-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ShXd0pvFvaL/HKLfyAdyitsxig9HmlwhEbkPhQX3aVQ6VbbhoapsRe5ZLPHOPeLJ OURuMMx1tvmAtSuYY9fhVg== 0000892917-97-000095.txt : 19970520 0000892917-97-000095.hdr.sgml : 19970520 ACCESSION NUMBER: 0000892917-97-000095 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: EPITOPE INC/OR/ CENTRAL INDEX KEY: 0000801555 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 930779127 STATE OF INCORPORATION: OR FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15337 FILM NUMBER: 97609374 BUSINESS ADDRESS: STREET 1: 8505 SW CREEKSIDE PL CITY: BEAVERTON STATE: OR ZIP: 97005-7108 BUSINESS PHONE: 5036416115 MAIL ADDRESS: STREET 1: 8505 S W CREEKSIDE PLACE CITY: BEAVERTON STATE: OR ZIP: 97008 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1997 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 - - - - - - - - - FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended March 31, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _ _ _ _ _ _ _ to _ _ _ _ Commission File Number 1-10492 EPITOPE, INC. (Exact name of Registrant as specified in its charter) OREGON 93-0779127 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 8505 SW Creekside Place Beaverton, Oregon 97008-7108 (Address of principal executive offices) (Zip code) (503) 641-6115 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock, no par value, outstanding as of March 31, 1997: 13,718,135 PART I. FINANCIAL INFORMATION
PAGE NO. -------- ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS EPITOPE MEDICAL PRODUCTS Condensed Combined Balance Sheets at September 30, 1996 and March 31, 1997............................... 3 Condensed Combined Statements of Operations for the three and six months ended March 31, 1997 and 1996 ............ 4 Condensed Combined Statements of Changes in Group Equity for the six months ended March 31, 1997................................ 5 Condensed Combined Statements of Cash Flows for the six months ended March 31, 1997 and 1996....................... 6 AGRITOPE Condensed Combined Balance Sheets at September 30, 1996 and March 31, 1997............................... 7 Condensed Combined Statements of Operations for the three and six months ended March 31, 1997 and 1996............. 8 Condensed Combined Statements of Changes in Group Equity for the six months ended March 31, 1997................................ 9 Condensed Combined Statements of Cash Flows for the six months ended March 31, 1997 and 1996...................... 10 EPITOPE, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets at September 30, 1996 and March 31, 1997............................... 11 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 1997 and 1996............. 12 Condensed Consolidated Statements of Changes in Group Equity for the six months ended March 31, 1997................................ 13 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 1997 and 1996...................... 14 Notes to Condensed Financial Statements.................................... 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................................. 18 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS...................................................... 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K....................................... 23
2 EPITOPE MEDICAL PRODUCTS CONDENSED COMBINED BALANCE SHEETS
3/31/97 9/30/96 (Unaudited) ASSETS Current assets Cash and cash equivalents (Note 2) .................................... $ 151,520 $ 795,787 Marketable securities (Note 2) ........................................ 10,244,510 18,818,120 Trade accounts receivable, net ........................................ 1,111,704 1,147,599 Other receivables ..................................................... 268,811 174,083 Inventories (Note 2) .................................................. 1,442,544 1,157,930 Prepaid expenses ...................................................... 370,890 89,518 ------------ ------------ 13,589,979 22,183,037 Property and equipment, net ........................................... 1,437,854 1,542,757 Patents and proprietary technology, net ............................... 662,177 601,234 Other assets and deposits ............................................ 11,868 22,758 ------------ ------------ $ 15,701,878 $ 24,349,786 LIABILITIES AND GROUP EQUITY Current liabilities Accounts payable ...................................................... $ 306,343 $ 449,170 Salaries, benefits and other accrued liabilities ...................... 1,989,475 1,368,166 ------------ ------------ 2,295,818 1,817,336 Commitments and contingencies.......................................... - - Group equity (Note 2) Contributed capital ................................................... 56,520,719 64,237,350 Accumulated deficit.................................................... (43,114,659) (41,704,900) ----------- ----------- 13,406,060 22,532,450 $ 15,701,878 $ 24,349,786
3 EPITOPE MEDICAL PRODUCTS CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED 3/31/97 3/31/96 3/31/97 3/31/96 Revenues Product sales ................................... $ 2,152,208 $ 1,052,818 $ 4,511,359 $ 1,887,696 Grants and contracts ............................ 183,729 154,419 465,339 544,082 ----------- ----------- ---------- ----------- 2,335,937 1,207,237 4,976,698 2,431,778 Costs and expenses Product costs ................................... 832,597 682,595 1,801,855 1,168,554 Research and development costs .................. 1,063,057 741,857 1,867,030 1,458,134 Selling, general and administrative expenses..... 1,678,648 1,395,028 3,156,345 2,703,137 ----------- ----------- ---------- ----------- 3,574,302 2,819,480 6,825,230 5,329,825 Loss from operations ............................ (1,238,365) (1,612,243) (1,848,532) (2,898,047) Other income (expense), net Interest income.................................. 193,146 220,047 422,285 443,663 Other, net....................................... 16,550 (1,802) 16,488 (1,007) ----------- ------------ ---------- ------------ 209,696 218,245 438,773 442,656 Net loss......................................... $ (1,028,669) $ (1,393,998) $ (1,409,759) $ (2,455,391) Proforma net loss per share...................... $ (.08) $ (.11) $ (.10) $ (.20) Proforma weighted average number of shares outstanding.......................... 13,714,551 12,547,795 13,428,920 12,519,936
4 EPITOPE MEDICAL PRODUCTS CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (UNAUDITED)
CONTRIBUTED ACCUMULATED CAPITAL DEFICIT TOTAL Balances at September 30, 1996....................... $ 64,237,350 $ (41,704,900) $ 22,532,450 Common stock issued upon exercise of options .............................. 48,008 - 48,008 Common stock issued as compensation ..................................... 31,172 - 31,172 Compensation expense for stock option grants .............................. 218,705 - 218,705 Net assets transferred to Agritope .................. (8,014,516) (8,014,516) Net loss for the period ............................. - (1,409,759) (1,409,759) ------------- ------------- -------------- Balances at March 31, 1997 .......................... $ 56,520,719 $ (43,114,659) $ 13,406,060
5 EPITOPE MEDICAL PRODUCTS CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED 3/31/97 3/31/96 CASH FLOWS FROM OPERATING ACTIVITIES Net loss .............................................................. $ (1,409,759) $ (2,455,391) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 363,080 457,363 Increase in accounts receivable and other receivables ................. (58,833) (315,627) (Increase) decrease in inventories .................................... (284,614) 81,167 Increase in prepaid expenses .......................................... (281,372) (302,085) Increase (decrease) in accounts payable and accrued liabilities ....... 478,482 (762,711) Common stock issued as compensation for services....................... 31,172 37,687 Compensation expense for stock option grants and deferred salary increases .......................................... 218,705 471,336 Other, net ............................................................ 9,403 (1,089) ------------ ------------- Net cash used in operating activities.................................. (933,736) (2,789,350) CASH FLOWS FROM INVESTING ACTIVITIES Investment in marketable securities ................................... (11,245,688) (18,943,849) Proceeds from sale of marketable securities ........................... 19,820,785 23,425,034 Additions to property and equipment ................................... (157,201) (30,681) Expenditures for patents and proprietary technology ................... (161,919) (223,619) ------------ ------------ Net cash provided by investing activities.............................. 8,255,977 4,226,885 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of common stock ................................ 48,008 1,002,570 Cash advances to Agritope ............................................. (8,014,516) (279,941) ------------- ------------- Net cash provided by (used in) financing activities.................... (7,966,508) 722,629 Net increase (decrease) in cash and cash equivalents .................. (644,267) 2,160,164 Cash and cash equivalents at beginning of period ...................... 795,787 13,210 ------------ ------------ Cash and cash equivalents at end of period............................. $ 151,520 $ 2,173,374
