase or decrease in the common area. Any use of the terms "rentable" and
"usable" is for convenience only, and such descriptions represent Lessor's
interpretation of such terms. If there are no Tenant Improvements or Exhibit B
is not attached hereto, then Lessee accepts the Premises in "AS-IS" condition
and Lessor shall have no obligation to provide or pay for any repair or other
work therein, except as stated in this Lease.
2.05 To Lessor's best knowledge, all Lessor-constructed Lessee
Improvements on or in the Premises as set forth in Exhibit "B", if any, comply
with all then applicable governmental agency laws, codes, regulations,
ordinances, covenants and restrictions. However, Lessor makes no warranty nor
accepts any responsibility for specifically meeting such compliance presently or
in the future with respect to any Lessee activity, including but not limited to:
a.) any Lessee Improvements or Lessee Alterations, as defined in Paragraph 10.02
below, made or to be made by Lessee or at Lessee's direction; b.) Lessee's
Permitted Use; c.) Lessee's occupancy of the Premises and/or the Property; and
d.) the presence of Lessee's employees, agents, contractors, suppliers, invitees
or licensees on or about the Property.
2.07 Subject to Paragraph 10.05 and Lessor's right to retain
improvements, upon termination of this Lease, Lessee agrees to return the
Premises to Lessor in the same condition as received by Lessee as of the
original date Lessor delivers the Premises to Lessee, normal wear and tear
excepted.
3. Base Rent
3.01 On or before the first day of each calendar month of the
Lease Term, Lessee will pay to Lessor in lawful monies of the United States of
America, without deduction or offset, prior notice or demand, Base Rent at the
place Lessor designates.
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4. Additional Rent
4.01 Unless otherwise specifically stated, any charge payable by
Lessee under this Lease other than Base Rent is, called "Additional Rent".
Additional Rent is to be paid concurrently with and subject to the same terms
and conditions of Base Rent. The term "rent" whenever used in this Lease means
Base Rent, Additional Rent and/or any other monies payable by Lessee under the
terms of this Lease. In the event any rent payable under this Lease commences or
ends on a day other than the first day of a calendar month, the actual number of
days in the prorated month will be used as the basis for the calculation.
4.02 "Operating Expenses" as used herein shall include all
reasonable costs and expenses, operation, maintenance, and repair of the
Premises, Building, Project and Property, or any part thereof, incurred by
Lessor including but not limited to: (1) Property supplies, materials, labor,
equipment, and tools; (2) Lessor-incurred utility and service costs and expenses
(as further described In Paragraph 4.03B below), security, janitorial, and all
applicable service and maintenance agreements; (3) Property related legal,
accounting, and consulting fees, costs and expenses; (4) insurance premiums for
all policies deemed necessary by Lessor and/or its lenders, and all deductible
amounts under such policies (as further described in Paragraph 4.03C below); (5)
costs and expenses of operating, maintaining, and repairing common areas of the
Property, including but not limited to, hallways, restrooms, conference rooms,
exercise rooms, equipment and telephone rooms, driving, parking and other paved
or unpaved areas (including but not limited to, resurfacing and striping),
landscaped areas (including but not limited to, tree trimming), walkways,
building exteriors (including but not limited to, painting and roof repairs),
signs and directories, and elevators and stairways; (6) capital improvements and
replacements (including all financing costs and interest charges) which have
been made to improve the operating efficiency of the Property; (7) capital
improvements and replacements (including but not limited to, all financing costs
and Interest charges) required by any governmental authority or law including
but not limited to, compliance required under the Americans with Disabilities
Act of 1990; (8) compensation (including but not limited to, any payroll taxes,
worker's compensation for employees, and customary employee benefits) of all
persons, including independent contractors, who perform duties, or render
services on behalf of, or in connection with the Property, or any part thereof,
including but not limited to, Property operations, maintenance, repair, and
rehabilitation; (9) Property management fees; (10) Real Property Taxes (as
further described In Paragraph 4,03, below), provided, however, wherever the
Lessee and/or any other lessee of space within the Property has agreed in its
lease or otherwise to provide any item of such services partially or entirely at
its own expense, or wherever in the Lessor's judgment any such significant item
of expense is not incurred with respect to or for the benefit of all of the
space within the Property, in allocating the Operating Expenses pursuant to the
foregoing provisions of this subsection the Lessor shall make an appropriate
adjustment, as aforesaid, so as to avoid allocating to the Lessee or to such
other lessee (as the case may be) those Operating Expenses covering such
services already being provided by the Lessee or by such other lessee at its own
expense, or to avoid allocating to all of the net rentable space within the
Property those Operating Costs incurred only with respect to a portion thereof,
as aforesaid.
4.03A Real Property Taxes" as used herein shall include any fee,
license, tax, late fee, levy, charge, assessment, penalty (if a result of
Lessee's delinquency or negligence), or surcharge (hereinafter individually
and/or collectively referred to as "Tax") imposed by any authority (including
but not limited to, any federal, state, county, or local government, or any
school, agricultural, lighting, drainage, or other improvement district, or
public or private association) having the direct or indirect power to tax and
where such Tax is Imposed against the Property, or any part thereof, or Lessor
in connection with its ownership or operation of the Property, including but not
limited to: (1) any Tax on Lessor's right to receive, or the receipt of, rent or
income from the Property, or any part thereof, or Tax against Lessor's business
of leasing the Property; (2) any Tax by any authority for services or
maintenance provided to the Property, or any part thereof, including but not
limited to, fire protection, streets, sidewalks, and utilities; (3) any Tax on
real estate or personal property levied with respect to the Property, or any
part thereof, and any fixtures and equipment and other property of Lessor or the
Property used in connection with the operation, maintenance or repair of the
Property; (4) any Tax imposed on this transaction, or based upon a reassessment
of the Property, or any part thereof, due to a change in ownership or transfer
of all or part of Lessor's interest in the Property, or any part thereof and,
(5) any Tax replacing, substituting for, or in addition to any Tax previously
included with this definition. Real Property Taxes do not include: (1) Lessor's
federal or state income, franchise, inheritance, or estate taxes; or (2)
Lessee's personal property taxes (taxes charged against Lessee's trade fixtures,
furnishings, equipment, or other personal property) which are the sole
responsibility of Lessee, and shall be billed directly to, and paid in a timely
manner by Lessee.
4.03B "Utility and Service Costs" as used herein shall include all
Lessor incurred utility and service costs and expenses including, but not
limited to water, electricity, gas, heating, lighting, steam sewer, waste
disposal, air conditioning, heating and ventilation.
4.03C "Insurance" as used herein shall include all insurance
premiums for all policies deemed necessary by Lessor and/or its lenders,
including but not limited to, worker's compensation, liability, commercial
general liability, automobile, rental interruption insurance and any and all
additional endorsements, extended coverage, riders under or attached to such
policies.
4.04 Throughout the Lease Term, Lessee will pay as Additional Rent
its proportionate share (of the
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Project and/or building, as applicable) of Operating Expenses which will be
equal to each calendar year's total Operating Expenses multiplied by Lessee's
Proportionate Share. in the event Lessee is only responsible for a portion of a
given calendar year, Lessee's share will be based on the actual number of
elapsed applicable days. All Operating Expenses will be adjusted to reflect an
average Project occupancy level of ninety-five percent (95%) during any calendar
year in which the Project is not at least eighty percent (80%) occupied.
Operating Expense Estimates and actualized Operating expenses will be determined
as outlined in 4.05A, 4.05B below and subject to the provisions of 4.07.
4.05 Lessee's Operating Expense estimates shall be determined as
follows:
4.05A Lessee's Operating Expense estimates: On or about April 1st
of each calendar year, Lessor will provide Lessee with a statement of: (1)
Lessee's annual share of estimated Operating Expenses for the then current
calendar year; (2) Lessee's new monthly Operating Expense estimate for the then
current year; and, (3) Lessee's retroactive estimate correction billing (for the
period of January 1st through the date immediately prior to the commencement
date of Lessee's new monthly Operating Expense estimate) for the difference
between Lessee's new and previously billed monthly Operating Expense estimates
for the then current year.
4.05A(1) Annual estimate share: Lessee's annual share of
estimated Operating Expenses for the then current calendar
year shall be determined by multiplying Lessor's estimated
total Operating Expenses for the then current calendar year,
by Lessee's Proportionate Share (of the Project or Building,
as applicable) identified in Paragraph 1.11.
4.05A(2) Monthly Operating Expense estimate: Lessee's new
monthly Operating Expense estimate for the then current
calendar year shall be calculated by dividing Lessee's annual
share of estimated Operating Expenses, as determined in
4.05A, above, by 12.
4.05A(3) Retroactive estimate correction: Lessee's share of
the change in Operating Expense estimates retroactive to
January 1st of each year shall be determined as follows: For
the then current calendar year, the total of Lessee monthly
Operating Expense estimates billed prior to the commencement
of Lessee's new monthly Operating Expense estimate shall be
subtracted from Lessee's new monthly Operating Expense
estimate multiplied by the number of elapsed months within
the same period.
4.05(B) Lessee's share of actualized annual Operating Expenses: On or
about April 1st of each year, Lessor will provide Lessee with a statement
reflecting the total Operating Expenses for the calendar year just ended. If the
total of Lessee's Operating Expense estimates billed for the calendar year just
ended are less than Lessee's share of the actualized Operating Expenses for the
calendar year just ended, the statement will indicate the payment amount and
date due. If Lessee has paid more than its share of Operating Expenses for the
preceding calendar year, Lessor will credit the overpayment towards Lessee's
future Operating Expense obligations.
4.06 Under this Lease, monthly Operating Expense estimates,
retroactive estimate corrections, and Lessee's share of actualized annual
Operating Expenses are considered Additional Rent. Monthly Operating Expense
estimates are due on the 1st of each month and shall commence in the month
specified by Lessor. Lessee's retroactive estimate correction, and actualized
annual Operating Expense charges, if any, shall be due, in full, on the date(s)
specified by Lessor.
4.07 Lessee will be entitled to any reduction, refund, offset,
allowance or rebate should any Real Property Taxes be retroactively reduced,
credited, abated or exempted by any direct or indirect taxing authority for any
prior taxation or assessment period. If Lessor fails to provide Lessee with an
Operating Expense statement by April 1st of any calendar year, or elects not to
bill Lessee its share of actualized Operating Expenses, and/or Operating
Expenses estimate(s), or estimate increase(s) for any period of time, Lessor's
right to bill and collect these charges from Lessee at a later time is not
waived.
4.08. Whether now in force or hereafter in force, Lessee will pay
as Additional Rent its share of any duties, levies or fees resulting from any
statutes or regulations, or interpretations thereof, enacted by any governing
authority which pertains to Lessor's or Lessee's use, ownership, occupancy or
alteration of the Premises, Project, or Property, or any part thereof. Lessee's
share of such duties or fees will be based on Lessee's Proportionate Share as
indicated in Paragraph 1.13, or other equitable method determined by Lessor in
its sole discretion. In the event the Property, or any part thereof, shares
common Operating Expenses, commonly used areas, land or other items not
exclusive to the Property, Lessor shall allocate and bill Lessee its share of
any costs and expenses attributable to such sharing on an equitable basis, as
determined by Lessor in its sole discretion.
4.09 In the event Lessee wishes to audit any Lessee rent charge,
such a review shall be performed only at a time and location designated
reasonably by Lessor, and only if Lessee is not in Default, as defined in
Paragraph 20.02 below at the time of the audit request and/or at any time during
the course of the audit. Lessor and Lessee agree that any Lessee audit must be
conducted within six (6) months of the date the rent charge becomes due, and if
this audit is not conducted within this period of time, Lessee's right to audit
is waived, and the rent charge, as originally billed, including all calculations
used as the basis for the Base Year or expense stop shall be deemed conclusive
and final for all purposes under this Lease. If the audit reveals that expenses
are overstated by more than ten percent (10%), Lessor shall reimburse Lessee for
Lessee's out-of-pocket expenses.
4.10 Limitations on increase in Expenses: Controllable expenses
shall not increase more than five percent (5%) per year.
5. Late Charges
Any installment, including any partial installment, of Base Rent,
Additional Rent, rent or any other rent charge payable which is not received by
Lessor within five (5) days after it becomes due, shall be considered past
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due, and shall constitute a default per paragraph 20.02 below and Lessee shall,
without the necessity of notification from Lessor, pay Lessor a late charge
equal to fifty dollars ($50.00) or ten percent (10%) of the then delinquent
amount, whichever is greater. Additionally, a fifty dollar ($50.00) handling fee
will be paid to Lessor by Lessee for each bank returned check which return shall
constitute a Default, and Lessee will be required to make all future payments to
Lessor by money order or cashier's check. The acceptance of late charges and
returned check charges by Lessor will in no way constitute a waiver of Lessee's
Default with respect to any overdue amount nor prevent Lessor from exercising
any of its rights or remedies resulting from such late payment.
6. Security Deposit
6.01 Lessee has deposited with Lessor an initial Security Deposit
in the amount specified in Paragraph 1.10 as security for Lessee's full and
faithful performance of every provision under this Lease. Lessor will not be
required to keep the Security Deposit separate from its general funds and has no
obligation or liability for payment of interest thereon (except when required by
law).
6.02 In no event will Lessee have the right to apply any part of
the Security Deposit to any amounts payable under the terms of this Lease nor is
it a measure of Lessor's damages in event of a Default or Breach by Lessee. If
Lessee fails to pay any rent due herein, or otherwise is in Default or in Breach
of any provision of this Lease, Lessor may use, apply or retain all or any
portion of the Security Deposit for the payment of any amount due Lessor, or to
compensate Lessor, for any loss or damage suffered by Lessee's Default or
Breach. Within ten (10) days after written notification by Lessor, Lessee will
pay monies to Lessor sufficient to restore the Security Deposit to the full
amount required under this Lease.
6.03 Within sixty (60) days (or as otherwise prescribed by law)
after the expiration or earlier termination of the Lease Term and after Lessee
has vacated the Premises, Lessor will return to Lessee that portion of the
Security Deposit not used or applied by Lessor to fulfill any and all of
Lessee's obligations under this Lease.
6.04 At any time during the Lease Term, within fifteen (15) days
after written request from Lessor, Lessee shall deliver to Lessor such financial
statements as Lessor reasonably requires to verify the net worth of Lessee or
any assignee, subtenant, or guarantor of Lessee. In addition, Lessee shall
deliver to any lender designated by Lessor any financial statements required by
such lender to facilitate the financing or refinancing of the Property. Lessee
represents and warrants to Lessor that each financial statement is a true and
accurate statement as of the date of such statement. All financial statements
shall be confidential and shall be used only for the purposes set forth in this
Lease.
7. USE OF PREMISES; QUIET ENJOYMENT; TRASH
7.01 The Premises will be used and occupied only for Lessee's
Permitted Use, as described in Paragraph 1.07. Lessee agrees it has negotiated
its Permitted Use in a fair and reasonable manner and, as so written, the
Permitted Use is enforceable for all purposes under this Lease. Further, Lessee
expressly waives the right to challenge the validity of its Permitted Use,
including but not limited to, as defined in Paragraph 20. below, challenges
which pertain to Default or Breach of this Lease, mitigation of damages, and any
and all Transfers under this Lease.
7.02 Lessee will comply with all conditions and covenants of this
Lease, and all applicable governmental agency laws, codes, regulations,
ordinances, covenants and restrictions affecting the Property or any part
thereof. Lessee will not use or permit the use of the Premises, the Property or
any part thereof, in a manner that is unlawful, diminishes the appearance or
aesthetic quality of any part of the Property, creates waste or a nuisance,
disturbs Lessor, other lessees or any neighboring property occupants, or causes
damage to the Property, or any part thereof, or to any neighboring property,
personal property or person. Any animals, excepting guide dogs or animals used
in Lessee's research, on or about the Property or any part thereof are expressly
prohibited.
7.03 Lessor agrees that so long as Lessee performs all of its
obligations under the Lease, Lessee's possession, quiet enjoyment and use of the
Premises for the term of the Lease will not be disturbed by Lessor, subject only
to the provisions of the Lease.
7.04 Lessee shall be responsible for providing all trash
receptacles and pickup for its premises. In the event of any excessive trash in
or outside Lessee's premises, as determined by Lessor in its reasonable
discretion, Lessor will have the right to remove such excess trash, charge all
costs and expenses attributable to its removal to Lessee, and require Lessee to
obtain, at its sole cost and expense, additional trash receptacles, to be placed
in a location designated by Lessor for Lessee's specific use. Under no
circumstances may any "Hazardous Materials", as defined in Paragraph 14 below,
any materials not permitted by law, any materials improperly or illegally
handled, stored, contained or released, or any materials which are not permitted
by Lessor, as determined in its sole discretion, be disposed of in any trash
receptacles located in or about the Property. Lessee will not cause, maintain or
permit any outside storage on or about the Property without prior written
consent by Lessor, which consent, if given, may be revoked at any time. In the
event of any unauthorized outside storage by Lessee, Lessor will have
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the right, without notice, in addition to such other rights and remedies it may
have, to remove any such storage and charge all direct and associated costs and
expenses to Lessee.
8. PARKING
All parking will comply with the terms and conditions of this Lease and
the parking criteria set forth in Exhibit "D". Unless otherwise stated, Lessee,
its employees, agents, contractors, suppliers, invitees and licensees will have
a non-exclusive privilege, in conjunction with Lessor, other lessees of the
Property, and such other persons as Lessor may designate, to use those parking
spaces designated by Lessor for public parking. Vehicles parked in public
parking areas will be no larger than full-sized passenger automobiles or pick-up
trucks. Larger vehicles, if permitted in writing by Lessor, will be parked,
loaded and unloaded in locations designated by Lessor. Lessor reserves the
right, with notice to Lessee, to tow away at Lessee's sole cost and expense any
vehicles parked in any parking area for any continuous period of 24 hours or
more, or earlier If Lessor, in its sole discretion, determines such parking to
be a hazard or inconvenience to other lessees or Lessor, upon written notice to
Lessee, or violates any rules or regulations or posted notices related to
parking. Lessor shall not be responsible for enforcing Lessee's parking rights
against third parties. From time to time, Lessor reserves the right, upon
written notice to Lessee, to change the location, the availability and nature of
parking spaces, establish reasonable time limits on parking, and, on an
equitable basis, assign specific spaces without charge to Lessee as Additional
Rent.
9. UTILITIES
9.01 Lessor agrees to provide at its cost water and electric
service connections (and gas where applicable) to the Premises and telephone
service connections to the Building, but Lessee agrees to make all arrangements
for and pay directly to the appropriate utility company all costs and expenses
of utility services supplied to, and for the use of, Lessee in or about the
Premises, including but not limited to, water, gas, heat, light, power,
telephone, sewer, sprinkler charges, usage costs and expenses, service fees,
connection charges, deposits and any duties or taxes for such utilities.
9.02 If for any reason, Lessor incurs any utility costs and
expenses which are attributed to Lessee, as reasonably determined by Lessor,
Lessee, upon notification from Lessor, shall immediately reimburse Lessor for
all such costs and expenses.
9.03 In the event it is not possible for Lessee to pay directly
for any utility service, may, at Lessor's discretion, be obtained in Lessor's
name, and Lessee will pay Lessor, as Additional Rent, Lessor's best estimate of
Lessee's share of such utility costs and expenses. Lessor's best estimate will
be determined by Lessor in its reasonable discretion and will be subject to
change as Lessor deems necessary. Periodically during the Lease Term, Lessor
will compare Lessee's utility estimates to actual utility costs and expenses
incurred, and bill or credit, whichever is applicable, Lessee for any
difference. Lessor reserves the right to separately meter any such service not
so separately metered at Lessee's sole cost and expense at any time during the
Lease Term, at which time Lessee shall be directly responsible for payment of
such expense directly to the utility service provider, if possible.
9.04 Lessor will not be liable or deemed in Default or Breach, nor
will there be any abatement of rent, for any interruption or reduction of
utilities, utility services or telecommunication services except for any
interruptions solely and directly caused by Lessor. Additionally Lessee agrees
to comply with any energy conservation programs implemented by Lessor by reason
of enacted laws or ordinances, or otherwise.
9.06 By execution of this Lease, Lessee acknowledges it has
satisfied itself as to the adequacy of any Lessor owned telephone equipment, if
any, and the quantity of telephone lines and service connections to the Building
available for Lessee's use. Should Lessee require additional equipment, lines or
wiring, beyond the Initial installation of the outside line to the building
itself, any and all associated costs and expense will be borne directly by
Lessee and be subject to the provisions of this Lease and Lessor's written
approval. Additionally prior to termination of this Lease, Lessee at its sole
cost and expense, will remove all telecommunications and computer related
equipment, installed after February 1, 2000, both above and below the ceiling to
the phone close where applicable, (if required by Lessor), including but not
limited to, all lines, wiring and all telephone boards belonging to Lessee and
restore the Premises to the same condition as before such installation.
9.07 Lessee acknowledges and agrees that the number and
installation of telephone lines to its Premises, including any telephone,
telecommunication or other communication equipment (specifically including any
antennas, towers {microwave or otherwise} or other exterior equipment of any
nature) which either utilizes telephone or telecommunications equipment or
technology or in any other manner which adversely affects Lessor's ability to
provide telephone or communications facilities to the Project is subject to
Lessor's approval, which will not be unreasonably withheld. Additionally, in the
event that Lessee wishes additional telephone, telecommunication or other
communication lines or access after the date of Lessee's execution of this
Lease, no such additional lines or access shall be permitted nor other
telephone, telecommunication or communication related equipment installed
without first securing the prior written consent of Lessor, which will not be
unreasonably withheld. Any telecommunications installation shall be subject to
the following:
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(1) Lessor shall incur no expense whatsoever with respect to any aspect of
Lessee's need for additional access or equipment, including without limitation,
the costs of installation, consultants, materials, permits, service, etc.
(2) Prior to the commencement of any work in or about the Building to install
such additional access, lines or equipment, Lessee shall agree to abide by such
rules and regulations, as reasonably determined by Lessor.
(3) Lessor reasonably determines that there is sufficient space in the Building
for the placement of all of the lines, access and equipment.
(5) Any other requirements Lessor may deem reasonable.
The refusal of Lessor to consent to any request shall not be deemed a Default or
Breach by Lessor of its obligation under this Lease nor be grounds for any
termination or offset by Lessee. Lessee agrees that to the extent service by any
telephone or communication equipment is interrupted, curtailed, or discontinued,
except for any interruptions solely and directly caused by Lessor; Lessor shall
have no obligation or liability with respect thereto and it shall be the sole
obligation of Lessee at its expense to obtain substitute service, but only with
Lessor's prior written permission, which shall not be unreasonably withheld.
Lessor's consent under this section shall not be deemed a warranty or
representation by Lessor as to the availability or suitability of the present or
future telephone or communications equipment, connections, compatibility or
space available for any additional equipment, lines or access. The provisions of
this clause may be enforced solely by the Lessee and Lessor, and are not for the
benefit of another party, specifically, without limitation, no telephone or
telecommunications provider shall be deemed a third party beneficiary of the
Lease.
10. LESSEE IMPROVEMENTS; LESSEE ALTERATIONS AND MECHANIC'S LIENS
10.01 Any improvements constructed under this Lease on behalf of
Lessee or at Lessee's expense prior to Lessor's initial delivery of the Premises
are referred to throughout this Lease as "Lessee Improvements". All Lessee
Improvements will be performed in accordance with the terms and conditions
outlined in Exhibit "B". Upon substantial completion, as determined by Lessor,
of the Lessee Improvements outlined in Exhibit "B", Lessor will be relieved of
any further obligation to alter, change, decorate or improve the Premises, or
any part thereof.
10.02 Lessor's prior written consent is required for any
alterations greater than $2,500: (a) Lessee constructed Lessee Improvements; and
(b) any alterations, utility installations, additions, or other improvements
made by Lessee, at its sole cost and expense, after Lessor's initial delivery of
the Premises (hereafter collectively referred to as Lessee Alterations).
Lessor's consent will be conditioned upon its approval of: (i) Lessee's
contractor(s); (ii) detailed plans and work specifications of Lessee
Alterations; and (iii) certificates of insurance from Lessee's contractor(s) for
commercial general liability, automobile liability and property damage insurance
with limits not less then $2,000,000 / $250,000 / $500,000 respectively endorsed
to show Lessor as an additional insured evidencing Lessor's requirement to be
notified at least thirty (30) days in advance of any change, expiration or
cancellation of any such policies along with proof of a current worker's
compensation policy. In addition, Lessee must obtain all approvals and permits
required by any and all governmental authorities and provide same to Lessor
prior to commencement of any work, and after work commences must comply with all
conditions of such approvals and permits and perform work in a prompt and
expeditious manner with good and sufficient materials. Lessor also retains the
right, as a condition of its consent, to require Lessee to provide Lessor with a
lien and completion bond in a form acceptable to Lessor in an amount equal to
one and one-half times the estimated cost of Lessee constructed Lessee
Improvements and Lessee Alterations and/or require the inclusion of Lessor's
non-responsibility language in all contracts In a form approved by Lessor.
Lessee will give Lessor a minimum of fifteen (15) days prior written notice to
the commencement of any Lessee constructed Lessee Improvements and Lessee
Alterations to allow Lessor sufficient time in which to post notices of
non-responsibility or no liability for work then in progress in, on, or about
the Premises as provided by law. Upon completion of any improvements,
alterations or additions, Lessee shall deliver to Lessor accurate, reproducible
as-built plans of such construction. For purposes of this paragraph only, (a)
and (b) shall be defined as those legally requiring a permit.
10.03 Lessor's approval of any Lessee constructed Lessee
Improvements and Lessee Alterations will not create any liability whatsoever on
the part of Lessor. By way of example and without limitation, Lessor's approval
of Lessee's plans and work specifications will not create any responsibility or
liability on the part of Lessor for their sufficiency, completeness or
compliance with any and all governmental laws, codes, regulations, ordinances,
covenants and restrictions (including without reservation any and all provisions
of the Americans with Disabilities Act of 1990 applicable to the Property, or
any part thereof).
10.04 Lessee will pay when due, all claims for services, labor and
materials furnished by, or at the request of Lessee, including any claims which
are secured by any mechanic's or materialmen's or other lien against the
Property, or any interest therein. Lessee agrees that should any lien be posted
on the Property due to work performed, materials furnished, or obligations
incurred by Lessee, or its employees, agents, contractors, suppliers, invitees
or licensees, Lessee will immediately notify Lessor and proceed to remove such
lien. Lessee further acknowledges that it will remain liable to Lessor and
indemnify Lessor for any costs and expenses or damages to Lessor or the Property
or any interest therein as a result of such lien(s). If Lessee, in good faith,
contests the validity of any such lien, claim or demand, Lessee will, at its
sole expense, defend and protect itself, Lessor and the Property, or any part
thereof. To ensure such protection of Lessor and the Property and any part
thereof, Lessor
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may, at its sole option, require Lessee to provide Lessor with a surety bond
satisfactory to Lessor in an amount deemed appropriate by Lessor which will
indemnify Lessor against any liability and ensure the Property, or any part
thereof, is free from the effect of such a lien or claim. In addition, Lessor
may require Lessee to pay all reasonable legal fees of Lessor's attorney(s) of
choice and any other associated costs and expenses should Lessor decide it Is In
its best interest to participate in such an action. If Lessee fails to keep the
Property, or any part thereof, free from any lien or provide a Lessor approved
surety bond, then, in addition to any other rights and remedies available to
Lessor, Lessor may take any action necessary to discharge such a lien, including
but not limited to, payment to the claimant on whose behalf the lien was filed,
and regardless of the corrective action taken by Lessor, Lessee will be liable
to Lessor for all costs and expenses of such action to discharge the lien,
including, but not limited to, any reasonable legal fees and costs.
10.5 All Lessee Improvements and Lessee Alterations are part of
the realty and belong to Lessor. As a condition of Lessor consenting to any
Lessee Improvements or Lessee Alterations, Lessor reserves the right, at the
time consent is sought to: (i) require Lessee to pay an amount determined by
Lessor to cover the costs of demolishing part or all of any Lessee Improvements
or Lessee Alterations and or the cost of returning the Premises to their
condition before any such work commenced (normal wear and tear excepted); or
(ii) elect to make Lessee the owner of all or any specified part and, upon
termination of this Lease, require Lessee to remove same at its sole cost and
expense. The provisions of this Paragraph shall survive the termination of this
Lease.
10.06 Lessee may, without prior written consent of Lessor, make
non-structural installations within the Premises of its trade fixtures,
equipment, and machinery in conformance with all applicable governing agency
laws, codes, regulations, ordinances, covenants and restrictions, and they may
be removed upon termination of this Lease provided the Premises are restored to
its condition at the commencement of this Lease and no material damage to the
Premises will occur. All such installations shall be made by a licensed and
bonded contractor, approved by Lessor, with all permits obtained when required
by law.
10.07 Lessor retains the right to construct or permit construction
of improvements, and/or Lessee Alterations, for new and existing lessees and to
alter any commonly used areas in or about the Property. Notwithstanding anything
which may be contained in this Lease, Lessee understands this right of Lessor
and agrees that such construction will not be deemed to constitute a Default or
a Breach of this Lease by Lessor. Lessee waives any such claims which it might
have arising from such construction. Lessor will not unreasonably interfere with
Lessee's enjoyment of the leased premises.
11. REPAIRS
11.01 This is a net lease. Lessee will, at all times and at its
sole cost and expense, keep all parts of the Premises, interior and exterior, in
good order, condition and repair, and all equipment and facilities within or
serving the Premises, including but not limited to: windows, glass and plate
glass, doors and office entry(s), walls and finish work, floors and floor
coverings, interior of the roof, heating and air conditioning systems,
electrical systems, dock boards, truck doors, chain link gates and fences, dock
bumpers, life safety-sprinkler systems, signage, plumbing work and fixtures,
termite and pest extermination, regular removal of trash and debris, keeping the
parking areas, driveways, alleys and whole of the Premises in a clean and
sanitary condition. The cost of maintenance and repair of any common party wall
(any wall, divider, partition or other structure separating the premises from
any adjacent premises occupied by other Lessees) shall be shared equally by
Lessee and the lessee occupying the adjacent promises. Lessee shall not damage
any party wall or disturb the integrity and support provided by any party wall
and shall, at its sole cost and expense, promptly repair any damage or injury to
any party wall caused by Lessee or its employees, agents or invitees. Lessee
will keep the Premises and every part thereof in good order, condition and
repair regardless of whether any portion of the Premises requiring repairs, or
the means of repairing same are reasonably or readily accessible. Additionally,
Lessee shall be obligated to maintain and repair the Premises whether the need
for such repairs or maintenance occurs as a result of Lessee's use, any prior
use, vandalism, acts of third parties, Force Majeure or the age of the Premises.
The standard for comparison of condition will be the condition of the Premises
as of Lessee's initial occupancy of the Premises and failure to meet such
standard shall create the need to repair. All Lessee repairs will be made by a
licensed and bonded contractor, approved by Lessor, with permits and any other
governmental agency approvals and requirements obtained and observed, and
conform to all requirements of Paragraph 10.02 herein. Lessor's maintenance and
repair obligations are limited to facilities and areas used in common with other
lessees, exterior walls, foundations and exterior roofs which Lessor agrees to
repair and maintain on behalf of Lessee unless such repairs are due to negligent
or intentional acts of Lessee or its employees, agents, contractors, suppliers,
invitees or licensee.
11.02 Lessee expressly waives the benefit of any statute or other
legal right now or hereafter in effect which would otherwise afford Lessee the
right to make repairs at Lessor's expense, whether by deduction of rent or
otherwise, or to terminate this Lease because of Lessor's failure to keep the
Property, or any part thereof in good order, condition and repair. If Lessee
does not keep the Premises in good order, condition, conforming to and
consistent with Lessor-specified standard colors, materials and quality, or
fails to make any Lessor required maintenance or repairs, Lessor reserves the
right to perform such obligations of Lessee on Lessee's behalf, and Lessee will
reimburse Lessor for any direct and indirect costs and expenses incurred
immediately upon demand. Failure by Lessee to pay for such costs and expenses
within five (5) days of written notification by Lessor is a Breach of this
Lease.
11.03 In the event the Premises constitute a portion of a multiple
occupancy building, Lessor shall
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perform the roof, paving, and landscape maintenance, exterior painting and
common sewage line plumbing which are otherwise Lessee's obligation under
Subsection 11.01 above, and Lessee shall, in lieu of the obligations set forth
under Section 11.01 above with respect to such items, be liable for its
Proportionate Share of the Building (as defined in Section 1.13 above) of the
costs and expense of Building maintenance and the care for the grounds around
the Building, including but not limited to, the mowing of grass, care of shrubs,
general landscaping, maintenance of parking areas, driveways and alleys, roof
maintenance, exterior repainting and common sewage line; plumbing; provided,
however, that Lessor shall have the right to require Lessee to pay such other
reasonable proportion for said mowing, shrub care and general landscaping costs
as may be determined by Lessor in its sole discretion, and further provided that
if Lessee or any other particular lessee of the Building can be clearly
identified as being responsible for obstruction or stoppage of the common
sanitary sewage line, then Lessee, if Lessee is responsible, or such other
responsible lessee, shall pay the entire cost thereof, upon demand, as
Additional Rent.