6 AGRITOPE CONDENSED COMBINED BALANCE SHEETS
3/31/97 9/30/96 (Unaudited) ASSETS Current assets Cash and cash equivalents (Note 2) .................................... $ 37,880 $ 4,903,476 Marketable securities (Note 2) ........................................ 2,561,128 - Trade accounts receivable, net ........................................ 192,453 264,986 Other receivables ..................................................... 18,849 32,337 Inventories (Note 2) .................................................. 1,484,030 509,745 Prepaid expenses ...................................................... 30,408 812 ------------ ------------ 4,324,748 5,711,356 Property and equipment, net ........................................... 2,105,462 1,286,196 Patents and proprietary technology, net (Note 2)....................... 1,162,349 510,244 Investment in affiliated companies (Note 3)............................ 443,490 2,448,623 Net assets of discontinued operations (Note 5)......................... 6,188,190 - Other assets and deposits ............................................. 63,517 140,513 ------------ ------------ $ 14,287,756 $ 10,096,932 LIABILITIES AND GROUP EQUITY Current liabilities Accounts payable ...................................................... $ 135,203 $ 91,474 Convertible notes due June 30, 1997 (Note 4)........................... 240,000 3,620,003 Salaries, benefits and other accrued liabilities ...................... 1,955,429 735,478 ------------ ------------ 2,330,632 4,446,955 Long-term debt......................................................... 10,601 - Minority interest in consolidated subsidiaries......................... 110,727 215,407 Commitments and contingencies (Note 5)................................. - - Group equity (Note 2) Contributed capital ................................................... 56,257,295 36,714,932 Accumulated deficit.................................................... (44,421,499) (31,280,362) ----------- ----------- 11,835,796 5,434,570 $ 14,287,756 $ 10,096,932
7 AGRITOPE CONDENSED COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED 3/31/97 3/31/96 3/31/97 3/31/96 Revenues Product sales ................................... $ 163,634 $ - $ 163,634 $ - Grants and contracts ............................ 62,526 262,669 88,322 349,267 ------------ ------------- ------------ ------------- 226,160 262,669 251,956 349,267 Costs and expenses Product costs ................................... 112,146 - 112,146 - Research and development costs .................. 364,145 333,563 784,954 662,839 Selling, general and administrative expenses..... 660,956 356,789 1,413,150 702,323 ------------ ------------- ------------ ------------- 1,137,247 690,352 2,310,250 1,365,162 Loss from operations ............................ (911,087) (427,683) (2,058,294) (1,015,895) Other income (expense), net Interest income.................................. 64,382 64,392 154,577 133,628 Interest expense................................. (4,187) (59,848) (23,871) (131,841) Valuation loss (Note 3).......................... - - (1,900,000) - Cost of debt conversion (Note 4)................. - - (1,216,654) - Other, net....................................... 41,913 - 109,605 - ------------ ------------- ------------ ----------- 102,108 4,544 (2,876,343) 1,787 Loss from continuing operations ................. (808,979) (423,139) (4,934,637) (1,014,108) Discontinued operations Income from discontinued operations (Note 5) .... 48,312 - 170,646 - Estimated loss on disposal (Note 5).............. (8,377,146) - (8,377,146) - ------------- ------------- ------------- ------------- (8,328,834) - (8,206,500) - Net loss......................................... $ (9,137,813) $ (423,139) $(13,141,137) $ (1,014,108) Proforma loss per share from continuing operations.................................... $ (.12) $ (.07) $ (.73) $ (.16) Proforma net loss per share...................... (1.33) (.07) (1.96) (.16) Proforma weighted average number of shares outstanding............................ 6,857,276 6,273,898 6,714,460 6,259,968
8 AGRITOPE CONDENSED COMBINED STATEMENTS OF CHANGES IN GROUP EQUITY (UNAUDITED)
CONTRIBUTED ACCUMULATED CAPITAL DEFICIT TOTAL Balances at September 30, 1996....................... $ 36,714,932 $ (31,280,362) $ 5,434,570 Common stock issued upon exercise of options .............................. 29,576 - 29,576 Common stock issued as compensation ..................................... 14,564 - 14,564 Compensation expense for stock option grants .............................. 20,832 - 20,832 Common stock issued upon exchange of convertible notes................................. 4,442,875 - 4,442,875 Common stock issued upon acquisition (Note 5)........ 7,020,000 - 7,020,000 Net assets transferred from Epitope Medical Products.......................... 8,014,516 - 8,014,516 Net loss for the period ............................. - (13,141,137) (13,141,137) ------------- ------------- -------------- Balances at March 31, 1997 .......................... $ 56,257,295 $ (44,421,499) $ 11,835,796
9 AGRITOPE CONDENSED COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED 3/31/97 3/31/96 CASH FLOWS FROM OPERATING ACTIVITIES Net loss .............................................................. $ (13,141,137) $ (1,014,108) Adjustments to reconcile net loss to net cash used in operating activities: Income from discontinued operations (Note 5)........................... (170,646) - Non-cash portion of estimated loss on disposal (Note 5)................ 7,767,653 - Depreciation and amortization ......................................... 226,755 125,903 Decrease in accounts receivable and other receivables ................. 86,021 306,216 Increase in inventories ............................................... (974,285) - (Increase) decrease in prepaid expenses ............................... (29,596) 54,502 Increase (decrease) in accounts payable and accrued liabilities ....... 263,680 (164,859) Common stock issued as compensation for services....................... 14,564 - Compensation expense for stock option grants........................... 20,832 114,582 Minority interest in subsidiary operating results...................... (104,680) - Valuation loss......................................................... 1,900,000 - Non-cash portion of cost of debt conversion............................ 1,149,054 - Other, net............................................................. (4,150) 1,884 ------------- ------------ Net cash used in operating activities.................................. (2,995,935) (575,880) CASH FLOWS FROM INVESTING ACTIVITIES Investment in marketable securities.................................... (2,561,128) - Additions to property and equipment ................................... (1,003,379) (29,815) Expenditures for patents and proprietary technology ................... (692,687) (459) Investment in affiliated companies .................................... - (171,735) Investment in discontinued operations (Note 5)......................... (5,767,160) - ------------- ------------ Net cash used in investing activities.................................. (10,024,354) (202,009) CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt............................................. 10,898 - Principal payments on long-term debt................................... (297) - Proceeds from issuance of stock........................................ 29,576 - Minority interest investment in subsidiary............................. 100,000 - Cash advanced from Epitope Medical Products ........................... 8,014,516 279,941 ------------ ------------ Net cash provided by financing activities.............................. 8,154,693 279,941 Net decrease in cash and cash equivalents ............................. (4,865,596) (497,948) Cash and cash equivalents at beginning of period ...................... 4,903,476 4,246,687 ------------ ------------ Cash and cash equivalents at end of period............................. $ 37,880 $ 3,748,739
10 EPITOPE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