11.04 Lessee shall, at its own cost and expense, enter into
regularly scheduled preventative maintenance/service contract(s) with a
maintenance contractor for servicing all heating and air conditioning systems
and equipment within the Premises and shall provide Lessor with copies of all
quarterly preventative maintenance service reports. The maintenance contractor
and contract must be reasonably approved by Lessor. The service contract must
include all services suggested by the equipment manufacturer within the
operation/maintenance manual and must become effective (and a copy thereof
delivered to Lessor) within thirty (30) days of the date Lessee takes possession
of the Premises. Each Lease year Lessor, at its option, may inspect the HVAC
system to determine that the aforementioned maintenance is being performed. If
the HVAC system is not being maintained pursuant to this Section, Lessor will
send notice of such lack of maintenance to Lessee and Lessee shall thereafter
have thirty (30) days to perform the necessary maintenance. Failure by Lessee to
complete the necessary maintenance in such thirty (30) day period shall be a
material Event of Default and Lessor shall have the right to cure such Event of
Default. Should the inspection demonstrate a lack of maintenance of the HVAC
system, Lessee shall pay for the cost of such inspection. Thirty days before
Lessee vacates the Premises, Lessor will have the HVAC equipment inspected by a
qualified HVAC mechanic at Lessor's expense. If, in the reasonable opinion of
the HVAC mechanic, taking into account the age of the equipment, the equipment
has not been properly maintained, then Lessor may authorize necessary repairs
and/or replacements to be made to the system. Such repairs will be deducted from
the Lessee's Security Deposit. Lessee shall reimburse Lessor for any and all
costs associated with such repairs which exceed the amount of any Security
Deposit. The remainder of the Security Deposit, if any, shall be refunded to
Lessee in accordance with the terms of the Lease.
12. INSURANCE
12.01 Except as expressly provided as Lessee's Permitted Use, or as
otherwise consented to by Lessor in writing, Lessee will not do or permit
anything to be done within or about the Premises or the Property which will
increase the existing rate of any insurance on any portion of the Property or
cause the cancellation of any insurance policy covering any portion of the
Property. Lessee will not keep, use or sell, or permit anyone to keep, use or
sell, anything in or about the Premises, which may be prohibited by the standard
form of fire and other insurance policies. Lessee will, at its sole cost and
expense, comply with any requirements of any insurer of Lessor and of Lessee.
12.02 Lessee agrees to maintain In full force and effect at all
times during the Lease Term, at its sole cost and expense, for the protection of
Lessee and Lessor, policies of insurance which afford the following coverage:
<TABLE>
<S> <C> <C> <C>
(a) Worker's Compensation Statutory Requirements
Employer's Liability Not less than $1,000,000.00
(b) Commercial General Liability Not less than $1,000,000.00 per occurrence
Not less than $2,000,000.00 aggregate this location
Commercial policies shall insure on an occurrence and not a claims-made basis
and cover the premises, project and property. The policy shall cover liability
arising from premises, operations, independent contractors, products-completed
operations, personal injury, advertising injury and liability assumed under an
insured contract and not be excess, nor exclude pollution or employment-related
practices.
(c) Automobile Liability Not less than $300,000.00 combined single limit
including property damage
</TABLE>
(d) "All Risk" coverage including fire and extended coverage,
vandalism, malicious mischief and any other perils normally covered therein.
This insurance coverage must be upon the Premises and all property owned by
Lessee, for which Lessee is legally liable, or which is made at the expense of
or at the request of Lessee, including but not limited to, any Lessee
Improvements, Lessee Alterations, furniture, fixtures, equipment, installations
and any other personal property of Lessee, in an amount not less than their full
replacement value, and with a deductible not to exceed $1,000.00 per occurrence.
All proceeds of this insurance shall only be used for the repair and replacement
of property so insured, and Lessee hereby assigns to Lessor all Its rights to
receive any proceeds of such insurance policies attributable to any Lessee
Improvements and Lessee Alterations.
The limits of the insurance coverage required under this Lease will not limit
the liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance to be carried by Lessee will be primary to, and non-contributory with
Lessor's insurance, and contain cross-liability endorsements and will in
addition to the above coverage specifically insure Lessor against any damage or
loss that may result either directly or indirectly from any breach or default of
Lessee under Paragraph 14 (Hazardous Materials) herein. Any similar insurance
carried by Lessor will be considered excess insurance only.
12.03 Lessee will name Lessor (and, at Lessor's request, any
Mortgagee) and each of its officers,
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subsidiaries, partners, officers, directors, and employees as additional
insureds on all insurance policies required of Lessee under this Lease, other
than Worker's Compensation and Fire and Extended coverage (except on
improvements or alterations to Lessees' Premises for which Lessor shall be named
an additional insured). Such insurance policies carried by Lessee will include
an express waiver of subrogation by the insurer in favor of Lessor, permit the
insured, prior to any loss, to agree with a third party to waive any claim it
might have against said third party without invalidating the coverage under the
insurance policy, and will release Lessor and any of its agents and employees
from any claims for damage to any person, to the Property of which the Premises
are a part, any existing improvements, etc., Lessee Improvements and Lessee
Alterations to the Premises, and to any furniture, fixtures, equipment,
installations and any other personal property of Lessee caused by or resulting
from, risks which are to be insured against by Lessee under this Lease,
regardless of cause, except for grossly negligent or intentional acts by Lessor.
Lessee's failure to provide evidence of this required insurance coverage to
Lessor shall constitute a Default under this Lease, and Lessee's failure, at any
time during the Lease Term, to maintain, in full force and effect, this
coverage, as required, shall constitute a Breach under this Lease. See Addendum
1.
12.04 Lessee will deliver to Lessor, (and, at Lessor's request any
Mortgagee, Assignee or Receiver) simultaneously with its execution of this
Lease, (and thereafter at least thirty (30) days prior to expiration,
cancellation or change in any Lessor required certificates of Insurance),
certificates of insurance evidencing, at a minimum, the coverage specified in
Paragraph 12.02. All insurance required hereunder will be with companies
licensed and authorized to do business in the state in which the Property is
located and holding a "General Policyholders Rating" of "A-, VII" or better, as
set forth In the most current BEST'S INSURANCE GUIDE.
12.05 If Lessee does not meet the insurance requirements of this
Lease, Lessor will secure and maintain, at Lessee's expense, insurance coverage
in such limits as Lessor may deem reasonable in its sole judgment to afford
Lessor adequate protection. Lessor's coverage, where applicable, will contain an
express waiver of subrogation.
12.06 Lessor makes no representation that the insurance policies
and coverage amounts specified to be carried by Lessee or Lessor under the terms
of this Lease are adequate to protect Lessee, and in the event Lessee believes
that such insurance is insufficient, Lessee will provide, at its own expense,
such additional insurance as Lessee deems adequate.
12.07 As to any insurance proceeds received by Lessor, such
proceeds shall for all purposes be deemed Lessor's sole property, free from any
claims of Lessee, and unless otherwise stated, available for Lessor's exclusive
use as it may alone determine in the exercise of its sole discretion.
[INITIAL]
13. INDEMNIFICATION AND WAIVER OF CLAIMS
Except due to the gross negligence of Lessor, Lessee waives all claims
against Lessor for any damage to any property in or about the Property and for
injury to any persons, including death resulting therefrom, regardless of cause
or time of occurrence. Lessee will indemnify, protect, defend and hold harmless
Lessor from and against all claims, losses, damages, costs, expenses and
liabilities, including legal fees, arising out of, involving, or in connection
with Lessee's occupancy of the Premises, presence on the Property, the
conducting of Lessee's business and any act, omission or neglect of Lessee, its
agents, contractors, employees, suppliers, licensees or invitees except for any
damage or injury which is the direct result of the gross or intentional acts by
Lessor, its agents, contractors, employees, suppliers, licensees or invitees. In
the event any action or proceeding is brought against Lessor, its agents,
contractors, employees, suppliers, licensees or invitees, by reason of the
foregoing, Lessee, upon notice by Lessor, will defend Lessor, its agents,
contractors, employees, suppliers, licensees or invitees, at Lessee's sole cost
and expense, and by counsel reasonably satisfactory to Lessor.
14. HAZARDOUS MATERIALS
14.01 For purposes of this Lease, "Hazardous Materials" will mean
any product, substance, chemical, material or waste whose presence, nature,
quantity and/or intensity of existence, use, manufacture, disposal,
transportation, spill, release or effect, either by itself or in combination
with other materials expected to be on the Property, now or in the future, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment or the Property, or any part thereof, (ii) regulated or monitored by
any governmental authority; or (iii) a basis for potential liability of Lessor
to any governmental authority or third party. Hazardous Materials will include,
but not be limited to, solvents, petrochemical products, flammable materials,
explosives, asbestos, urea formaldehyde, PCB's, chlorofluorocarbons, freon or
radioactive materials. Lessor, however, grants Lessee permission to keep small
amounts of materials or substances in the Premises which are necessary for
Lessee's normal business operations. Lessee agrees to provide Lessor, prior to
its occupancy of the Premises, a list of all materials and substances, their
locations within the Premises, and methods of storage. Lessee further agrees to
comply with all future requests for information by Lessor including but not
limited to copies of all applicable Material Safety Data Sheets (MSDS sheets).
14.02 Lessee shall: (1) use such Hazardous Material only as is
reasonably necessary to Lessee's business, in properly labeled quantities; (2)
handle, use, keep, store, and dispose of such Hazardous Material using the
highest accepted industry standards and in compliance with all applicable
regulatory agencies and governmental Hazardous Materials requirements; (3)
maintain at all times with Lessor a copy of the most current MSDS sheet for each
such Hazardous Material; and (4) comply with such other
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rules and requirements Lessor may from time to time impose.
[INITIAL]
14.03 Lessee will comply with all federal, state and local laws,
ordinances, and rules and regulations relating to Hazardous Materials, including
but not limited to, current rules and regulations or levels and standards as set
from time to time by the Environmental Protection Agency, the U. S. Occupational
Safety and Health Administration, or any other governmental agency. It is not
necessary that any presence or contamination of the Premises reflect any
government mandated threshold or quantity in order for Lessor to take any action
under this paragraph 14. Notwithstanding the foregoing, Lessee will have the
right to bring, store, and use hazardous materials and controlled substances on
the premises in its business operations without the Lessor's prior consent in
each specific instance, provided that Lessee complies with the requirements of
Section 12 and 14 of this Lease.
14.04 Upon expiration or earlier termination of this Lease, Lessee
will, at Lessee's sole cost and expense, cause all Hazardous Materials brought
on the Property by Lessee, its agents, contractors, employees, suppliers,
licensees or invitees, to be removed from the Property in compliance with any
and all applicable Hazardous Material disposal laws. If Lessee or its agents,
contractors, employees, suppliers, licensees or invitees, violates the
provisions of this Section 14, or performs any act or omission, or contaminates,
or expands the scope of contamination of the Premises, the Property, or any part
thereof, the underlying groundwater, or any property adjacent to Lessor's
Property, then Lessee will promptly, at Lessee's expense, take all investigatory
and/or remedial action (collectively called "Remediation") that is necessary to
clean up, remove and dispose of such Hazardous Materials and any contamination
so caused in compliance with any applicable Hazardous Material laws and
regulations. Lessee will also repair any damage to the Premises and any other
affected portion(s) of the Property caused by such Hazardous Material presence,
investigation and Remediation.
14.05 With respect to any Remediation of the Premises, the Property
or any portion thereof, Lessee will provide Lessor with written notice of
Lessee's intended Remediation, including Lessee's method, time and procedure of
Remediation, and Lessor will have the right to require reasonable changes in
such method, time or procedure before Lessee commences any such work. Lessee
will not commence any Remediation of Hazardous Materials in any way connected
with the Property, or any portion thereof, without first notifying Lessor, in
writing, of Lessee's intention to do so and affording Lessor ample opportunity
to appear, intervene or otherwise appropriately assert and protect Lessor's
interest.
14.06 Lessee will immediately notify Lessor in writing of any
governmental or regulatory action threatened, any claim, demand, or complaint
made or threatened by any person against Lessee or any portion of the Property
relating to damage, contribution, cost recovery compensation, or loss or injury
resulting from any Hazardous Materials, and any report made to any governmental
authority arising out of any Hazardous Materials on, or removed from, the
Property or any portion thereof. Lessor retains the right to join and
participate, as a party, in any legal actions affecting the Property or any
portion thereof initiated in connection with Hazardous Materials laws.
14.07 Lessee will indemnify, protect, defend and forever hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, the Property, or any portion thereof, harmless from any and all
damages, losses, liabilities, judgments, penalties, claims, obligations,
attorneys' and consultants' fees and any other costs and expenses arising out of
any failure of Lessee, its agents, contractors, employees, suppliers, licensees
or invitees to observe any covenants of this Section 14 of this Lease.
Non-compliance by Lessee with any provisions of this Section 14 shall constitute
a Breach under this Lease, and all provisions of this Section 14 shall survive
any termination of this Lease.
15. AUCTIONS AND SIGNS
15.01 Lessee will not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction on or about the Property, without
having the express written consent of Lessor, and Lessor will not be obligated
to exercise any standard of reasonableness in determining whether or not to
grant such consent. Should Lessor grant such consent, Lessee will comply with
any requirements of Lessor and any applicable laws governing such an auction.
15.02 Lessee will not place any Signage on or about the Property,
or on any part thereof, without the prior written consent of Lessor, which
Lessor may withhold in its sole discretion. All approved Lessee Signage will
comply with the terms and conditions of this Lease and the sign criteria set
forth in Exhibit "C" and Exhibit "D", Rules and Regulations, or other criteria
which Lessor may establish from time to time. Non-compliance with any of the
provisions of this Paragraph 15, Exhibit "C' or Exhibit "D" shall constitute a
Default under this Lease.
16. LESSOR'S ACCESS
16.01 Lessor, its agents, contractors, consultants, servants and
employees, will have the right to enter the Premises at any time in the case of
an emergency, and otherwise at reasonable times and upon reasonable notice to
(a) examine the Premises; (b) perform any obligation to or exercise any right or
remedy of Lessor under this Lease; (c) make repairs, alterations, improvements
or additions to the Premises or to other portions of the Property as Lessor
deems necessary or desirable; (d) perform work necessary to comply with laws,
ordinances, rules or regulations of any governing authority or insurance
underwriter; (e) serve, post or keep posted any notices required or allowed
under the provisions of this Lease or by law; (f) show at reasonable times,
Lessee's Premises to prospective lessees; (g) post on or about the Premises any
ordinary "For Lease" signs during the last sixty (60) days of the Lease Term;
and (h) perform work at Lessee's sole cost that Lessor deems necessary to
prevent waste or deterioration of the Premises should Lessee fail to commence to
make, and diligently pursue to completion, its
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required repairs. When the Lessor is exercising its right to enter the premises
for various allowed purposes, Lessor will comply with all of Lessee's reasonable
instructions with respect to hazardous materials and controlled substances kept
on the premises by Lessee, and will be responsible to Lessee for any loss,
liability, cost, or expense directly arising from Lessor's failure to do so.
[INITIAL]
16.02 For each of the purposes described in Paragraph 16.01 above,
Lessor will at all times have and retain any necessary keys with which to unlock
all doors in, upon and about the Premises, excluding Lessee's vaults and safes.
Lessee will not alter any lock or install new or additional locks or bolts on
any door in or about the Premises without obtaining Lessor's prior written
approval and will, in each event, furnish Lessor with a new key. All access
activities of Lessor will be without abatement of rent or liability on the part
of Lessor.
17. ABANDONMENT
Lessee will not vacate or abandon the Premises, or permit the Premises
to remain unoccupied for any period longer than fifteen (15) consecutive days
any time during the Lease Term. If Lessee abandons, vacates or surrenders the
Premises, or is dispossessed by process of law, or otherwise, any personal
property belonging to Lessee left in or about the Premises will, at the option
of Lessor, be deemed abandoned and may be disposed of by Lessor.
18. DAMAGE OR DESTRUCTION
18.01 If the Premises, or any portion of the Property, is damaged
or destroyed by fire or other casualty, Lessee will immediately give written
notice to Lessor of the casualty and Lessor will promptly repair the damage as
set forth in Paragraph 18.03 unless Lessor has the right to terminate this Lease
as provided In Paragraphs 18.02 and 18.04, and lessor elects to so terminate.
18.02 If Lessee, or its agents, contractors, employees, suppliers,
licensees or invitees is not the cause of the casualty, Lessor will have the
right, but not the obligation, to terminate this Lease following a casualty if
any of the following occurs: (i) insurance proceeds (excluding Lessor's
deductible and including Lessee's deductible) together with any additional
monies Lessee elects, at its option, to contribute are not available to Lessor
to pay one hundred percent (100%) of the cost to fully repair the damage; (ii)
Lessor determines that the Premises cannot, with reasonable diligence, within
six (6) months after Lessor obtains knowledge of the casualty, be fully repaired
by Lessor or cannot be safely repaired because of the presence of hazardous
factors and conditions, including but not limited to, Hazardous Materials,
earthquakes, utility outages and any other similar dangers; (iii) the Premises
are damaged or destroyed within the last twelve (12) months of the Lease Term;
(iv) the building within which the Premises is located, or any other portion of
the Property, is damaged or destroyed and Lessor (as determined in its sole
discretion) cannot reasonably complete such repair within six (6) months of
Lessor obtaining knowledge of the casualty; (v) Lessee is in Default or Breach
of this Lease at the time of the casualty; or (vi) Lessor would be required
under Paragraph 18.05 to abate or reduce Lessee's rent for a period in excess of
six (6) months if the repairs were undertaken. If Lessor elects to terminate
this Lease pursuant to this Paragraph 18.02, Lessor will give Lessee written
notice of this election, and fifteen (15) days after Lessee's receipt of such
notice, this Lease will terminate. If Lessor elects to terminate this Lease,
subject to the rights of any mortgagee, Lessor will be entitled to retain all
applicable Lessee insurance proceeds excepting those attributable to Lessee's
furniture, fixtures, equipment, installations, and any other personal property.
See Addendum 2.
18.03 If Lessee, or its agents, contractors, employees, suppliers,
licensees or invitees is not the cause of the casualty, and Lessor elects not to
terminate this Lease, this Lease will remain in full force and effect, and
Lessor will, within ten (10) days after receipt of all applicable insurance
proceeds and monies required to fully repair 100% of the Premises, begin the
process of obtaining all necessary permits and approvals, and upon receipt
thereof, diligently pursue the repair through completion.
18.04 If Lessee, or its agents, contractors, employees, suppliers,
licensees or invitees is the cause of the casualty, or any portion thereof,
Lessor may elect any of the following: (i) to continue this Lease in full force
and effect; (ii) to make Lessor or Lessee, as determined in Lessor's sole
discretion, responsible for the completion of all, or any portion, of the
repairs necessitated by the casualty, and all such repairs shall be at Lessee's
sole cost and expense; and/or (iii) terminate this Lease with fifteen (15) days
written notice and retain all applicable Lessee insurance proceeds excepting
those specifically attributable to Lessee's furniture, fixtures, equipment,
installations, and other personal property. No election by Lessor of any remedy
hereunder shall be deemed a limitation on Lessee's liability.
18.05 If Lessor elects not to terminate this Lease, during the
period of repair, Lessee's rent will be temporarily abated or reduced in
proportion to the degree to which Lessee's use of the Premises is impaired, as
determined by Lessor in its reasonable discretion, beginning the date Lessor
obtains knowledge of the casualty and ending on the date all repairs affecting
Lessee's use of the Premises are substantially completed, as determined by
Lessor in its reasonable discretion. However, the total amount of such rent
abatement or reduction shall not exceed the total amount of insurance proceeds,
directly attributable to Lessee's Premises, Lessor may receive from any rental
loss insurance coverage it may carry free from any claim of Lessee. Except for
the abatement of rent as herein described, Lessee will not be entitled to any
compensation or damages for the loss of or interference with Lessee's personal
property (including but not limited to, furniture, fixtures, equipment, and
installations), or existing improvements of the Premises, Lessee Improvements,
Lessee Alterations or any other improvements on or about any portion of the
Property, or business, or use, or access to all or any part of the Premises or
the Property resulting from such damage, destruction or repair, including but
not limited to, any consequential damages, opportunity costs or lost profits
incurred or suffered by Lessee. In no event, however, will Lessor be responsible
for any abatement of rent if Lessee, or its agents, contractors, employees,
suppliers, licensees or invitees is the cause of the casualty, or any part
thereof.
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19. TRANSFER (ASSIGNMENT/SUBLETTING)
19.01 Lessee will not assign, sell, mortgage, encumber, convey,
pledge, sublet or otherwise transfer all or any part of Lessee's right or
interest in this Lease, or allow any other person or entity to occupy or use all
or any part of the Premises (collectively called "Transfer") without first
obtaining the written consent of Lessor which shall not unreasonably be withheld
or delayed. The following shall be deemed a "Transfer" for purposes of this
section: (i) a request by Lessee for an entity other than itself to become
Lessee hereunder by merger, consolidation, or other reorganization; a transfer
of any ownership interest in Lessee (unless Lessee is an entity whose stock is
publicly traded) so as to result in a change in the current control of Lessee;
(ii) a grant of a license, concession, or other right of occupancy of any
portion of the Premises, or (iii) the use of the Premises by any party other
than Lessee. Should Lessee desire a Transfer, Lessee will notify Lessor in
writing of: (i) Lessee's intent to Transfer. (ii) the name of the proposed
transferee; (iii) the nature of the proposed transferee's business to be
conducted on the Premises, (iv) the terms and provisions of the proposed
Transfer, and (v) any other information Lessor may reasonably request concerning
the proposed Transfer; including but not limited to, a statement of net worth,
financial statements covering a specified period of time, environmental reports
and a completed environmental questionnaire supplied by Lessor.
19.02 Lessee agrees, by way of example and without limitation, that
Lessor may withhold its consent to a proposed Transfer if Lessor in its
reasonable judgment determines that the proposed transferee: (a) is of a
character or is engaged in a business which is not in keeping with Lessor's
standards for the Property, as determined solely by Lessor; (b) has a use which
conflicts with a provision of this Lease or proposes an unacceptable risk to
Lessor, as determined by Lessor; (c) does not meet the reasonable financial
standards required by Lessor; (d) has been required by any prior lessor, lender
or governmental authority to take a remedial action in connection with Hazardous
Materials contaminating a property; (e) is unacceptable because Lessee is in
Default or Breach under this Lease at the time of the request for Transfer or as
of the effective date of the Transfer. Notwithstanding the foregoing, Lessee's
right to a Transfer is subject to Lessor's approval of Lessee's financial
condition at the time the Transfer is requested by Lessee.
19.03 In the event Lessor consents to a Transfer, the Transfer will
not be effective until Lessor is in receipt of a fully executed agreement to
Transfer, in a form and of substance acceptable to Lessor, and a Transfer fee of
two hundred and fifty dollars ($250.00) which shall represent Lessee's minimum
liability for such service. The receipt and cashing of any check by Lessor
wherein such check is in a name other than that of Lessee will not constitute a
Transfer. Lessor also reserves the right to collect any rents due under this
Lease directly from the transferee, and such direct collection will not
constitute recognition of the transferee as Lessee or release Lessee or any
guarantor of Lessee from any of its obligations under this Lease. Any
consideration received by Lessee in excess of Lessee's Base Rent (including
additional rent) as a result of a Lessor approved transfer shall be due and
payable to Lessor and any rights of first refusal, options or expansions under
the original lease shall be null and void.
19.04 Lessor may, within fifteen (15) business days after
submission of Lessee's written request for Lessor's consent to a Transfer,
cancel this Lease (or, as to a subletting or assignment, cancel as to the
portion of the Premises proposed to be sublet or assigned) as of the date the
proposed Transfer was to be effective. If Lessor cancels this Lease as to any
portion of the Premises, then this Lease shall cease for such portion of the
Premises, and Lessee shall pay to Lessor all Base Rent and other amounts accrued
through the cancellation date relating to the portion of the Premises covered by
the proposed Transfer and all brokerage commissions paid or payable by Lessor in
connection with this Lease that are allocable to such portion of the Premises.
Thereafter, Lessor may lease such portion of the Premises to the prospective
transferee (or to any other person) without liability to Lessee.
19.05 If Lessor has not responded in writing to a Transfer within
fifteen (15) business days of Lessee's request hereunder, Lessor will be deemed
to have approved Lessee's request.
20. DEFAULT AND BREACH
20.01 Lessee's performance of each of Lessee's obligations under
this Lease is a condition as well as a covenant. Lessee's right to continue in
possession of the Premises is conditioned upon such performance. Time is of the
essence in the performance of all covenants and conditions. Lessee's failure to
perform any of its obligations shall put it in Default or Breach under this
Lease.
20.02 A "Default" is a failure to fulfill any terms, conditions,
covenants or rules under this Lease. A "Breach" is a Default which has no cure
period, stated or otherwise, or a Default which is not cured within the stated
cure period provided under this Lease. Lessor and Lessee agree that if an
attorney is consulted by Lessor in connection with a Lessee Default or Breach,
$250.00 is a reasonable minimum sum to charge Lessee as Additional Rent to cover
Lessor's legal preparation and service costs. Unless otherwise stated in this
Lease, Lessee will be in Breach if at any time during the Lease Term:
(a) Lessee fails to make any payment of Base Rent, Additional
Rent, or any other monetary payment required to be made by
Lessee herein and Lessee does not cure such failure within
five (5) days after receipt of Lessor's written notice to
Lessee.
(b) Lessee fails to provide Lessor with proof of insurance or
performance or surety bond as required under this Lease; and
Lessee does not cure such failure within five (5) days after
Lessor's
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written notice to Lessee.
(c) Lessee, at any time during the Lease Term, fails to maintain,
in full force and effect, its required insurance coverage.
(d) Lessee fails to ensure that life and property are not
endangered, as determined by Lessor in its reasonable
discretion.
[INITIAL]
(e) Lessee vacates the Premises with payment of rent or abandons
the Premises as further described in Paragraph 17. In the
event of such abandonment, Lessee shall not be held in
default as long as it conducts thorough weekly inspections of
the premises.
(f) Lessee fails to observe, perform or comply with any of the
non-monetary terms, covenants, conditions, provisions or
rules and regulations applicable to Lessee under this Lease
and such failure is curable, in the sole opinion of Lessor,
and then is not cured within ten (10) days after Lessor's
written notice to Lessee; provided, however, that if the
nature of Lessee's obligation is such that more than ten (10)
days are required for performance, then Lessee will not be in
Breach if Lessee commences performance within such ten (10)
day period and thereafter diligently, in Lessor's sole
opinion, pursues such cure to completion.
(g) Lessor discovers that any financial statement of Lessee or of
any guarantor of this Lease given to Lessor, was materially
false.
(h) Lessee makes any general arrangement or assignment for the
benefit of creditors, becomes a "debtor" as defined in 11 U.
S. Code Section 101 or any successor statute, has
substantially all its assets located at the Premises or its
interest in this Lease appointed to a receiver or trustee,
indicates in Lessor's reasonable opinion an inability to pay
its debts or obligations as they occur, has an attachment, or
execution or other judicial seizure of substantially all of
its assets located at the Property or its interest in this
Lease.
(i) Lessee is in Breach of any other term or condition of this
Lease.
21. REMEDIES OF LESSOR
21.01 If Lessee fails to perform any duty or obligation of Lessee
under this Lease, Lessor may at its option perform any such duty or obligation
on Lessee's behalf. The costs and expenses of any such performance by Lessor
will be immediately due and payable by Lessee upon receipt from Lessor of the
reimbursement amount required. In the event of a Breach of this Lease by Lessee
as defined in Paragraph 20.02, with or without notice or demand, and without
limiting any other of Lessor's rights or remedies, Lessor may:
(a) Terminate Lessee's right to possession of the Premises, in
which case this Lease will terminate and Lessee will
immediately surrender possession of the Premises to Lessor.
Lessor reserves all right and remedies available to it
pursuant to the terms and conditions of this Lease as well as
under state law. Lessee hereby grants Lessor the full and
free right, to enter the Premises with process of law. Lessee
releases Lessor of any liability for any damage resulting
therefrom and waives any right to claim damage for such
re-entry. Lessee also agrees that Lessor's right to release
or any other right given to Lessor as a consequence of
Lessee's breach hereunder or by operation of law is not
relinquished. On such termination, Lessor will be entitled to
recover from Lessee: (i) the worth at the time of the award
of the unpaid rent which had been earned at the time of the
termination; (ii) the worth at the time of the award of the
amount by which the unpaid rents which would have been earned
after termination until the time of award exceeds the amount
of such rental loss that Lessee proves could have been
avoided; (iii) the worth at the time of the award of the
amount by which the unpaid rents for the balance of the Lease
Term after the time of award exceeds the amount of such
rental loss for such period that Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to
compensate Lessor for all the damage proximately caused by
Lessee's failure to perform its obligations under this Lease
or which in the ordinary course of events would likely result
therefrom, including but not limited to, all costs and
expenses attributable to recovering possession of the
Premises, reletting expenses (including the costs and
expenses of any necessary repairs, renovations and
alterations to the Premises), costs of carrying the Premises
(including but not limited to, Lessor's payment of real
property taxes and insurance premiums), actual legal fees and
associated costs and expenses, any unearned brokerage
commissions paid in connection with this Lease, any
unamortized Lessee Improvements, and reimbursement of any
deferred rent or other Lease execution inducement.
(b) Continue the Lease and Lessee's right to possession and
recover rent as it becomes due. Acts of maintenance or
preservation, efforts to relet the Premises, removal or
storage of Lessee's personal property or the appointment of a
receiver to protect Lessor's interest under this Lease, will
not constitute a termination of Lessee's right to possession.
Lessor agrees to make reasonable efforts to mitigate its
damages provided however, Lessor shall not be required to
relet any or all of the Premises prior to leasing other
vacant space on the Project, nor shall Lessor be required to
accept a tenant of lesser financial quality than Lessee was
as of the commencement date of this Lease.
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(c) Pursue any other remedy now or hereafter available to Lessor under
the laws or judicial decisions of the state wherein the Premises
are located.
21.02 In the event of bankruptcy of Lessee, or if Lessee becomes a
debtor as defined under the Bankruptcy Code, Lessee assigns to Lessor all its
rights, title and interest in the Premises as security for its obligations under
this Lease. The expiration or termination of this Lease, and/or the termination
of Lessee's right to possession, will not relieve Lessee from any liability
accruing during Lessee's Lease Term or by reason of Lessee's occupancy of the
Premises. Any efforts by Lessor to mitigate the damages caused by Lessee's
Breach of this Lease will not waive Lessor's right to recover damages.
21.03 The "worth at the time of award" referred to in 21.01(a)(i)
and 21.01(a)(ii) and 21.01(a)(iii) will be computed by discounting the amount at
the discount rate of the Federal Reserve Bank of San Francisco in effect at the
time of award, plus one percent (1%).
21.04 No right or remedy conferred upon or reserved to Lessor in
this Lease is intended to be exclusive of any right or remedy granted to Lessor
by statute or common law, and each and every such right and remedy will be
cumulative.
22. ARBITRATION
In the event any dispute arises regarding matters occurring before,
during or after the term of this agreement, the parties agree that in lieu of
judicial proceedings, the matter shall be submitted to arbitration, and if not
otherwise resolved, arbitrated in accordance with the rules of the American
Arbitration Association, in a venue nearest to the location of the Leased
Premises. The Lessor and Lessee further agree that such requirement of
arbitration shall not be limited to contractual disputes alone, but shall
pertain to any dispute between Lessor and Lessee, whether arising from contract,
tort, in equity, under statute or administrative resolution, or any other legal
basis. This agreement to arbitrate shall not, however, prohibit Lessor from
exercising its statutory and/or common law rights to proceed against Lessee for
possession of the Premises and damages related thereto, in the nature of
unlawful detainer, ejectment, or any other similar summary proceeding.
23. SURRENDER OF LEASE NOT MERGER
Unless specifically stated otherwise in writing by Lessor, the
voluntary or other surrender of this Lease by Lessee, the mutual termination or
cancellation of this Lease, or the termination of this Lease by Lessor due to a
Breach by Lessee, will not work as a merger, and will, at the option of Lessor,
terminate all or any Transfer of the Premises or operate as a Transfer to Lessor
of any or all such Transfers.