3/31/97 9/30/96 (Unaudited) ASSETS Current assets Cash and cash equivalents (Note 2) .................................... $ 189,400 $ 5,699,263 Marketable securities (Note 2) ........................................ 12,805,638 18,818,120 Trade accounts receivable, net ........................................ 1,304,157 1,412,585 Other receivables ..................................................... 287,660 206,420 Inventories (Note 2) .................................................. 2,926,574 1,667,675 Prepaid expenses ...................................................... 401,298 90,330 ------------ ------------ 17,914,727 27,894,393 Property and equipment, net............................................ 3,543,316 2,828,953 Patents and proprietary technology, net (Note 2)....................... 1,824,526 1,111,478 Investment in affiliated companies (Note 3)............................ 443,490 2,448,623 Net assets of discontinued operations (Note 5)......................... 6,188,190 - Other assets and deposits ............................................. 75,385 163,271 ------------ ------------ $ 29,989,634 $ 34,446,718 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable ...................................................... $ 441,546 $ 540,644 Convertible notes due June 30, 1997 (Note 4)........................... 240,000 3,620,003 Salaries, benefits and other accrued liabilities ...................... 3,944,904 2,103,644 ------------ ------------ 4,626,450 6,264,291 Long-term debt......................................................... 10,601 - Minority interest in consolidated subsidiaries......................... 110,727 215,407 Commitments and contingencies (Note 5) ................................ - - Shareholders' equity (Note 2) Preferred stock, no par value - 1,000,000 shares authorized no shares issued or outstanding..................................... - - Common stock, no par value - 30,000,000 shares authorized 13,718,135 and 12,937,383 shares issued and outstanding, respectively........................................................ 112,778,014 100,952,282 Accumulated deficit.................................................... (87,536,158) (72,985,262) ----------- ----------- 25,241,856 27,967,020 $ 29,989,634 $ 34,446,718
11 EPITOPE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED 3/31/97 3/31/96 3/31/97 3/31/96 Revenues Product sales ................................... $ 2,315,842 $ 1,052,818 $ 4,674,993 $ 1,887,696 Grants and contracts ............................ 246,255 417,088 553,661 893,349 ------------ ------------- ------------ ------------- 2,562,097 1,469,906 5,228,654 2,781,045 Costs and expenses Product costs ................................... 944,743 682,595 1,914,001 1,168,554 Research and development costs .................. 1,427,202 1,075,420 2,651,984 2,120,973 Selling, general and administrative expenses..... 2,339,604 1,751,817 4,569,495 3,405,460 ------------ ------------- ------------ ------------- 4,711,549 3,509,832 9,135,480 6,694,987 Loss from operations ............................ (2,149,452) (2,039,926) (3,906,826) (3,913,942) Other income (expense), net Interest income.................................. 257,528 284,439 576,862 577,291 Interest expense................................. (4,187) (59,848) (23,871) (131,841) Valuation loss (Note 3).......................... - - (1,900,000) - Cost of debt conversion (Note 4)................. - - (1,216,654) - Other, net....................................... 58,463 (1,802) 126,093 (1,007) ------------ ------------- ------------ ------------- 311,804 222,789 (2,437,570) 444,443 Net loss from continuing operations.............. (1,837,648) (1,817,137) (6,344,396) (3,469,499) Discontinued operations Income from discontinued operations (Note 5)..... 48,312 - 170,646 - Estimated loss on disposal (Note 5).............. (8,377,146) - (8,377,146) - ------------- ------------- ------------- ------------- (8,328,834) - (8,206,500) - Net loss......................................... $(10,166,482) $ (1,817,137) $(14,550,896) $ (3,469,499) Loss per share from continuing operations........ $ (.13) $ (.14) $ (.47) $ (.28) Net loss per share............................... (.74) (.14) (1.08) (.28) Weighted average number of shares outstanding................................... 13,714,551 12,547,795 13,428,920 12,519,936
12 EPITOPE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
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 .......................... 6,096 77,584 - 77,584 Common stock issued as compensation ................................. 4,289 45,736 - 45,736 Compensation expense for stock option grants .......................... - 239,537 - 239,537 Common stock issued upon exchange of convertible notes............................. 250,367 4,442,875 - 4,442,875 Common stock issued upon acquisition (Note 5).... 520,000 7,020,000 - 7,020,000 Net loss for the period ......................... - - (14,550,896) (14,550,896) ------------ ------------- ------------ ------------- Balances at March 31, 1997 ...................... 13,718,135 $ 112,778,014 $ (87,536,158) $ 25,241,856
13 EPITOPE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED 3/31/97 3/31/96 CASH FLOWS FROM OPERATING ACTIVITIES Net loss .............................................................. $ (14,550,896) $ (3,469,499) Adjustments to reconcile net income (loss) to net cash used in operating activities: Income from discontinued operations (Note 5)........................... (170,646) - Non-cash portion of estimated loss on disposal (Note 5)................ 7,767,653 - Depreciation and amortization ......................................... 589,835 583,266 (Increase) decrease in accounts receivable and other receivables ...... 27,188 (9,411) (Increase) decrease in inventories .................................... (1,258,899) 81,167 Increase in prepaid expenses .......................................... (310,968) (247,583) Increase (decrease) in accounts payable and accrued liabilities ....... 742,162 (927,570) Common stock issued as compensation for services....................... 45,736 37,687 Compensation expense for stock option grants and deferred salary increases .......................................... 239,537 585,918 Minority interest in subsidiary operating results...................... (104,680) - Valuation loss......................................................... 1,900,000 - Non-cash portion of cost of debt conversion............................ 1,149,054 - Other, net............................................................. 5,253 795 ------------ ------------ Net cash used in operating activities.................................. (3,929,671) (3,365,230) CASH FLOWS FROM INVESTING ACTIVITIES Investment in marketable securities ................................... (13,806,816) (18,943,849) Proceeds from sale of marketable securities ........................... 19,820,785 23,425,034 Additions to property and equipment ................................... (1,160,580) (60,496) Expenditures for patents and proprietary technology ................... (854,606) (224,078) Investment in discontinued operations (Note 5)......................... (5,767,160) - Investment in affiliated companies .................................... - (171,735) ------------ ------------- Net cash provided by (used in) investing activities.................... (1,768,377) 4,024,876 CASH FLOWS FROM FINANCING ACTIVITIES Issuance of long-term debt............................................. 10,898 - Principal payments on long-term debt................................... (297) - Proceeds from issuance of common stock ................................ 77,584 1,002,570 Minority interest investment in subsidiary............................. 100,000 - ------------ ------------ Net cash provided by financing activities.............................. 188,185 1,002,570 Net increase (decrease) in cash and cash equivalents .................. (5,509,863) 1,662,216 Cash and cash equivalents at beginning of period ...................... 5,699,263 4,259,897 ------------ ------------ Cash and cash equivalents at end of period............................. $ 189,400 $ 5,922,113