24. PROFESSIONAL FEES, COSTS AND EXPENSES
24.01 In the event that any party to this Lease initiates an action
or proceeding to enforce the terms of this Lease or to declare the rights of a
party to this Lease, the prevailing party will be entitled to all actual costs
and expenses, including but not limited to, all fees and costs and expenses of
appraisers, experts, accountants and attorneys, which obligations shall be
deemed to have accrued as of the commencement date of such action or proceeding.
Should Lessor be named as a defendant in any legal action or proceeding brought
against Lessee in connection with, or arising out of, Lessee's occupancy within
the Property, Lessee will pay to Lessor all of Lessor's actual costs and
expenses incurred, including its legal fees. Attorneys' fees will not be
computed in accordance with any court fee schedule, but will be the actual
amount of any fees incurred.
24.02 If Lessor utilizes the services of any attorney with regard
to Lessee's occupancy or tenancy under this Lease, Lessor will be entitled to
reimbursement by Lessee of its reasonable legal fees, and all other reasonable
costs and expenses, whether or not a legal action is commenced by Lessor.
25. CONDEMNATION
If any portion of the Premises or any portion of the Building in which
the Premises is located, or any portion of the Property which would
substantially interfere with Lessor's ownership, or Lessor's or Lessee's ability
to conduct business is taken for any public or quasi-public purpose by any
governmental authority, including but not limited to, by exercise of the right
of appropriation, inverse condemnation, condemnation or eminent domain, or sold
to prevent such taking, Lessor, at its option, may terminate this Lease without
recourse by Lessee. Any award for such taking or payment made under such threat
of exercise of such power will be the property of Lessor, whether such award be
made as compensation for diminution of value of the leasehold or for the taking
of the fee, or as severance damages; however, Lessee will be entitled to any
compensation, separately awarded to Lessee for Lessee's relocation expenses and
alterations made by Lessee. If this Lease is not terminated, Lessor will
promptly proceed to restore the Premises and/or any portion of the Property used
in common by all lessees to substantially the same condition as prior to such
taking allowing for any reasonable effects of such taking. Should a partial
taking directly affect a portion of Lessee's Premises including parking area and
Lessor does not exercise its right to terminate this Lease, Lessor will make an
appropriate allowance to Lessee for the rent corresponding to the term during
which, and to the part of the Premises which, Lessee is deprived on account of
such taking and restoration.
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26. RULES AND REGULATIONS
Lessee agrees to abide by, keep and observe all rules and regulations
Lessor has set forth in Exhibit "D". Lessor reserves the right to modify and
amend them, upon prior notice to Lessee, as it deems necessary and will not be
responsible to Lessee for any nonperformance by any other lessee, occupant or
invitee of the Property of any said rules and regulations. Violation by Lessee,
its employees, agents, contractors, suppliers, invitees or licensees will be
deemed a Default under this Lease.
27. ESTOPPEL CERTIFICATE
Lessee will execute and deliver, in a form prepared by Lessor, to
Lessor within ten (10) days after written receipt of notice from Lessor, a
written statement certifying: (i) that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification);
(ii) the date to which rent and any other charges are paid in advance, if any;
(iii) acknowledgment that there are not, to Lessee's knowledge, any uncured
Defaults on the part of Lessor, or stating the nature of any uncured Defaults;
(iv) the current Base Rent amount and the amount and form of the Security
Deposit on deposit with Lessor; and (v) any other information as Lessor,
Lessor's agents, mortgagees and prospective purchasers may reasonably request,
including but not limited to, any requested information regarding Hazardous
Materials. Lessee's failure to deliver such statement within ten (10) days of
its receipt will be deemed as Lessee's conclusive confirmation that: (1) this
Lease (including specifically the Base Rent, Additional Rent and Lease Term) is
in full force and effect and without modification except as may be represented
by Lessor; (2) neither Lessor nor Lessee are in Default under the Lease; and (3)
not more than one (1) month's rent charges, if any, are paid in advance. Such
failure shall be deemed, at Lessor's option, a Breach of this Lease.
28. SALE BY LESSOR
Upon the sale or any other conveyance by Lessor of the Property, or any
portion thereof, Lessor will be relieved of all liability under any and all of
its covenants and obligations contained in or derived from this Lease or arising
out of any act, encumbrance, occurrence or omission occurring after the date of
such conveyance. In such event, all obligations of Lessor, under this Lease,
transfer to new Lessor.
29. NOTICES
All written communications and notices required under this Lease shall
be considered sufficiently given and served if sent to: 1) Lessee by U. S. mail
(First Class, postage prepaid), personal delivery or by other reasonable method
(including posting on or about the Premises), unless otherwise required by law,
to the address indicated in Paragraph 1.05 and shall be deemed received three
(3) days after such mailing, personal delivery or posting; 2) Lessor by U. S.
mail (First Class, postage prepaid), registered or certified (unless otherwise
required by law) to the address indicated in Paragraph 1.06 and shall be deemed
received five (5) days after such mailing; and 3) Lessee by facsimile or
overnight delivery and shall be deemed received twenty-four (24) hours after
transmission of such facsimile or placement in an overnight depository. At any
time during the Lease Term, Lessor or Lessee may specify a different Notice
Address by providing written notification to the other.
30. WAIVER
No waiver by Lessor of a Default or Breach of any term, covenant or
condition of this Lease by Lessee, will be deemed a waiver of any other term,
covenant or condition of this Lease, or of any subsequent Default or Breach of
Lessee of the same or any other term, covenant or condition of this Lease, nor
will any delay or omission by Lessor to seek a remedy for any Lessee Default or
Breach of this Lease be deemed a waiver by Lessor of its remedies or rights with
respect to such Default or Breach. Additionally, regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor whether on account of monies or damages due Lessor, or
otherwise, will not constitute a waiver by Lessor of any Default or Breach by
Lessee.
31. LESSEE'S INTENT; HOLDOVER
Unless otherwise specified in this Lease, Lessee will give Lessor, not
less than ninety (90) days prior to the expiration date of this Lease Term,
written notice of its intent to remain or vacate the Premises on the expiration
date of this Lease. If Lessee remains in possession of all or any part of the
Premises with Lessor's written consent after the expiration of the Lease Term,
such possession will constitute a month-to-month tenancy, which may be
terminated by either Lessor or Lessee with thirty (30) days written notice and
will not constitute a renewal or extension of the Lease Term. If Lessee remains
in possession after the Lease Term without Lessor's written permission, such
possession will constitute a tenancy-at-will terminable upon forty-eight (48)
hour notice by either Lessee or Lessor. In the event of a month-to-month tenancy
or tenancy-at-will, Lessee's Base Rent will be one hundred fifty percent (150%)
of the Base Rent payable during the last month of the Lease Term, and any other
sums due under this Lease will be payable in the amounts and at the times
specified in this Lease and all options, rights of refusal, expansions and/or
renewals shall be null and void. Such tenancy will be subject to every other
term, condition and covenant contained in this Lease.
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33. DEFAULT BY LESSOR;LIMITATION OF LIABILITY; REAL ESTATE INVESTMENT TRUST
33.01 In the event Lessor is deemed in Default or Breach in the
performance of any obligation required to be performed under this Lease, Lessee
will notify Lessor In writing, pursuant to the provisions of Paragraph 29, of
Lessor's Default or Breach at Lessor's Notice Address as specified In Paragraph
1.06, and within ten (10) working days of receipt of such notice, Lessor will
commence to make a good faith effort to cure the Default or Breach and in a
diligent and prudent manner continue to do so until completion.
33.02 The obligations of Lessor under this Lease shall be binding
only on Lessor and not upon any of the individual partners, investors, trustees,
directors, officers, employees, agents, shareholders, advisors or managers of
Lessor in their individual capacities, and with respect to any obligations of
Lessor to Lessee, Lessee's sole and exclusive remedy shall be against Lessor.
33.03 In consideration of the benefits accruing hereunder, Lessee
on behalf of itself and all of its Transferees covenants and agrees that, in the
event of any actual or alleged failure, Default or Breach of this Lease by
Lessor, Lessee's recourse against Lessor for any monetary damages will be
limited to the lesser of Lessor's interest in the Property including, subject to
the prior rights of any mortgagee, Lessor's interest in the rents of the
Property, or Lessor's equity interest in the Property if the Property were
encumbered by debt in an amount equal to eighty percent (80%) of its value of
the Property as of the initial date Lessee notifies Lessor of the actual or
alleged failure, Default or Breach, and any insurance proceeds payable to
Lessor. Any action by Lessee will be limited to actual damages only and will
not, under any circumstances, include future profits or consequential damages.
33.04 If Lessor is a real estate investment trust, and if Lessor in
good faith determines that its status as a real estate investment trust under
the applicable provisions of the Internal Revenue Code of 1986, as heretofore or
hereafter amended, will be jeopardized because of any provision of this Lease,
Lessor may require reasonable amendments to this Lease and Lessee shall not
unreasonably withhold or delay its consent thereto, provided that such
modifications do not in any way, (i) increase the obligations of Lessee under
this Lease or (ii) adversely affect any rights or benefits to Lessee under this
Lease. Lessor shall pay all reasonable costs incurred by Lessee, including
without limitation, legal fees incurred for reviewing any such proposed
modifications.
34. SUBORDINATION
Without the necessity of any additional document being executed by
Lessee for the purposes of effecting a subordination, and at the election of
Lessor or any mortgagee or any ground lessor with respect to the land of which
the Premises are a part, this Lease will be subject and subordinate at all times
to: (i) all ground leases or underlying leases which may now exist or hereafter
be executed affecting the Property and (ii) the lien of any mortgage or deed of
trust which may now exist or hereafter be executed in any amount for which the
Property, ground leases or underlying leases, or Lessor's interest or estate in
any of said items is specified as security. Lessor or any mortgagee or ground
lessor will have the right, at its election, to subordinate or cause to be
subordinated any ground lessee or underlying leases or any such liens to this
Lease. If Lessor's interest in the Premises is acquired by any ground lessor or
mortgagee, or in the event any proceedings are brought for the foreclosure of,
or in the event of exercise of power of sale under, any mortgage or deed of
trust made by Lessor covering the Premises, or in the event a conveyance in lieu
of foreclosure is made for any reason, Lessee will, notwithstanding any
subordination and upon the request of such successor in interest to Lessor,
attorn to and become the Lessee of the successor in interest to Lessor and
recognize such successor in interest as the Lessor under this Lease. Lessee
acknowledges that although this Paragraph 34 is self-executing, Lessee covenants
and agrees to execute and deliver, upon demand by Lessor and in the form
requested by Lessor, or any other mortgagee or ground lessor, any additional
documents evidencing the priority or subordination of this Lease with respect to
any such ground leases or underlying leases or the lien of any such mortgage or
deed of trust. Lessee's failure to timely execute and deliver such additional
documents will, at Lessor's option, constitute a Breach of this Lease.
35. FORCE MAJEURE
Neither party will have liability to the other, nor will either party
have any right to terminate this Lease or abate rent or assert a claim of
partial or constructive eviction, because of Lessor's failure to perform any of
its obligations under this Lease if the failure is due in part or in full to
reasons beyond Lessor's reasonable control. Such reasons will include but not be
limited to: strike, other labor trouble, fuel, labor or supply shortages,
utility failure or defect,
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<PAGE>
the inability to obtain any necessary governmental permit or approval (including
building permits and certificates of occupancy), war, riot, mandatory or
prohibitive injunction issued in connection with the enforcement of the
Americans with Disabilities Act of 1990, civil insurrection, accidents, acts of
God, any governmental preemption in connection with a national emergency or any
other cause, whether similar or dissimilar, which is beyond the reasonable
control of Lessor. If this Lease specifies a time period for performance of an
obligation by Lessor, that time period will be extended by the period of any
delay in Lessor's performance caused by such events as described herein.
36. MISCELLANEOUS PROVISIONS
36.01 Whenever the context of this Lease requires, the neuter, the
masculine and the feminine gender shall include the other, and the word person
shall include partnership or corporation or joint venture, and the singular
shall include the plural and the plural shall include the singular.
36.02 If more than one person or entity is Lessee, the obligations
imposed on each such person or entity will be joint and several.
36.03 The captions and headings of this Lease are used for the
purpose of convenience only and shall not be construed to interpret, limit or
extend the meaning of any part of this Lease.
36.04 This Lease contains all of the agreements and conditions made
between Lessor and Lessee and may not be modified in any manner other than by a
written agreement signed by both Lessor and Lessee. Any statements, promises,
agreements, warranties or representations, whether oral or written, not
expressly contained herein will in no way bind either Lessor or Lessee, and
Lessor and Lessee expressly waive all claims for damages by reason of any
statements, promises, agreements, warranties or representations, if any, not
contained in this Lease. No provision of this Lease shall be deemed to have been
waived by Lessor unless such waiver is in writing signed by a regional vice
president or higher of Lessor or the management company, and no custom or
practice which may develop between the parties during the Lease Term shall waive
or diminish the Lessor's right to enforce strict performance by Lessee of any
terms of the Lease.
36.05 Time is of the essence for the performance of each term,
condition and covenant of this Lease.
36.06 Except as otherwise expressly noted, each payment required to
be made by Lessee is in addition to and not in substitution for other payments
to be made by Lessee.
36.07 Subject to Section 19, the terms, conditions and provisions
of this Lease will apply to and bind the heirs, successors, executors,
administrators and assigns of Lessor and Lessee.
36.08 If any provision contained herein is determined to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality,
or unenforceability will not affect any other provision of this Lease.
36.09 In consideration of Lessor's covenants and agreements
hereunder, Lessee hereby agrees not to disclose any terms, covenants or
conditions of this Lease to any non-related party other than its officers,
directors, attorneys or accountants without the prior written consent of Lessor.
Additionally, Lessee shall not record this Lease or any short form memorandum
hereof without the prior written consent of Lessor, which Lessor may withhold in
its sole discretion.
36.10 The rights and obligations of the parties under this Lease
shall survive its termination.
36.11 The duties and warranties of Lessor are limited to those
expressly stated in this Lease and does not and shall not include any implied
duties or implied warranties, now or in the future. No representations or
warranties have been made by Lessor other than those contained in this Lease.
36.12 Lessee promises and it is a condition to the continuance of
this Lease that there will be no discrimination against or segregation of any
person or group of persons on the basis of race, color, sex, creed, national
origin or ancestry in the leasing, subleasing, transferring occupancy, tenure,
or use of the Property, the Premises, or any portion thereof.
36.13 Lessor and Lessee each warrant to the other that it has not
dealt with any broker or agent in connection with this Lease, other than the
person(s) listed in Paragraph 1.15 above. Except for any broker(s) who shall be
compensated in accordance with the provisions of a separate agreement, Lessor
and Lessee each agree to indemnify the other against all costs, expenses, legal
fees and other liability for commissions or other compensation claimed by any
other broker or agent.
37. EXAMINATION OF LEASE; GOOD FAITH DEPOSITS
Submission of this document for examination and signature by Lessee
does not create a reservation or option to lease. Lessee hereby agrees that
Lessor will be entitled to immediately endorse and cash any good faith check(s)
forwarded by Lessee along with this document. it is further agreed that such
cashing of good faith checks by Lessor will not guarantee acceptance of this
document by Lessor, but, in the event Lessor does not accept or
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<PAGE>
execute this document, the amount of such good faith check(s) will be refunded
to Lessee. This document will become this "Lease" and be effective and binding
only upon full execution by authorized representatives of both Lessee and Lessor
as defined in this Lease. Thereafter, a fully executed copy of this Lease will
be deemed an original for all purposes.
38. GOVERNING LAW
This Lease is governed by and construed in accordance with the laws of
the state in which the Premises are located, and venue of any legal action will
be in the county where the Premises are located.
39. LESSOR'S LIEN
LESSOR HEREUNDER WILL HAVE THE BENEFIT OF, AND THE RIGHT TO, ANY AND
ALL LESSOR'S LIENS PROVIDED UNDER THE LAW BY WHICH THIS LEASE IS GOVERNED.
40. SPECIAL PROVISIONS AND EXHIBITS
Special provisions of this Lease number 41 through are attached
------
hereto and made a part hereof. The following Exhibits are attached to this Lease
and by this reference made a part hereof: "A", "Al", "A2", "B", "C", and "D".
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of
the day and year indicated by Lessor's execution date as written below.
If Lessee is a corporation, each person signing this Lease on behalf of
Lessee represents and warrants that he or she has full authority to do so and
that this Lease binds the corporation. Prior to the execution of this Lease,
Lessee shall deliver to Lessor a certified copy of a resolution of Lessee's
Board of Directors authorizing the execution of this Lease or other evidence of
such authority reasonably acceptable to Lessor. If Lessee is a partnership or
limited liability company, each person or entity signing this Lease for Lessee
represents and warrants that he, she or it is a general partner of the
partnership or limited liability company, as applicable. Lessee shall give
written notice to Lessor of any general partner's or member's withdrawal or
addition. Simultaneous with the delivery of Lessee's signed lease, Lessee shall
deliver to Lessor a copy of Lessee's recorded statement of partnership or
certificate of limited partnership or articles of organization, as applicable.
THIS LEASE, WHETHER OR NOT EXECUTED BY LESSEE, IS SUBJECT TO ACCEPTANCE
BY LESSOR, ACTING BY ITSELF OR BY ITS AGENT BY THE SIGNATURE ON THIS LEASE OF
ITS SENIOR VICE PRESIDENT, VICE PRESIDENT, REGIONAL MANAGER OR DIRECTOR OF
LEASING.
LESSOR: LESSEE:
PS BUSINESS PARKS, L.P. EPITOPE, INC.
A California Limited Partnership An Oregon Corporation
Federal ID #95-4609260
By:
--------------------------------
OWNER ENTITY
By: Eileen Newkirk, Assistant By: /s/ Charles E. Bergeron
---------------------- -----------------------------
Vice-President AUTHORIZED SIGNATURE
Date: 10-25-99 President/CFO
---------------------- -----------------------------
LEASE EXECUTION DATE TITLE
Lessor Fed. ID #95-4609260
----------
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<PAGE>
ADDENDUM #1
MUTUAL WAIVER OF SUBROGATION
ADDITION TO PARAGRAPH 12.03
To the extent permitted by their respective policies of insurance, the parties
hereby waive any right of recovery against the other party for any loss or
damage that is covered by any insurance policy maintained or required to be
maintained with respect to this agreement. The parties shall inform all of their
insurers of policies described in this agreement about this waiver of
subrogation, and shall secure from such insurers amendments to the policies
recognizing and providing for such waiver.
ADDENDUM #2
ADDITION TO PARAGRAPH 18.02
If (a) the Premises are destroyed, or any substantial part thereof is damaged by
----------
fire, (b) the destruction or damage is not the fault of Lessee, and (c) Lessor
- ----
reasonably determines that the Premises cannot be restored to substantially the
same condition as existed before the destruction, damage or condemnation within
ninety (90) days following such event and (d) the fire damage or destruction is
---------------------------------
limited to the Premises as opposed to a project-wide disaster, then Lessee also
- -------------------------------------------------------------
will have the right to terminate the Lease unless Lessor provides suitable
premises for Lessee's occupancy while the replacement or repair work is being
done. In the event Lessor provides temporary premises, Lessor will be obligated
to abate only the positive difference, if any, between the Base Rent and
Additional Rent under the Lease and the cost to Lessor in providing the
temporary premises. In no event will Lessee be obligated to pay more than the
Base Rent and Additional Rent for the temporary premises without Lessee's prior
written consent. Lessor must determine within thirty (30) days following the
destruction or damage whether the Premises can be restored.
ADDENDUM #3
OPTION TO EXTEND LEASE
Provided Lessee is not in default under any terms and conditions of the Lease,
Lessee shall have the option to extend the term of this Lease for -5- years on
the same terms and conditions of this Lease, except for the following
provisions:
1. That the Base Monthly Rental during the option period shall be at
market rate.
2. That the option to extend shall be exercised in writing by Lessee
270 days prior to the expiration of the initial term of the within
lease.
3. In the event that Lessor and Lessee have not reached a mutual
agreement in writing at least ninety (90) DAYS in advance of the
renewal term, this Lease shall terminate at the expiration of the
initial -5- year term.
17 [INITIAL]
<PAGE>
Exhibits
Ex. A The Project [Diagrams]
First Floor/Second Floor [Diagram]
Ex. B Tenant Improvement List
Ex. C Sign Requirements
Ex. D Rules and Regulations
AGREEMENT CONCERNING INVENTIONS, DISCOVERIES, IMPROVEMENTS,
TRADE SECRETS AND OTHER CONFIDENTIAL INFORMATION
In consideration of employment by EPITOPE, INC., or its subsidiaries,
affiliates, successors or assigns (collectively referred to as "Employer"),
Andrew S. Goldstein ("Employee") agrees as follows:
- ------------------
1. DISCLOSURE AND ASSIGNMENT TO EMPLOYER
Employee will disclose immediately and assign to Employer, or to any other
person designated in writing by Employer, all inventions, discoveries and
improvements, patentable or unpatentable, made, conceived or first reduced to
practice by Employee, alone or jointly with others, during his employment, which
inventions or improvements:
A. Were made, conceived or first reduced to practice in the performance of
duties assigned to or undertaken by the Employee as a part of such
employment, or
B. Were made, conceived or first reduced to practice with the material use
of the Employer's time, material, facilities or funds, or
C. Make use of any trade secrets or other confidential information of the
Employer's with which Employee comes into contact, or
D. Relate to any investigations or obligations undertaken by the Employer,
the details of which the Employee became aware of because of this
employment, or
E. Which relate to investigations or obligations undertaken by the
Employer and which are being performed at the physical location of
employment, and to which the Employee has access.
All such inventions, discoveries and improvements will be the sole and exclusive
property of Employer.
2. PERFECTION OF RIGHTS, TITLE AND INTEREST, AND OBTAINING OF PATENT
Employee will, during his employment for Employer and thereafter, perform at the
request and expense of Employer all lawful acts and execute, acknowledge and
deliver all instruments deemed necessary or desirable by Employer to vest in
Employer the entire right, title and interest in the inventions, discoveries and
improvements referenced in Section I [sic] above, and to enable Employer to
properly prepare, file and prosecute applications for and obtain and defend
patents of the United States and of foreign countries, as well as reissues,
renewals and extensions thereof, and to obtain and record title to such
applications and patents, so that Employer shall be the sole and absolute owner
thereof in any and all countries in which it may desire patent or like
protection.
3. NONDISCLOSURE TO UNAUTHORIZED PERSONS
Unless authorized or instructed in writing by Employer, or required by legally
constituted authority, Employee will not, except as required in the course of
Employer's business, during or after his employment, disclose to others or use
any of Employer's inventions, discoveries, improvements or any trade secrets or
other confidential information, knowledge or data which he obtains during the
course of employment related to formulae, processes, machines, or compositions,
whether or not developed by him, unless and until, and then to the extent that
such items become available to the public, other than by his act or failure to
act. In addition, the Employee agrees to use his best efforts to prevent
accidental or negligent loss of such inventions, discoveries, improvements,
trade secrets or other confidential information, knowledge or data, or release
to any person not authorized to received [sic] such items.
4. DELIVERY OF MODELS AND OTHER MATERIALS
During or after his employment for Employer, Employee will deliver immediately
to Employer upon its request all models, drawings, maps, plans, reports,
memoranda, diaries, notes, records, plates, blueprints. sketches, letters,
manuals, documents, chemicals, biological materials and all other writings,
graphic records and materials made or compiled by, or delivered or made
available to, or otherwise obtained by him, containing or relating to any
inventions, discoveries and improvements which the Employee is required to
disclose under this agreement, or with respect to any other trade secrets or
other confidential information, knowledge or data designated by Employer which
Employee has obtained as the result of his employment. Employee will retain no
excerpts, notes, photographs, reproductions or copies of any such material.
5. LIST OF INVENTIONS NOT SUBJECT TO THIS AGREEMENT
Employee attaches as Exhibit A to this agreement, a list and description of all
unpatented inventions (including those for which patent applications are
pending), which he has made, conceived or first reduced to practice prior to
this employment by Employer. Exhibit A includes, and is limited to, all
<PAGE>
those inventions, discoveries and improvements that Employee later may claim to
be excluded from this agreement. Such inventions, discoveries and improvements
shall be excluded from this agreement, unless further made or reduced to
practice in one of the manners specified in Section I [sic] above. Such list
shall be updated by Employee from time to time to include all inventions made,
conceived or first reduced to practice during Employee's employment, but not
falling within the scope of this agreement. Employer will not disclose to others
or use any information, knowledge or data that it derives from Exhibit A, until
and unless, and then to the extent that such information, knowledge or data
becomes available to the public, other than by Employer's act or failure to act.
6. OTHER LEGAL RIGHTS OF EMPLOYER
The rights and duties of Employer and Employee under this agreement are in
addition to, and not in lieu of, those rights and duties afforded to and imposed
upon them by law, or at equity. Employer and Employee agree to the entry of a
temporary restraining order and permanent injunction by any court of competent
jurisdiction to prevent breach or further breach of this agreement. Such remedy
shall be in addition to any other remedy available to the Employer or Employee
at law, or at equity.
7. SEVERABILITY OF PROVISIONS
The provisions of this agreement are severable, and if any provision hereof is
held invalid or unenforceable the remaining provision of this agreement shall
not be affected thereby.
8. SUCCESSORS, HEIRS, ASSIGNEES OR NOMINEES
This agreement shall inure to the benefit of and be binding upon Employer, its
successors, assigns or nominees and also upon Employee, his estate, heirs and
assigns.
9. WAIVER
No provision of this agreement may be waived by either party, except by a
writing signed by that party. The waiver of any portion of this agreement with
respect to any person or invention shall be construed narrowly and shall not
affect the right of the party granting the waiver to enforce any other provision
of this agreement or to enforce any provision of this agreement with respect to
any other person or invention.
10. REFERENCE TO GENDER
Any reference in this agreement to the masculine gender shall also be deemed to
refer to the feminine gender.
11. OREGON LAW TO BE APPLIED
The interpretation of and performance under this agreement shall be governed by
the laws of the State of Oregon.
NOTICE TO EMPLOYEE
THIS AGREEMENT MAY REQUIRE TRANSFER TO YOUR EMPLOYER OF CERTAIN INVENTIONS. YOU
MAY WISH TO CONSULT YOUR LEGAL COUNSEL FOR ADVICE CONCERNING YOUR RIGHTS AND
OBLIGATIONS.
DATED the 28 day of April, 1988
/s/ Andrew S. Goldstein
-----------------------------------
EMPLOYEE
-----------------------------------
EPITOPE, INC.
/s/ Shirley McKenna
- -----------------------------
WITNESS
ADDRESS:
EPITOPE, INC.
- -----------------------------
15425-E S.W.KOLL PARKWAY
BEAVERTON, OR 97006
- -----------------------------
<PAGE>
EXHIBIT A
A list and description of inventions, discoveries and improvements (including
those for which patent applications are pending) specified in Section 5 of this
agreement. List updated through .
------------------------------------
AGREEMENT CONCERNING INVENTIONS, DISCOVERIES,
IMPROVEMENTS, TRADE SECRETS AND OTHER CONFIDENTIAL INFORMATION
In consideration of employment by EPITOPE, INC., or its subsidiaries,
affiliates, successors or assigns (collectively referred to as "Employer"),
("Employee") agrees as follows:
- ------------------
DISCLOSURE AND ASSIGNMENT TO EMPLOYER
Employee will disclose immediately and assign to Employer, or to any other
person designated in writing by Employer, all inventions, discoveries and
improvements, patentable or unpatentable, made, conceived or first reduced to
practice by Employee, alone or jointly with others, during his employment, which
inventions or improvements:
1. Were made, conceived or first reduced to practice in the performance of
duties assigned to or undertaken by the Employee as a part of such
employment, or
2. Were made, conceived or first reduced to practice with the material use
of the Employer's time, material, facilities or funds, or
3. Make material use of any trade secrets or other confidential
information of the Employer's with which Employee comes into contact,
or
4. Relate to any investigations or obligations undertaken by the Employer,
the details of which the Employee became aware of because of this
employment, or
5. Which relate to investigations or obligations undertaken by the
Employer and which are being performed at the physical location of
employment, and to which the Employee has access.
All such inventions, discoveries and improvements will be the sole and exclusive
property of Employer.
PERFECTION OF RIGHTS, TITLE AND INTEREST, AND OBTAINING OF PATENT
Employee will, during his employment for Employer and thereafter, perform at the
request and expense of Employer all lawful acts and execute, acknowledge and
deliver all instruments deemed necessary or desirable by Employer to vest in
Employer the entire right, title and interest in the inventions, discoveries and
improvements referenced above, and to enable Employer to properly prepare, file
and prosecute applications for and obtain and defend patents of the United
States and of foreign countries, as well as reissues, renewals and extensions
thereof, and to obtain and record title to such applications and patents, so
that Employer shall be the sole and absolute owner thereof in any and all
countries in which it may desire patent or like protection.
NONDISCLOSURE TO UNAUTHORIZED PERSONS
Unless authorized or instructed in writing by Employer, or required by legally
constituted authority, Employee will not, except as required in the course of
Employer's business, during or after his employment, disclose to others or use
any of Employer's inventions, discoveries, improvements or any trade secrets or
other confidential information, knowledge or data which he obtains during the
course of employment related to formulae, processes, machines, or compositions,
whether or not developed by him, unless and until, and then to the extent that
such items become available to the public, other than by his act or failure to
act. In addition, the Employee agrees to use his best efforts to prevent
accidental or negligent loss of such inventions, discoveries, improvements,
trade secrets or other confidential information, knowledge or data, or release
to any person not authorized to receive such items.
DELIVERY OF MODELS AND OTHER MATERIALS
During or after his employment for Employer, Employee will deliver immediately
to Employer upon its request all models, drawings, maps, plans, reports,
memoranda, dairies [sic], notes, records, plates, blueprints. sketches, letters,
manuals, documents, chemicals, biological materials and all other writings,
graphic records and materials made or compiled by, or delivered or made
available to, or otherwise obtained by him, containing or relating to any
inventions, discoveries and improvements which the Employee is required to
disclose under this agreement, or with respect to any other trade secrets or
other confidential information, knowledge or data designated by Employer which
Employee has obtained as the result of his employment. Employee will retain no
excerpts, notes, photographs, reproductions or copies of any such material.
<PAGE>
LIST OF INVENTIONS NOT SUBJECT TO THIS AGREEMENT
Employee attaches as Exhibit A to this agreement, a list and description of all
unpatented inventions (including those for which patent applications are
pending), which he has made, conceived or first reduced to practice prior to his
employment by Employer. Exhibit A includes, and is limited to, all those
inventions, discoveries and improvements that Employee later may claim to be
excluded from this agreement. Such inventions, discoveries and improvements
shall be excluded from this agreement, unless further made or reduced to
practice in one of the manners specified in the Disclosure & Assignment section
above. Such list shall be updated by Employee from time to time to include all
inventions made, conceived or first reduced to practice during Employee's
employment, but not falling within the scope of this agreement. Employer will
not disclose to others or use any information, knowledge or data that it derives
from Exhibit A, until and unless, and then to the extent that such information,
knowledge or data becomes available to the public, other than by Employer's act
or failure to act.
OTHER LEGAL RIGHTS OF EMPLOYER
The rights and duties of Employer and Employee under this agreement are in
addition to, and not in lieu of, those rights and duties afforded to and imposed
upon them by law, or at equity.
SEVERABILITY OF PROVISIONS
The provisions of this agreement are severable, and if any provision hereof is
held invalid or unenforceable the remaining provision of this agreement shall
not be affected thereby.
SUCCESSORS, HEIRS, ASSIGNEES OR NOMINEES
This agreement shall inure to the benefit of and be binding upon Employer, its
successors, assigns or nominees and also upon Employee, his estate, heirs and
assigns.
WAIVER
No provision of this agreement may be waived by either party, except by a
writing signed by that party. The waiver of any portion of this agreement with
respect to any person or invention shall be construed narrowly and shall not
affect the right of the party granting the waiver to enforce any other provision
of this agreement or to enforce any provision of this agreement with respect to
any other person or invention.
REFERENCES TO GENDER
Any reference in this agreement to the masculine gender shall also be deemed to
refer to the feminine gender.
OREGON LAW TO BE APPLIED
The interpretation of and performance under this agreement shall be governed by
the laws of the State of Oregon.
- NOTICE TO EMPLOYEE -
This agreemenk may require transfer to your employer of certain inventions. You
may wish to consult your legal counsel for advice concerning your rights and
obligations.
X /s/ James R. George 4/17/95
- ----------------------------------------- ---------------------------------
Employee Signature Date
X /s/ Paige C. Khan 4/17/95
- ----------------------------------------- ---------------------------------
Witness Signature Date
Witness's Address:
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT A
A list and description of inventions. discoveries and improvements (including
those for which patent applications are pending) specified in Section 5 of this
agreement . List updated through .
------------------------------------
EMPLOYMENT AGREEMENT
This Employment Agreement is entered into as of 5/16/99, between
William Block ("Employee") and Epitope, Inc., an Oregon corporation (the
"Company").