14 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 THE COMPANY Epitope, Inc. (the Company or Epitope) is an Oregon corporation utilizing biotechnology to develop and market medical diagnostic products through its Epitope Medical Products group (Epitope Medical Products) and superior new plants and related products through its Agritope group (Agritope). The interim condensed financial statements included herein are unaudited; however, in the opinion of the Company, the interim data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial position and results of operations for the interim periods. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1996 Annual Report on Form 10-K. Results of operations for the six-month period ended March 31, 1997 are not necessarily indicative of the results of operations expected for the full fiscal year. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying combined financial statements of Epitope Medical Products and Agritope have been prepared using the amounts included in the consolidated financial statements of the Company. Assets, liabilities, revenues and expenses of each group are included in the respective financial statements of the applicable group. Cash, cash equivalents and marketable securities have been allocated 80% to Epitope Medical Products and 20% to Agritope. Cash, cash equivalents and marketable securities advanced and allocated by the Company to Agritope have been reflected as contributed capital in the combined financial statements. The presentation of separate financial statements for each group is consistent with a proposal, currently undergoing further study, to create two classes of common stock, one targeted to the operations of the Epitope Medical Products group, and the other to the Agritope group (the Agritope Stock Proposal). On December 12, 1996, a subsidiary of the Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a producer and wholesale distributor of fresh and frozen fruits and vegetables based in San Diego, California. Under the terms of the merger, the Company issued 520,000 shares of common stock of Epitope, Inc. in exchange for all of the outstanding common stock of A&W. In accordance with Accounting Principles Board Opinion No. 16, Business Combinations (APB No. 16), the merger was initially accounted for as a pooling of interests. On May 4, 1997, the Company reached agreement with the former owners of A&W to rescind the merger. Accordingly, as required by APB Opinion No. 16, the merger has now been accounted for as a purchase transaction rather than as a pooling of interests. The purchase price was $7,020,000 based on the fair market value of the Company's stock used to acquire A&W. A&W's net assets as of March 31, 1997 and its results of operations for the period from December 13, 1996 through March 31, 1997 are presented in the accompanying financial statements as discontinued operations reflecting the agreement to rescind the merger (Note 5). A&W's results of operations reflect the amortization of acquired goodwill over a 15 year period under the straight-line method. Patents and Proprietary Technology. On November 11, 1996, the Company amended an agreement pursuant to which it acquired Agritope's patented ethylene control technology in 1987. A co-inventor of the technology who is an officer of the Company relinquished all rights to future compensation under the agreement in exchange for a one-time cash payment of $590,000. The amount is included in Agritope's combined balance sheet under the caption "Patents and proprietary technology" and is being amortized over 15 years, the remaining life of the related patent. 15 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Inventories.
3/31/97 9/30/96 (Unaudited) EPITOPE MEDICAL PRODUCTS Raw materials.......................................................... $ 574,602 $ 522,824 Work-in-process ....................................................... 352,624 389,642 Finished goods ........................................................ 433,907 192,882 Supplies .............................................................. 81,411 52,582 ----------- ----------- $ 1,442,544 $ 1,157,930 AGRITOPE Work-in-process ....................................................... $ 1,484,030 $ 471,208 Finished goods ........................................................ - 38,537 ----------- ----------- $ 1,484,030 $ 509,745 CONSOLIDATED Raw materials ......................................................... $ 574,602 $ 522,824 Work-in-process ....................................................... 1,836,654 860,850 Finished goods ........................................................ 433,907 231,419 Supplies .............................................................. 81,411 52,582 ----------- ----------- $ 2,926,574 $ 1,667,675
Net Loss Per Share. Consolidated net loss per share has been computed using the weighted average number of shares of common stock outstanding during the period. Common stock equivalents were excluded from the computation because their effect is anti-dilutive. Net loss per share for Epitope Medical Products and Agritope is presented on a proforma basis assuming a ratio of one-half share of Agritope common stock for each share of Epitope common stock as contemplated under the Agritope Stock Proposal. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). This new standard is effective for interim and annual periods ending after December 15, 1997. SFAS 128 will require the reporting of "basic" and "diluted" earnings per share (EPS) instead of "primary" and "fully diluted" EPS as required under current accounting principles. Basic EPS eliminates the common stock equivalents considered in calculating primary EPS. Diluted EPS is similar to fully diluted EPS. Since common stock equivalents were excluded as anti-dilutive in the computation of EPS, basic EPS would have been the same as primary EPS. NOTE 3 INVESTMENT IN AFFILIATED COMPANIES The Company's investment in affiliated companies includes its 9% interest in UAF, Limited Partnership, a fresh flower distribution operation in Charlotte, North Carolina, and its 19.5% interest in Petals USA, Inc., an affiliate of a Canadian fresh flower wholesaler. During the first quarter of fiscal 1997, the Company determined that the value of its investment in affiliated companies had more than temporarily declined, and accordingly, recorded a non-cash charge to results of operations of $1.9 million reflecting the permanent impairment in the value of its investment in these companies. NOTE 4 DEBT Bank Line of Credit. Effective December 17, 1996, A&W entered into a new $6.5 million revolving bank line of credit and terminated its prior agreement. The new agreement expires February 5, 1998 and advances bear interest at prime or LIBOR plus 2.5%, at the Company's option. The line is secured by A&W's accounts receivable, inventory and equipment. Epitope has agreed to guarantee the line of credit and any succeeding line of credit through November 1, 1998. The Company's guarantee contains various financial covenants including minimum tangible net worth levels. The balance outstanding under the line was $2,375,000 at March 31, 1997. 16 NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) Convertible Notes. In November 1996, the Company exchanged $3,380,000 principal amount of Agritope convertible notes for 250,367 shares of common stock of the Company at a reduced exchange price of $13.50 per share. Accordingly, the Company recognized a charge to results of operations of $1.2 million in the first quarter of fiscal 1997 representing the conversion expense. NOTE 5 DISCONTINUED OPERATIONS, COMMITMENTS AND CONTINGENCIES On March 29, 1997, the Centers For Disease Control and Prevention (CDC) associated an outbreak of Hepatitis A in Michigan with frozen strawberries produced by A&W. A&W immediately initiated a voluntary recall of the strawberries. There has been no further incidence of Hepatitis A attributed to the strawberries. A former officer of A&W certified that the strawberries were grown in the U.S. when they were in fact grown in Mexico. The strawberries were grown, harvested, processed and sold prior to the Company's acquisition of A&W on December 12, 1996 (Note 2). A&W, its former shareholders, and Epitope have been named in lawsuits pertaining to the frozen strawberries. The Company intends to vigorously defend against the proceedings. While it is not possible to determine with certainty what the ultimate outcome of these lawsuits will be, management does not expect the final disposition of such proceedings to have a material adverse effect on the Company's financial position or future results of operations. On May 4, 1997, Epitope and A&W reached agreement to rescind the merger (Note 2). Under the rescission agreement, the former shareholders of A&W will return the 520,000 shares of Epitope common stock they received, and Epitope will return all of the outstanding shares of A&W common stock. Epitope will also receive A&W preferred stock in satisfaction of intercompany loans made to A&W between December 12, 1996 and March 19, 1997. This preferred stock carries a $5.7 million liquidation preference, dividend preferences, and various redemption features. The results of operations of A&W from December 13, 1996 through March 31, 1997 have been presented as discontinued operations in the accompanying financial statements. Revenues of A&W were $10,169,000 for the three months ended March 31, 1997, and $13,569,000 for the period from December 13, 1996 through March 31, 1997. The net assets of A&W, presented as discontinued operations, are summarized as follows: 3/31/97 (Unaudited) Receivables.................................................. $ 4,005,272 Inventories.................................................. 5,846,128 Property and equipment, net.................................. 1,631,568 Intangible assets resulting from purchase, net............... 6,353,323 Other assets................................................. 