1. SERVICES.
1.1 EMPLOYMENT. The Company agrees to employ Employee as Vice
President of Sales and Marketing, and Employee hereby accepts such employment,
in accordance with the terms and conditions of this Agreement.
1.2 DUTIES. Employee shall have the position named in Section 1
with such powers and duties appropriate to that office (a) as may be provided by
the bylaws of the Company and/or (b) as determined from time to time by the
President and Chief Executive Officer or the Board of Directors of the Company.
Employee's position and duties may be changed from time to time during the term
of this Agreement, and Employee's place of work may be relocated at the sole
discretion of the President and Chief Executive Officer, the Board of Directors,
or their designees.
1.3 OUTSIDE ACTIVITIES. Employee shall obtain the consent of the
President and Chief Executive Officer or the Board of Directors before he
engages, either directly or indirectly, in any other professional or business
activities that may require an appreciable portion of Employee's time or effort
or which could result in detriment to the Company's business.
1.4 DIRECTION OF SERVICES. Employee shall at all times discharge
his duties in consultation with and under the supervision and direction of the
President and Chief Executive Officer of the Company or such other designee
appointed by the President and Chief Executive Officer or the Board of
Directors.
2. COMPENSATION AND EXPENSES.
2.1 SALARY. As compensation for services under this Agreement,
the Company shall pay to Employee a regular salary of $150,000 per year. Such
salary may be adjusted from time to time in the discretion of the President and
Chief Executive Officer or the Board of Directors. Payment shall be made on a
bi-weekly basis, less all amounts deemed by the Company as required by law or
authorized by Employee to be withheld or deducted, in accordance with the
Company's usual payroll practices.
2.2 ADDITIONAL EMPLOYEE BENEFITS. To the extent otherwise
eligible, Employee shall also be entitled to receive or participate in any
additional benefits, including without limitation medical, dental, life, and
long-term disability insurance programs, medical reimbursement plans, and a
401(k) plan, which may from time to time be made generally
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available by the Company to corporate officers. The Company may change or
discontinue such benefits at any time in its sole discretion.
2.3 EXPENSES. The Company shall reimburse Employee for all
reasonable and necessary expenses incurred in carrying out his duties under this
Agreement. Employee shall present to the Company an itemized account of such
expenses in such form and at such time as may be required by the Company. The
Company shall further pay to Employee (a) a one-time relocation allowance of
$30,000; (b) the Company will also reimburse Employee's actual and reasonable
moving expenses for transferring Employee's family and his household goods to
Portland from North Carolina. To the extent the relocation allowance described
in this section is includable in Employee's net taxable income, the Company
shall pay Employee an additional amount so that the amount paid to him under
this section, less taxes at Employee's effective marginal tax rate, equals the
expenses to be reimbursed. The relocation allowance and the moving expenses must
be repaid by Employee on a prorated basis if Employee voluntarily leaves the
Company pursuant to Section 6.2 within two years of the date of hire or is
terminated pursuant to Section 6.3 within two years of the date of hire. The
prorated basis will be based on the numbers of complete months worked during the
initial two-year period.
2.4 FEES. All compensation earned by Employee, other than
pursuant to this Agreement, as a result of services performed on behalf of the
Company or as a result of or arising out of any work done by Employee in any way
related to the scientific or business activities of the Company shall belong to
the Company. Employee shall pay or deliver such compensation to the Company
promptly upon receipt. For the purposes of this provision, "compensation" shall
include, but is not limited to, all professional and nonprofessional fees,
lecture fees, expert testimony fees, publishing fees, royalties, and any related
income, earnings, or other things of value; and "scientific or business
activities of the Company" shall include, but not be limited to, any project or
projects in which the Company is involved and any subject matter that is
directly or indirectly researched, tested, developed, promoted, or marketed by
the Company.
3. STOCK OPTIONS. Subject to approval by the Executive
Compensation Committee and/or the Board of Directors, the Company shall grant
Employee an option to purchase up to 100,000 shares of common stock of the
Company pursuant to the terms of the Epitope, Inc. 1991 Stock Award Plan. The
options shall be incentive stock options up to the $100,000 annual limit imposed
by law, the remainder of the options shall be nonqualified options. The exercise
price shall be equal to the fair market value of the stock on the date of hire.
In the event of a change of control, as defined in the option agreement, while
Employee is employed by the Company, Employee's unvested stock options will vest
on the date of the change of control.
4. RESTRICTED STOCK GRANT. Employee shall also be entitled to a
restricted stock grant, valued at $30,000, up to a maximum of 7,500 Shares under
the terms of the 1991 Stock Award Plan. The grant value shall be based on the
stock price on Employee's hire date (i.e., the mean between the high and low
sales prices of the Common Stock). This grant is expressly conditioned on final
approval by the Board of Directors. Employee understands that this grant
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comes with certain restrictions, including inability to sell for one year from
grant. The Company encourages Employee to seek advice concerning the tax
consequences of this grant. Employee may elect to incur the tax expense at time
of grant or at the time the restrictions are lifted.
5. PROTECTION OF EMPLOYER INFORMATION.
5.1 BUSINESS PROTECTION AGREEMENT. Employee understands and
agrees to execute the Business Protection Agreement attached as Exhibit A. Such
Agreement is hereby incorporated herein. Employee understands that the execution
of this Business Protection Agreement is a pre-condition of his employment at
the Company.
5.2 MATERIALS PREPARED AND INVENTIONS MADE DURING EMPLOYMENT.
The Company shall be the exclusive owner of all materials, concepts, and
inventions Employee prepares, develops, or makes (whether alone or jointly with
others) within the scope of his employment, and of all related rights (including
copyrights, trademarks, and patents) and proceeds. Without limitation,
materials, concepts, and inventions that (a) relate to the Company's business or
actual or demonstrably anticipated research or development, or (b) result from
any work performed by Employee for the Company, shall be considered within the
scope of Employee's employment. Employee shall promptly disclose all such
materials, concepts, and inventions to the Company. Employee shall take all
action reasonably requested by the Company to vest ownership of such materials,
consents, and inventions in the Company and to permit the Company to obtain
copyright, trademark, patent, or similar protection in its name.
6. TERMINATION.
6.1 TERMINATION UPON DEATH. This Agreement shall terminate
immediately upon Employee's death.
6.2 TERMINATION BY EMPLOYEE. Employee may terminate his
employment under this Agreement by 90 days' advance written notice to the
Company.
6.3 TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate Employee's employment under this Agreement for cause at any time, with
or without advance notice. "Cause" includes, but is not limited to: (a) a breach
of this Agreement by Employee (de minimus violations excluded) and Employee's
failure to promptly cure such breach after receipt of notice; (b) Employee's
refusal or failure to comply with the written/communicated policies or standards
of the Company or refusal or failure (after notice of deficiencies) to perform
any job duties of Employee; (c) any act of fraud, dishonesty, or misconduct by
Employee in connection with Employee's employment with the Company; (d) a
violation of the Business Protection Agreement; (e) the commission of an act or
omission of an act detrimental to the best interests of the Company (de minimus
violations excluded); or (f) Employee's failure to otherwise comply with the
standards of behavior that an employer reasonably has the right to expect of an
employee.
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<PAGE>
6.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. Employee
understands that his employment is at-will. The Company may also terminate
Employee's employment under this Agreement without cause by written notice
to Employee. Employee may (but shall not be required to) elect to treat any of
the following events as a termination without cause, provided Employee acts
within 60 days of the event:
6.4.1 A reduction in Employee's salary below the amount
being paid on the date of this Agreement (except as part of and in proportion to
a reduction in all executive officers' salaries) or a substantial diminution in
Employee's duties or title below those or that stated in this Agreement.
6.4.2 A relocation by the Company of the principal place
where Employee's duties are to be performed to a place outside of the Portland
metropolitan area.
6.4.3 A "Change of Control" of the Company. For purposes
of this Agreement, a "Change of Control" shall mean a change of control of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A as in effect on the date hereof pursuant to the
Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without
limitation, such a change of control shall be deemed to have occurred at such
time as (i) any Acquiring Person hereafter becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30
percent or more of the combined voting power of Voting Securities; (ii) during
any period of 12 consecutive calendar months, individuals who at the beginning
of such period constitute the Board of Directors cease for any reason to
constitute at least a majority thereof unless the election, or the nomination
for election, by the Company's shareholders of each new director was approved by
a vote of at least a majority of the directors then still in office who were
directors at the beginning of the period; (iii) there shall be consummated (a)
any consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which Voting Securities would
be converted into cash, securities, or other property, other than a merger of
the Company in which the holders of Voting Securities immediately prior to the
merger have the same, or substantially the same, proportionate ownership of
common stock of the surviving corporation immediately after the merger, or (b)
any sale, lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; or (iv) approval by the shareholders of the Company of any plan or
proposal for the liquidation or dissolution of the Company. For purposes of this
Agreement, "Acquiring Person" means any person or related persons which
constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the
Exchange Act, as such Section and Rule are in effect as of the date of this
Agreement; provided, however, that the term Acquiring Person shall not include:
(i) the Company or any of its subsidiaries; (ii) any employee benefit plan of
the Company or any of its subsidiaries; (iii) any entity holding voting capital
stock of the Company for or pursuant to the terms of any such employee benefit
plan; or (iv) any person or group solely because such person or group has voting
power with respect to capital stock of the Company arising from a revocable
proxy or consent given in response to a public proxy or consent solicitation
made pursuant to the
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<PAGE>
Exchange Act. For purposes of this Agreement, "Voting Securities" means the
Company's issued and outstanding securities ordinarily having the right to vote
at elections for the Company's Board of Directors.
6.5 COMPENSATION UPON TERMINATION.
6.5.1 TERMINATION UNDER SECTION 6.1, 6.2, OR 6.3. In the
event of a termination of Employee's employment under Section 6.1, 6.2, or 6.3,
Employee's regular compensation pursuant to Section 2.1 shall be prorated and
payable until the date of termination.
6.5.2 TERMINATION UNDER SECTION 6.4. In the event of a
termination of Employee's employment by the Company without cause as provided in
Section 6.4, Employee shall continue to be paid the salary provided in Section
2.1 for 12 months from the date of notice of such termination of employment, in
the manner and at the times at which regular compensation was paid to Employee
during the term of his employment under this Agreement, except that if Employee
elects to treat an event described in Sections 6.4.1, 6.4.2, or 6.4.3 as a
termination without cause but continues to work for the Company or any of its
subsidiaries, then any amounts Employee receives as compensation during the
12-month period shall be credited against the amounts payable to Employee under
this section. Unless Employee elects to continue working for the Company or any
of its subsidiaries, as a condition to receipt of the compensation described in
the preceding sentence, Employee shall sign, deliver, and abide by a Release and
Waiver of Claims Agreement, substantially in the form attached as Exhibit B to
this Agreement. Moreover, the Company's obligation to pay the amounts stated in
this section shall terminate if Employee breaches any aspects of the Business
Protection Agreement attached as Exhibit A.
7. REMEDIES. The respective rights and duties of the Company and
Employee under this Agreement are in addition to, and not in lieu of, those
rights and duties afforded to and imposed upon them by law or at equity.
Employee acknowledges that breach of the Business Protection Agreement will
cause irreparable harm to the Company and agrees to the entry of a temporary
restraining order and permanent injunction by any court of competent
jurisdiction to prevent breach or further breach of such Agreement. Such remedy
shall be in addition to any other remedy available to the Company at law or in
equity. In recognition of the paramount importance of such temporary restraining
order and permanent injunction, Employee waives any right he may have had to the
posting of a bond as a precondition to entry of such orders.
8. SEVERABILITY OF PROVISIONS. The provisions of this Agreement are
severable, and if any provision hereof is held invalid or unenforceable, it
shall be enforced to the maximum extent permissible, and the remaining
provisions of the Agreement shall continue in full force and effect.
9. ATTORNEY FEES. In the event a suit or action is filed to enforce
the Business Protection Agreement, the prevailing party shall be reimbursed by
the other party for all costs and expenses incurred in connection with the suit
or action, including without limitation reasonable attorney fees at trial or on
appeal.
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<PAGE>
10. NONWAIVER. Failure of the Company at any time to require
performance of any provision of this Agreement shall not limit the right of the
Company to enforce the provision. No provision of this Agreement or breach
thereof may be waived by either party except by a writing signed by that party.
A waiver of any breach of a provision of this Agreement shall be construed
narrowly and shall not be deemed to be a waiver of any succeeding breach of that
provision or a waiver of that provision itself or of any other provision.
11. ARBITRATION.
11.1 CLAIMS COVERED. To the extent provided by law, the
Company and Employee mutually consent to the resolution of all claims or
controversies, except for those excluded by Section 11.2, whether or not arising
out of Employee's employment (or its termination), that the Company may have
against Employee or that Employee may have against the Company or against its
officers, directors, employees or agents, in their capacity as such or
otherwise, by binding arbitration as provided in this Section. Claims covered by
this Section include, but are not limited to, claims for wages or other
compensation due; claims for breach of any contract or covenant (express or
implied); tort claims; claims for discrimination (including, but not limited to,
race, sex, sexual orientation, religion, national origin, age, marital status,
or disability); claims for benefits (except where an employee benefit or pension
plan specifies that its claims procedure shall culminate in an arbitration
procedure different from this one); and claims for violation of any federal,
state, or other governmental law, statute, regulation, or ordinance except as
provided in Section 11.2
11.2 NON-COVERED CLAIMS. Claims arising out of the Business
Protection Agreement and workers' compensation or unemployment compensation
benefits are not covered by this Section 11.1. Non-covered claims include but
are not limited to claims by the Company for injunctive and/or other equitable
relief for unfair competition and/or the use and/or unauthorized disclosure of
trade secrets or confidential information, as to which Employee understands and
agrees that the Company may seek and obtain relief from a court of competent
jurisdiction.
11.3 REQUIRED NOTICE OF ALL CLAIMS AND STATUTE OF
LIMITATIONS. Company and Employee agree that the aggrieved party must give
written notice of any claim to the other party within one year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim. The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based.
11.4 HEARING OR MEDIATION. Prior to any arbitration
proceeding taking place pursuant to this section, Company or Employee may, at
its respective option, elect to submit the claim to non-binding mediation before
a mutually agreeable mediation tribunal or mediator, in
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which event both parties shall execute a suitable confidentiality agreement and
abide by the procedures specified by the mediation tribunal or mediator.
11.5 ARBITRATION PROCEDURES. Any arbitration shall be
conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association ("AAA"), modified to
substitute for AAA actions, the United States Arbitration and Mediation Service
("USA&MS"), before an arbitrator who is licensed to practice law in the state of
Oregon (the "Arbitrator"). The arbitration shall take place in or near Portland,
Oregon.
11.5.1 SELECTION OF ARBITRATOR. The USA&MS shall give
each party a list of 11 arbitrators drawn from its panel of labor-management
dispute arbitrators. Each party may strike all names on the list it deems
unacceptable. If only one common name remains on the lists of all parties, that
individual shall be designated as the Arbitrator. If more than one common name
remains on the lists of all parties, the parties shall strike names alternately
until only one remains. The party who did not initiate the claim shall strike
first. If no common name remains on the lists of all parties, the USA&MS shall
furnish an additional list or lists until an Arbitrator is selected.
11.5.2 APPLICABLE LAW. The Arbitrator shall apply the
substantive law (and the law of remedies, if applicable) specified in this
Agreement or federal law, or both, as applicable to the claim(s) asserted. The
Arbitrator, and not any federal, state, or local court or agency, shall have
exclusive authority to resolve any dispute relating to the interpretation,
applicability, enforceability or formation of this Agreement, including but not
limited to any claim that all or any part of this Agreement is void or voidable.
The arbitration shall be final and binding upon the parties, except as provided
in this Agreement.
11.5.3 AUTHORITY. The Arbitrator shall have
jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold
pre-hearing conferences by telephone or in person as the Arbitrator deems
necessary. The Arbitrator shall have the authority to entertain a motion to
dismiss and/or a motion for summary judgment by any party and shall apply the
standards governing such motions under the Federal Rules of Civil Procedure. The
Arbitrator shall render an award and opinion in the form typically rendered in
labor arbitrations.
11.5.4 REPRESENTATION. Any party may be represented by
an attorney or other representative selected by the party.
11.5.5 DISCOVERY. Each party shall have the right to
take the deposition of one individual and any expert witness designated by
another party. Each party also shall have the right to make requests for
production of documents to any party. The subpoena right specified below shall
be applicable to discovery pursuant to this paragraph. Additional discovery may
be had only where the Arbitrator selected pursuant to this Agreement so orders,
upon a showing of substantial need. At least 30 days before the arbitration, the
parties must exchange lists of witnesses, including any experts, and copies of
all exhibits intended to be used at the
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arbitration. Each party shall have the right to subpoena witnesses and documents
for the arbitration.