274,940 Accounts payable and accrued expenses........................ (1,736,103) Bank line of credit.......................................... (2,375,000) Long-term debt............................................... (434,792) Estimated valuation loss..................................... (7,377,146) ------------- $ 6,188,190 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of operations and financial condition should be read in conjunction with the Financial Statements and Notes thereto included in the Company's 1996 Annual Report on Form 10-K and with the Financial Statements and Notes thereto included in this Form 10-Q. Certain statements set forth below constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company or industry results to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These factors with respect to the Company include litigation against the Company related to A&W; damage to business reputation resulting from the Hepatitis A outbreak; loss or impairment of sources of capital; development of competing products; market acceptance of oral testing and genetically engineered produce; development of other methods for controlling fruit and vegetable ripening; crop failure; changes in federal or state law or regulations; and loss of key personnel. Given these uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements. DISCONTINUED OPERATIONS On December 12, 1996, a subsidiary of the Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a producer and wholesale distributor of fresh and frozen fruits and vegetables based in San Diego, California. Under the terms of the merger, the Company issued 520,000 shares of common stock of Epitope, Inc. in exchange for all of the outstanding common stock of A&W. In accordance with Accounting Principles Board Opinion No. 16, Business Combinations (APB No. 16), the merger was initially accounted for as a pooling of interests. On May 4, 1997, the Company reached agreement with the former owners of A&W to rescind the merger. Under the rescission agreement, the former shareholders of A&W will return the 520,000 shares of Epitope common stock they received, and Epitope will return all of the outstanding shares of A&W common stock. Epitope will also receive A&W preferred stock in satisfaction of intercompany loans made to A&W between December 12, 1996 and March 19, 1997. This preferred stock carries a $5.7 million liquidation preference, dividend preferences, and various redemption features. Accordingly, as required by APB No. 16, the merger has now been accounted for as a purchase transaction rather than as a pooling of interests. A&W's net assets as of March 31, 1997 and its results of operations for the period from December 13, 1996 through March 31, 1997 are presented in the accompanying financial statements as discontinued operations reflecting the agreement to rescind the merger. A&W's results of operations include the amortization of the excess of the purchase price over the identifiable net assets at acquisition, using the straight-line method and a 15 year amortization period. The estimated loss on disposal of $8.4 million results from several factors, including a $1.8 million reduction in market price of the Company's stock from the purchase date to the rescission date, a $4.6 million discount of the A&W preferred stock to its estimated net present value as compared with the face amount of the loans made to A&W, the estimated $1 million loss resulting from the operations of A&W from April 1, 1997 through the expected recission date, and the accrual of $1 million in estimated costs of disposition. EPITOPE MEDICAL PRODUCTS RESULTS OF OPERATIONS Revenues. Total revenues increased by $1,129,000 or 93% in the current quarter as compared to the second quarter of fiscal 1996, and by $2,545,000 or 105% in the comparable six month periods. Revenues by product line are shown below: 18
THREE MONTHS ENDED MARCH 31 (IN THOUSANDS, EXCEPT %) 1997 1996 DOLLARS PERCENT DOLLARS PERCENT Product sales Oral collection device................................. $ 1,676 72% $ 650 54% Western blot HIV confirmatory test..................... 476 20 403 33 ------ --- ------- --- 2,152 92 1,053 87 Grants and contracts...................................... 184 8 154 13 ------ --- ------- --- $ 2,336 100% $ 1,207 100%
SIX MONTHS ENDED MARCH 31 (IN THOUSANDS, EXCEPT %) 1997 1996 DOLLARS PERCENT DOLLARS PERCENT Product sales Oral collection device................................. $ 3,576 72% $ 1,143 47% Western blot HIV confirmatory test..................... 935 19 745 31 ------ --- ------- --- 4,511 91 1,888 78 Grants and contracts...................................... 466 9 544 22 ------ --- ------- --- $ 4,977 100% $ 2,432 100%
Sales of the Company's oral collection device increased by $1,026,000 or 158% in the current quarter as compared to the second quarter in fiscal 1996, and by $2,433,000 or 213% in the comparable six month periods. The increase is primarily attributable to increased use of the device for insurance testing purposes following approval of the device by the Food and Drug Administration (FDA) in June 1996 for use in conjunction with an oral-based confirmatory test. As of March 31, 1997, the Company had firm orders for the device totaling $1,664,000 scheduled for shipment before June 30, 1997. Sales of the Company's Western blot HIV confirmatory test increased by $73,000 or 18% in the current quarter as compared to the second quarter in fiscal 1996, and by $190,000 or 26% in the comparable six month periods. Sales in the prior year were negatively affected by a reduction in orders from the Company's exclusive distributor for this product as the distributor lowered inventory stock levels. In addition, current year sales of the oral-based Western blot HIV confirmatory tests have increased as a result of increased sales of the related oral collection device. As of March 31, 1997, the Company had firm orders for the confirmatory HIV test totaling $445,000 scheduled for shipment before June 30, 1997. Grant and contract revenues increased by $30,000 or 19% in the current quarter as compared to the second quarter of fiscal 1996, and decreased by $79,000 or 14% in the comparable six month periods. These fluctuations are primarily related to research and development projects conducted in collaboration with the Company's strategic partner, SmithKline Beecham plc (SB). These research projects are directed at developing new applications for the oral collection device, and at making improvements to the device. The Company has entered into a research and development arrangement with SB whereby SB funds a portion of the cost of such projects in exchange for distribution rights to any resulting new products. Revenue from such projects can vary significantly from quarter to quarter as new projects are started while other projects may be extended, completed, or terminated. As of March 31, 1997, the Company had deferred revenue of $439,000 included in "Salaries, benefits and other accrued liabilities" related to these projects. Gross Margins on product sales were 61% and 60% of sales in the second quarter and first six months of fiscal 1997 as compared to 35% and 38% of sales in the comparable periods of fiscal 1996. The improvement in gross margins is attributable to increased sales volume of the oral collection device which resulted in lower per unit costs and to the shift in product mix towards the oral collection device which carries a higher gross margin than does the Western blot confirmatory HIV test. Research and development costs increased by $321,000 or 43% in the current quarter as compared to the second quarter of fiscal 1996 and by $409,000 or 28% in the comparable six month periods. This increase is a result of increased research and development expenses incurred under arrangements with SB and for other projects 19 conducted by the Company. Expenditures for these projects can vary significantly from quarter to quarter as new projects are started while other projects may be extended, completed, or terminated. Selling, general and administrative expenses increased by $284,000 or 20% in the current quarter as compared to the second quarter in fiscal 1996 and by $453,000 or 17% in the comparable six month periods, primarily as a result of increased selling and marketing efforts. These expenses include charges for corporate overhead allocation of shared services of $1,062,000 and $893,000, respectively, for the current and prior year quarters and $1,826,000 and $1,722,000, respectively, for the current and prior year six month periods. LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 3/31/97 9/30/96 Cash and cash equivalents.............................................. $ 151 $ 796 Marketable securities.................................................. 10,245 18,818 Working capital........................................................ 11,294 20,366
During the six months ended March 31, 1997, proceeds from the sale of marketable securities represented the primary source of funds for meeting the Company's requirements for operations and business expansion. Inventories increased during the period by $285,000 as a result of increased production levels. Salaries, benefits and other accrued liabilities increased by $621,000 primarily due to $439,000 of grant and contract funding received in advance of the related research efforts. AGRITOPE RESULTS OF OPERATIONS Revenues. Total revenues decreased by $37,000 or 14% in the current quarter as compared to the second quarter of fiscal 1996 and by $97,000 or 28% in the comparable six month periods. Revenues by product line are shown below:
THREE MONTHS ENDED MARCH 31 (IN THOUSANDS, EXCEPT %) 1997 1996 DOLLARS PERCENT DOLLARS PERCENT Product Sales Grape plant sales...................................... $ 164 72% $ - -% Grants and contracts...................................... 62 28 263 100 ------- ---- ------- --- $ 226 100% $ 263 100% SIX MONTHS ENDED MARCH 31 (IN THOUSANDS, EXCEPT %) 1997 1996 DOLLARS PERCENT DOLLARS PERCENT Product Sales Grape plant sales...................................... $ 164 65% $ - -% Grants and contracts...................................... 88 35 349 100 ------- ---- ------- --- $ 252 100% $ 349 100%
Sales in the Company's grape plant propagation subsidiary (Vinifera) are highly seasonal and generally occur in the spring and summer planting seasons. Vinifera was acquired by the Company in August 1996 and therefore its results are not included in the comparable periods of fiscal 1996. As of March 31, 1997, Vinifera had firm orders totaling $1,297,000 for delivery in the spring and summer of 1997. Grant and contract revenues decreased by $200,000 or 76% in the current quarter as compared to the second quarter of fiscal 1996, and by $261,000 or 75% in the comparable six month periods. Grant and contract revenues 20 in the second quarter of fiscal 1996 included $200,000 received from a strategic partner for a research project. These research projects are directed at developing superior new plants through genetic engineering. Revenue from such projects can vary significantly from quarter to quarter as new projects are started while other projects may be extended, completed, or terminated. Gross margins on product sales were 31% of sales in the second quarter and first six months of fiscal 1997. There were no comparable product sales for the prior year periods. Research and development costs increased by $31,000 or 9% in the current quarter as compared to the second quarter in fiscal 1996 and by $122,000 or 18% in the comparable six month periods. The higher research and development costs in the current year reflect increased efforts to develop and propagate crops containing the Company's patented ethylene control technology as well as research and development efforts to improve grape plant propagation conducted by Vinifera. Vinifera was acquired by the Company in August 1996 and therefore its results are not included in the comparable periods of fiscal 1996. Selling, general and administrative expenses increased by $304,000 or 85% in the current quarter as compared to the second quarter in fiscal 1996 and by $711,000 or 101% in the comparable six month periods. The increases are attributable to $439,000 of expenses incurred by Vinifera, which was not part of the combined group in the comparable periods of fiscal 1996, and to expenses of $256,000 related to development of a proposal, currently undergoing further study, to create two classes of common stock, one targeted to the operations of the Epitope Medical Products group, and the other to the Agritope group. These expenses also include charges for corporate overhead allocation of shared services of $369,000 and $261,000, respectively, for the current and prior year quarters and $639,000 and $518,000, respectively, for the comparable six month periods. Other income (expense), net was impacted by two significant non-recurring charges in the first quarter of fiscal 1997. First, the Company recorded a non-cash charge to results of operations of $1,900,000, reflecting the permanent impairment in the value of its investment in affiliated companies. Secondly, conversion of $3,380,000 principal amount of the Agritope convertible notes at a reduced exchange price resulted in a charge to results of operations of $1,217,000. Interest expense decreased by $56,000 or 93% in the current quarter as compared to the second quarter in fiscal 1996 and by $108,000 or 82% in the comparable six month periods due to the conversion of notes into common stock. LIQUIDITY AND CAPITAL RESOURCES
(IN THOUSANDS) 3/31/97 9/30/96 Cash and cash equivalents.............................................. $ 38 $ 4,903 Marketable securities.................................................. 2,561 - Working capital ....................................................... 1,994 1,264
Working capital increased as a result of the conversion in November 1996 of $3,380,000 principal amount of Agritope notes into 250,367 shares of common stock of the Company, partially offset by the accrual of estimated costs of disposal of discontinued operations. Inventories increased by $974,000 due to a buildup at Vinifera in anticipation of sales in the spring and summer planting seasons. Expenditures for property and equipment were $1,003,000, largely as a result of expansion of greenhouse capacity at Vinifera. During the current year, Agritope made a one-time cash payment of $590,000 to a co-inventor of Agritope's ethylene control technology in exchange for all rights to future compensation. Such amount is included in "Patents and proprietary technology, net." Agritope's investment in affiliated companies, obtained in connection with divestiture of its fresh flower distribution business, was reduced by a non-cash charge of $1,900,000 reflecting the permanent impairment in the value of these investments. During the current year, the Company made intercompany loans totaling $5,765,000 to its discontinued operation, A&W. 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Product Liability and Related Claims - ------------------------------------ Lawsuits, described in more detail below, have been filed against the Company, Andrew & Williamson Sales, Co. ("A&W"), and various other parties arising out of the alleged association of certain frozen strawberries sold by A&W with an outbreak of Hepatitis A in Michigan in late March 1997. The berries were processed by A&W in the spring of 1996 and distributed in several states through the United States Department of Agriculture ("USDA") school lunch program. A&W's former chief executive officer certified to the USDA in November 1996 that the berries were grown in the United States, as required by the USDA school lunch program, although the berries in fact were grown in Mexico. The Company acquired A&W on December 12, 1996 without knowledge of the USDA contract or the certification. Separate lawsuits regarding A&W strawberries have been instituted on behalf of a number of individual plaintiffs against the Company and A&W in the Circuit Court of the State of Michigan for the County of Calhoun. The causes of action alleged in the suits include product liability, fraudulent, negligent and innocent misrepresentation related to the USDA certification, negligence, and violation of the Michigan Consumer Protection Act. The lawsuits, filed in April 1997, seek compensatory and exemplary damages in an unspecified amount. The lawsuits have been removed to the United States District Court for the Western District of Michigan. On April 8, 1997, a suit was filed in the Superior Court of the State of California for the County of Los Angeles, Central District, against the Company, A&W, and an unrelated company in connection with the A&W strawberries. The plaintiffs purport to represent a class of California residents and allege causes of action for gross negligence, negligence, breach of express and implied warranties, product liability, fraud, negligent misrepresentation, intentional and negligent infliction of emotional distress, unfair business practices and false and misleading advertising. The suit seeks compensatory and punitive damages in an unspecified amount, equitable relief in the form of disgorgement of profits from the sale of strawberries and creation of a fund to monitor the health and reimburse the medical expenses of the class members, and attorney fees. The suit has been removed to the United States District Court for the Central District of California. On April 14, 1997, a suit was filed in the United States District Court for the Southern District of California against the Company, A&W, and four individuals who were then the former owners of A&W in connection with the A&W strawberries. The plaintiffs purport to represent a class and allege claims for relief for medical monitoring, unfair