11.5.6 REPORTER. Either party, at its expense, may
arrange for and pay the cost of a court reporter to provide a stenographic
record of proceedings.
11.5.7 POST-HEARING BRIEFS. Either party, upon
request at the close of hearing, shall be given leave to file a post-hearing
brief. The time for filing such a brief shall be set by the Arbitrator.
11.6 ENFORCEMENT. Either party may bring an action in any
court of competent jurisdiction to compel arbitration under this Agreement and
to enforce an arbitration award. Except as otherwise provided in this Agreement,
both the Company and Employee agree that neither shall initiate or prosecute any
lawsuit (other than for a non-covered claim) in any way related to any claim
covered by this Agreement. A party opposing enforcement of an award may not do
so in an enforcement proceeding, but must bring a separate action in any court
of competent jurisdiction to set aside the award, where the standard of review
will be the same as that applied by an appellate court reviewing a decision of a
trial court sitting without a jury.
12. ARBITRATION FEES AND COSTS. Company and Employee shall equally
share the fees and costs of the Arbitrator. Each party will deposit funds or
post other appropriate security for its share of the Arbitrator's fee, in an
amount and manner determined by the Arbitrator, 10 days before the first day of
hearing. Each party shall pay for its own costs and attorneys' fees, if any,
provided that the Arbitrator, in its sole discretion, may award reasonable fees
to the prevailing party in a proceeding.
13. GENERAL TERMS AND CONDITIONS. This Agreement and the incorporated
Exhibits constitute the entire understanding of the parties relating to the
employment of Employee by the Company, and supersedes and replaces all written
and oral agreements heretofore made or existing by and between the parties
relating thereto. This Agreement shall be construed in accordance with the laws
of the state of Oregon, without regard to any conflicts of laws rules thereof.
This Agreement shall inure to the benefit of any successors or assigns of the
Company. All captions used herein are intended solely for convenience of
reference and shall in no way limit any of the provisions of this Agreement.
Employee acknowledges that he signed this Agreement and the attached Business
Protection Agreement upon his initial employment with the Company.
The parties have executed this Employment Agreement as of the date
stated above.
EPITOPE, INC.
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/s/ William Block By: /s/ John Morgan
- --------------------------- -------------------------------
WILLIAM BLOCK
Title: President and CEO
-------------------------------
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BUSINESS PROTECTION AGREEMENT
[EXECUTIVES]
In consideration of employment by EPITOPE, INC., or its subsidiaries,
affiliates, successors or assigns (collectively referred to as "Employer"),
William Block ("Employee") agrees as follows:
1. NEED FOR EMPLOYER PROTECTION.
Employee recognizes and acknowledges that:
(a) In the course of performing his/her duties for Employer, he/she
will have access to Confidential Information, the ownership and confidential
status of which are highly important to the Company. Employee also acknowledges
that except as otherwise specifically provided for in this Agreement such
Confidential Information is and shall continue to be the exclusive and permanent
property of the Company, whether or not prepared in whole or in part by
Employee, and whether or not disclosed or entrusted to Employee in connection
with his/her duties for Employer. Confidential Information shall not be deemed
disclosed to the public due to its being disclosed to Employee or to any past,
present, or potential employees of the Company.
(b) Employer has a vital and substantial interest in maintaining the
confidentiality of its Confidential Information, in maintaining a stable work
force, in continuing its relationships with its Corporate Contacts, in remaining
in business, and in avoiding or minimizing any disruption of, damage or
impairment to, or interference with its business.
(c) The Confidential Information and Corporate Contacts that Employee
will obtain as a result of his/her employment hereunder is special and unique to
Employer, and a breach by Employee of any of the terms and covenants of this
Agreement will result in irreparable and continuing harm to Employer for which
there will be no adequate remedy at law and for which the injury could not be
adequately compensated by money damages.
2. CONFIDENTIAL INFORMATION
As used in this Agreement, the term "Confidential Information" shall mean any
information of Employer, (including any parent, subsidiary, predecessor,
successor, or otherwise affiliated corporation, partnership or other business
enterprise, hereinafter collectively referred to as the "Company"), whether or
not in written form, which has not been previously disclosed to the public by
the Company and which (1) is either designated or treated by the Company as
confidential or proprietary or as a trade secret, (2) the Company is obligated
to keep confidential because it has been provided by third parties or (3) the
Employee knows or should know is confidential. Consistent with the definition
set forth above, the term "Confidential Information" shall include, but is not
limited to, the Company's: trade secrets; proprietary information; inventions,
discoveries, or improvements; methods of conducting or obtaining business,
including methods of marketing; non-public lists of actual or prospective
clients, customers, suppliers, vendors or investors provided to Employee by
Employer or developed or learned by Employee while employed by Employer
(collectively "Corporate Contacts"); corporate documents, plans or manuals;
software and data; finances; legal affairs; labor or other reports; current or
future business opportunities; current or future products or technology;
formulae, processes, machines, or compositions; relationships with third party
companies; the terms of Employer's agreements with Corporate Contacts; and other
information marked, designated and/or treated by the Company as confidential.
3. SCOPE OF EMPLOYER PROTECTION
Employer is a multi-national concern that does business all over the United
States as well as in foreign countries. In his/her employment with Employer,
Employee may perform services in more than one city, county, state or country,
and may gain access to Confidential Information that pertains not only to the
specific area in which Employee lives and/or works but also to other cities,
counties, states and countries in which Employer does business. The Employer
protections stated herein are intended to protect Employer to the fullest extent
possible in all of the cities, counties, states, and countries in which Employer
does business.
Employer and Employee expressly acknowledge and agree that each of the Employer
protections stated herein is intended to be as broad as may be permitted under
the provisions of applicable law. Employer and Employee further
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acknowledge and agree that if any of the protections herein are deemed
unenforceable, the unenforceability of any one or more Employer protections
stated herein (or any portion thereof), shall not affect the enforceability of
any other protection (or portion thereof) stated herein.
4. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
Employee shall hold all Confidential Information in a fiduciary capacity and
shall exercise the highest degree of care in safeguarding Confidential
Information against loss, theft, or other inadvertent disclosure, and shall take
all steps reasonably necessary to maintain the confidentiality thereof. Employee
shall not, directly or indirectly, either during the term of his/her employment
(except as required in the course of the performance of her/his duties), or at
any time after her/his employment is terminated for any reason:
(a) Disclose or furnish to any person, corporation or other entity, use
in his/her own or in any other person's business, any Confidential Information;
(b) Utilize any such Confidential Information for the gain, advantage,
or profit of anyone other than Employer; or
(c) Take advantage of any business opportunity which, because of
Confidential Information obtained in Employee's employment capacity or as a
result of his/her employment, Employee knows the Company may or is likely to
consider.
If Employee is served with any subpoena or other compulsory judicial or
administrative process calling for production of Confidential Information,
Employee will immediately notify Employer in order that the Company may take
such action as it deems necessary to protect its interests.
5. NONCOMPETITION
For one year after termination of employment employee shall not directly or
indirectly, own, operate, provide financial, technical or other assistance or
services to, accept any involvement with, or be connected with as an officer,
partner, proprietor, consultant, representative, agent or stockholder (other
than as an owner of less than 5% of the stock of a publicly held corporation
whose stock is traded on a national securities exchange or in the
over-the-counter market) any organization which engages in the business of
researching, manufacturing, marketing or distributing products for oral specimen
based medical testing or HIV testing.
(a) Due to the fact that Employer does business all over the world,
this covenant not to compete shall apply within 50 miles of any geographical
area in which Employer actively conducted business or actively contemplated
doing business during any period of Employee's employment with Employer.
(b) During the term of his/her employment and the term of this
covenant not to compete, Employee shall inform any potential employer, prior to
accepting employment, of this covenant not to compete and provide such potential
employer with a copy thereof.
(c) The one year restriction period set forth in Paragraph 5A shall
not have the effect of diminishing or reducing the period(s) of restriction
contained in any other provision of this BPA.
6. NON-SOLICITATION OF EMPLOYEES/CONTRACTORS
(a) Unless Employee receives the prior express written consent of the
Employer, Employee shall not during the term of Employee's employment and for
one year after termination of his/her employment, induce or attempt to induce,
directly or by assisting others, any person who is in the employment of, or is
providing services to, the Employer to leave such employment or engagement.
(b) If Employee violates Paragraph (1) above, then at the sole
election of Employer, Employee shall pay to Employer $10,000 for each identified
employee. This remedy, if elected by Employer, shall be in addition to any other
remedies provided to Employer under this BPA or by law.
7. NON-PROVISION OF SERVICES TO CORPORATE CONTACTS
2
<PAGE>
(a) Unless Employee receives the prior, express, written consent of
Employer, Employee shall not, during the term of Employee's employment and for
one year after termination of her/his employment, solicit or accept, or attempt
to solicit or accept, directly or by assisting others, any work, services,
goods, or other business from any of Corporate Contacts of Employer (as defined
above).
(b) If Employee violates this Section above, then at the sole election
of Employer, Employee shall pay to Employer fifty percent (50%) of the actual
fees billed or billable to such Corporate Contacts during that period of time.
This remedy, if elected by Employer, shall be in addition to any other remedies
provided to Employer under this BPA or by law.
8. WORK FOR HIRE
Employee agrees that all creative work, including without limitation designs,
drawings, specifications, techniques, models, and processes, prepared or
originated by Employee during or within the scope of employment, whether or not
subject to protection under federal copyright or other law, constitutes work
made for hire, all rights to which are owned by Employer; and, in any event,
employee hereby assigns to Employer all right, title and interest, whether by
way of copyright, trade secret, or otherwise, in all such work, whether or not
subject to protection by copyright or other law.
9. DISCLOSURE OF PRIOR RESTRICTIONS
Employee understands that Employer is not employing Employee in order to obtain
any information that is the property of any previous employers or any other
person or entity for whom Employee has performed services. Employee represents
that he/she is not currently subject to any restriction that would prevent or
limit Employee from carrying out his/her duties for Employer. Employee further
represents that he/she will not disclose or provide any information to Employer
(a) relating to any inventions, discoveries, or improvements excluded from this
Agreement which Employer shall not be free to use without restriction or (b)
which, if used by Employer, would cause Employer to infringe or violate the
rights of any person, including without limitation, Employee.
10. OTHER LEGAL RIGHTS OF EMPLOYER
The rights and duties of Employer and Employee under this Agreement are in
addition to, and not in lieu of, those rights and duties afforded to and imposed
upon them by law, or at equity. The parties acknowledge that although a
condition of continued employment, this Agreement does not constitute a contract
of employment, nor does it entitle Employee to employment for any specific term.
All of Employer's employees are employees "at-will" unless specifically provided
otherwise by written agreement.
11. BREACH
In the event of breach of any of the terms or covenants contained in this
Agreement, Employee agrees that Employer shall be entitled to temporary and/or
permanent injunctive relief upon a showing that Employee has breached this
Agreement without proof of actual damage and without posting a bond therefore,
against the Employee and any of the Employee's partners, agents, employers or
employees, or any persons acting for or with the Employee, and/or an order of
temporary specific performance enforcing this Agreement, and any other temporary
and/or permanent remedies provided to Employer by applicable law. Such temporary
and/or permanent relief shall remain in effect until the matter in dispute is
permanently resolved.
12. SEVERABILITY OF PROVISIONS
The provisions of this Agreement are severable, and if any provision hereof is
held invalid or unenforceable the remaining provision of this Agreement shall
not be affected thereby.
13. SUCCESSORS, HEIRS, ASSIGNEES OR NOMINEES
This Agreement shall inure to the benefit of and be binding upon Employer, its
successors, assigns or nominees and also upon Employee, his/her estate, heirs
and assigns. Employee's contractual obligations under this Agreement are
personal and neither Employee's rights or obligations under this Agreement may
be assigned or transferred. Employer's rights and obligations, however, may be
assigned or transferred.
3
<PAGE>
14. WAIVER
No provision of this Agreement may be waived by either party, except by a
writing signed by that party. The waiver of any portion of this Agreement with
respect to any person or invention shall be construed narrowly and shall not
affect the right of the party granting the waiver to enforce any other provision
of this Agreement or to enforce any provision of this Agreement with respect to
any other person or invention.
15. REFERENCES TO GENDER
Any reference to this Agreement to the masculine gender shall also be deemed to
refer to the feminine gender.
16. OREGON LAW TO BE APPLIED
The interpretation of and performance under this Agreement shall be governed by
the laws of the State of Oregon, without giving effect to its choice of law
principles.
17. ATTORNEY FEES
In the event of a default under this Agreement, the defaulting party shall
reimburse the nondefaulting party for all costs and expenses reasonably incurred
by the nondefaulting party in connection with the default, including without
limitation, attorney fees. In addition, the prevailing party in any suit or
action to enforce this Agreement, or any term hereof, shall be entitled to
recover all its costs and expenses incurred in connection with such suit or
action, including, without limitation, reasonable attorneys' fees, arbitration
costs, and other legal costs incurred at all levels and proceedings.
18. VENUE/JURISDICTION
For all disputes under this Agreement, the parties agree that any suit or action
between them shall be instituted and commenced exclusively in the local state
courts in Multnomah County, or the United States District Court for the District
of Oregon, sitting in Portland. Both parties waive the right to change such
venue and hereby consent to the jurisdiction of such courts for all potential
claims under this Agreement.
19. TERM OF THIS AGREEMENT
This Agreement shall continue until no longer applicable. For example, by their
stated terms, the non-competition, non-solicitation and non-provision of
services provisions apply for one year after termination of Employee's
employment. Also, for example, the non-disclosure obligations set forth in
Paragraphs 1-4 of this Agreement will continue beyond the term of employment of
Employee and until the covered information is released to the public by
Employer.
X William D. Block 4/20/99
------------------------------------- -----------------------
Employee Signature Date
X Maureen Haggerty 4/26/99
------------------------------------- -----------------------
Witness Signature Date
Witness's Address: (omitted)
--------------------------------------------------------------
4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Forms S-3 (Numbers 33-68510,
33-67618, 33-57246, 33-52920, 33-42841, 33-39166, and 33-32673), and in the
Registration Statements on Forms S-8 (Numbers 333-73463, 333-73465, 33-63220,
33-63218, 33-41712, 33-13416, 33-21545, 33-82788, 33-63106, and 33-60789) of
Epitope, Inc. of our report dated November 12, 1999 relating to the financial
statements appearing in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Portland, Oregon
December 23, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints CHARLES E. BERGERON and THEODORE R. GWIN,
and each of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for the undersigned and in the
undersigned's name, place, and stead, in any and all capacities, to sign the
Annual Report on Form 10-K of Epitope, Inc., for its fiscal year ended September
30, 1999, and any and all amendments to the report and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as the undersigned might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or each of them or
their or his substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
IN WITNESS WHEREOF, this power of attorney has been signed by the
following persons in the capacities indicated effective as of December 14, 1999.
<TABLE>
Name Title Name Title
---- ----- ---- -----
<S> <C> <C> <C>
/s/ W. Charles Armstrong Director /s/ Michael J. Paxton Director
W. Charles Armstrong Michael J. Paxton
/s/ Andrew S. Goldstein Director, /s/ Roger L. Pringle Director
Andrew S. Goldstein Vice Roger L. Pringle
President
/s/ Margaret H. Jordan Director /s/ G. Patrick Sheaffer Director
Margaret H. Jordan G. Patrick Sheaffer
/s/ John W. Morgan Director /s/ Robert J. Zollars Director
John W. Morgan Robert J. Zollars
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the consolidated financial statements
included herein and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 1,075,898
<SECURITIES> 4,532,594
<RECEIVABLES> 1,613,240
<ALLOWANCES> 50,000
<INVENTORY> 1,504,050
<CURRENT-ASSETS> 9,005,740
<PP&E> 5,884,538
<DEPRECIATION> 4,853,943
<TOTAL-ASSETS> 10,694,315
<CURRENT-LIABILITIES> 2,118,286
<BONDS> 0
0
0
<COMMON> 114,827,231
<OTHER-SE> (106,251,202)
<TOTAL-LIABILITY-AND-EQUITY> 10,694,315
<SALES> 10,072,961
<TOTAL-REVENUES> 10,073,020
<CGS> 3,847,444
<TOTAL-COSTS> 13,554,948
<OTHER-EXPENSES> (276,284)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,205,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,205,644)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