trade practices under the California Business and Professions Code, and violation of the federal Perishable Agricultural Commodities Act of 1930. The suit seeks compensatory, consequential and punitive damages in an unspecified amount. A class action alleging the same claims for relief against the same defendants was also filed on April 14, 1997, in the United States District Court for the District of Oregon. Defense of each of the lawsuits described above has been tendered to the Company's insurance carriers and, as discussed under "Rescission of A&W Acquisition" below, A&W has agreed to indemnify the Company for joint and several judgments and certain defense costs to the extent not reimbursed by insurance. The Company intends to vigorously defend against the proceedings. While it is not possible to determine with certainty what the ultimate outcome of these lawsuits will be, management does not expect the final disposition of such proceedings to have a material adverse effect on the Company's financial position or future results of operations. Rescission of A&W Acquisition - ----------------------------- The Company previously reported in its Current Report on Form 8-K dated April 22, 1997, its commencement of a suit in the United States District Court for the District of Oregon to rescind its acquisition of A&W. On May 4, 1997, the parties entered into a settlement agreement pursuant to which the acquisition is to be rescinded. Pursuant to the settlement, the Company will exchange the outstanding A&W common stock for the 520,000 22 shares of the Company's common stock issued in the acquisition, and will also receive A&W nonvoting preferred stock with a liquidation preference of $5.7 million in return for the cancellation of loans by the Company to A&W. Other terms of the settlement include: (1) Fred L. Williamson, Fred M. Williamson, and Keith Andrew will personally guarantee the $6.5 million credit facility provided by A&W's bank lender. The facility is secured by A&W accounts receivable and inventory. The Company's guarantee of the facility will also continue in effect through November 1, 1998, but the three individual guarantors have agreed to reimburse the Company for any amounts it is required to pay under its guarantee. (2) A&W has agreed to indemnify the Company for joint and several judgments against the two companies and for certain defense costs, to the extent not reimbursed by insurance. The Company and A&W have each reserved the right to assert claims against the other in connection with suits in which only one is named as a defendant. The parties will otherwise release each other from liabilities arising out of events occurring before the rescission. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibits are listed on the attached exhibit index following the signature page of this report. (b) Reports on Form 8-K On April 3, 1997, the Company filed a current report on Form 8-K dated April 1, 1997, to report under Item 5 events related to the recall of frozen strawberries by A&W. On April 22, 1997, the Company filed a current report on Form 8-K dated April 7, 1997, to report under Item 5 the filing of a suit by the Company in federal court seeking damages and rescission of its acquisition of A&W and developments and legal proceedings relating to A&W's distribution of frozen strawberries which the CDC associated with an outbreak of Hepatitis A. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EPITOPE, INC., an Oregon corporation May 15, 1997 ADOLPH J. FERRO, Ph.D. Date Adolph J. Ferro, Ph.D. President, Chief Executive Officer and Director (Principal Executive Officer) May 15, 1997 GILBERT N. MILLER Date Gilbert N. Miller Executive Vice President, Chief Financial Officer (Principal Financial Officer) May 15, 1997 MARK V. ALLRED Date Mark V. Allred Controller (Principal Accounting Officer) 24 EXHIBIT INDEX 3. Bylaws of the Company, as amended. 10.1 Settlement Agreement and Release dated as of May 4, 1997, among the Company, Keith R. Andrew and Kevin S. Andrew as cotrustees under the Fred W. and Virginia S. Andrew 1990 Revocable Living Trust, Keith R. Andrew individually, Fred L. Williamson, Fred M. Williamson, and Andrew and Williamson Sales, Co. 10.2 Credit Agreement between Andrew and Williamson Sales, Co. ("A&W"), and Wells Fargo Bank, National Association ("Wells Fargo"), Continuing Guaranty of the Company, and Subordination Agreement among A&W, the Company, and Wells Fargo, each dated as of December 17, 1996. 27. Financial Data Schedule 25 EX-3 2 RESTATED BYLAWS OF EPITOPE, INC. RESTATED BYLAWS OF EPITOPE, INC. ARTICLE I Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders of the corporation shall be held each year on a date designated by the Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. In case of incomplete financial or other information, unavailability of shareholders, directors, officers or other persons whose attendance at the annual meeting would be desirable, or other similar circumstances, the president in his discretion may postpone the annual meeting. If the annual meeting is postponed, or if the election of directors shall not be held on the day designated herein for any annual meeting of the shareholders, or at any adjournment thereof, a special meeting shall be held as soon as may be convenient as determined by the president, either in lieu of the annual meeting if the annual meeting was postponed or for the election of directors if the election was not held at the annual meeting or at any adjournment thereof. Written or printed notice, stating the place, day, hour and purpose of the special meeting shall be delivered not less than ten nor more than sixty days before the date of the special meeting, either personally or by mail, by the president or, at the direction of the president, by the secretary to each shareholder of record entitled to vote at the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mails addressed to the shareholder at his address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 2. Special Meetings. Special meetings of the shareholders may be called for any purpose or purposes by the president, the Board of Directors, the holders of not less than one-tenth (1/10) of all the shares entitled to vote at the meeting or as provided in the Oregon Business Corporation Act. Notice of special meetings shall be given by the president or, at the direction of the president, by the secretary or assistant secretary to each shareholder of record entitled to vote at such meetings in the same manner as hereinabove provided in Section 1 of this Article. Section 3. Place of Meeting. Meetings, annual or special, of the shareholders shall be held at such place either within or without the state of Oregon as shall be designated by the Board of Directors, or in the absence of such a designation, at the main office of the corporation. Section 4. Quorum; Waiver of Notice. A proposal voted upon by the shareholders, other than the election of directors, shall be approved if the votes cast favoring the matter exceed the votes cast opposing the matter, unless the corporation's articles of incorporation, bylaws, or - 1 - applicable provisions of the Oregon Business Corporation Act require a greater number of affirmative votes. If a quorum be not present at any annual or special meeting, a majority of the shareholders present, either in person or by proxy, may adjourn to such time and place as may be decided upon by the holders of the majority of the shares present, and notice of such adjournment shall be given in accordance with Section 4 of this Article; but if a quorum be present, adjournment may be taken from day to day or to such time and place as may be decided by the holders of the majority of the shares present, and no notice of such adjournment need be given. No business shall be transacted at an adjourned meeting that could not have been transacted at the meeting from which the adjournment was taken. Whenever any notice is required to be given pursuant to statute, to the articles of incorporation, or to these bylaws, a waiver thereof signed by the shareholder entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Any shareholder attending a meeting without objection thereof shall be deemed to have waived notice of such meeting. Notice otherwise complying with the terms hereof may be given by prepaid telegram as the equivalent of notice by mail. Section 5. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. No proxy shall be valid after 11 months from the date of its execution, unless otherwise provided in the proxy. ARTICLE II Board of Directors Section 1. Board of Directors. The business and affairs of the corporation shall be managed by a Board of Directors. Section 2. Meetings. A regular annual meeting of the Board of Directors shall be held immediately after, and at the same place as, the annual meeting of shareholders. No notice of the annual meeting other than this bylaw need be given unless the meeting is to be held at a place other than the main office of the corporation, in which case the notice shall be given in the manner provided in Section 1 of Article I of these restated bylaws. The Board of Directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution. Special meetings of the Board of Directors may be called by or at the request of the president or any director. Notice of any special meeting shall be given at least three (3) days prior thereto by oral notice given in person, by telephone, or by other means of oral electronic two-way communication, or by written notice delivered personally or sent by mail, courier, fax, or similar means to the director's residential or business address. Directors may waive notice of meetings of the Board of Directors, and a waiver thereof signed by the director entitled to notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where the director attends the meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. - 2 - Section 3. Quorum and Voting. A majority of the elected and acting directors shall constitute a quorum for the transaction of business. If at any meeting of the Board of Directors there shall be less than a quorum present, a majority of the directors present may adjourn to such time and place as may be decided upon by the majority of the directors present, and notice of such adjournment shall be given in accordance with Section 2 of this Article; but if a quorum be present, adjournment may be taken from day to day or to such time and place as may be decided by the majority of the directors present, and no notice of such adjournment need be given. When a quorum exists, action may be taken by a majority vote of the directors present. Section 4. Notification of Nominations. Nominations for the election of directors may be made by the Board of Directors or a proxy committee appointed by the Board of Directors or by a shareholder entitled to vote in the election of directors generally. However, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the secretary of the corporation not later than (a) with respect to an election to be held at an annual meeting of shareholders, 60 days in advance of the date of the previous year's annual meeting of shareholders, and (b) with respect to an election to be held at a special meeting of shareholders for the election of directors, the close of business on the seventh day following the date on which notice of such meeting is first given to shareholders. Each such notice shall set forth: (i) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (ii) a representation that the shareholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made; (iv) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934, and the related proxy regulations of the Securities and Exchange Commission promulgated thereunder, had the nominee been nominated, or intended to be nominated, by the Board of Directors; and (v) the consent of each nominee to serve as a director of the corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure. ARTICLE III Executive Committee The majority of the Board of Directors may designate two or more directors to constitute an executive committee, which committee between meetings of the Board of Directors shall have and may exercise all of the authority and powers of the Board of Directors in the management of the business and affairs of the corporation, except that the committee may not: (a) authorize distributions, except as permitted by clause (g) below; (b) approve or propose to shareholders - 3 - actions that the Oregon Business Corporation Act requires to be approved by shareholders; (c) fill vacancies on the board of directors or on any of its committees; (d) amend the articles of incorporation, except as permitted by the Oregon Business Corporation Act; (e) adopt, amend, or repeal bylaws; (f) approve a plan of merger not requiring shareholder approval; (g) authorize or approve reacquisition of shares, except within limits prescribed by the board of directors; (h) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences and limitations of a class or series of shares, except as permitted by the Oregon Business Corporation Act; or (i) appoint or remove officers of the corporation. ARTICLE IV Officers and Agents Section 1. Executive Officers. (a) Number: The officers of the corporation shall consist of a chairman of the board, president, chief executive officer, that number of vice presidents which the Board of Directors may from time to time determine and with such designations and seniority as the directors may assign, a secretary and a treasurer. Any two or more offices may be held by one person. (b) Election and Tenure: The officers of the corporation shall be elected at the organizational meeting and thereafter at each regular annual meeting. In the event of a failure to hold the annual meeting as herein provided, officers may be elected at any time thereafter at a special meeting of directors called for that purpose. Each officer shall hold office for the term of one year and until his successor shall be elected except where expressly provided to the contrary in a contract authorized by the Board of Directors. All officers and agents shall be subject to removal at any time by the vote of a majority of the entire Board of Directors whenever in the judgment of the directors the best interests of the corporation will be served by such removal, without prejudice, however, to any contract rights of the person so removed. (c) Vacancies: A vacancy in any office shall be filled by the Board of Directors at any regular meeting, or at any special meeting called for that purpose. (d) Additional Officers and Agents: The Board of Directors may also elect one or more assistant secretaries, one or more assistant treasurers, and such other officers or agents as it may deem necessary, with such authority and duties as from time to time may be prescribed by the Board of Directors. Section 2. Chairman of the Board. The chairman of the board, if one is elected by the Board of Directors, shall preside at and conduct all meetings of the shareholders and - 4 - directors. The chairman of the board may designate another officer to preside at and conduct any such meeting in his absence. The chairman of the board shall exercise such other powers and perform such other duties as shall be prescribed by the directors from time to time. Section 3. Chief Executive Officer. The chief executive officer shall have general and active charge of the business and management of the corporation, subject to control by the Board of Directors. In the absence of the chairman of the board or another officer designated by the chairman of the board at any meeting of the shareholders or the directors, the chief executive officer or another officer designated by the chief executive officer shall preside at the meeting. The chief executive officer is authorized to sign all certificates of stock, and all deeds, leases, notes, mortgages and contracts, including those in any way affecting real property or interests therein, as the same may be required in the regular course of the corporation's business. He shall have the power to appoint and discharge agents and employees, subject to approval of the Board of Directors. Section 4. President. The president shall exercise such powers and perform such duties as may be prescribed by the Board of Directors or by the chief executive officer. In the absence or incapacity of the chief executive officer, and at the direction of the Board of Directors, he is authorized to sign all certificates of stock, and all deeds, leases, notes, mortgages and contracts, including those in any way affecting real property or interests therein, as the same may be required in the regular course of the corporation's business. Section 5. Vice Presidents. The vice presidents, in the order of seniority as designated by the Board of Directors, shall in the absence or disability of the president exercise the powers and perform the duties of the president. Each vice president shall also exercise such other powers and perform such other duties as shall be prescribed by the directors, and such powers and duties of the president as may be designated by the president. Section 6. Secretary. The secretary shall give such notices of meetings of the shareholders and of the Board of Directors as required by these restated bylaws, and shall keep a record of the proceedings of all such meetings. Such record shall be kept at the principal or registered office of the corporation. He shall have custody of all books and records and papers of the company except those which are in the care of the treasurer or some other person authorized to have custody and possession thereof by resolution of the Board of Directors. He shall, with the president, sign all certificates of stock of the corporation and shall affix the seal of the corporation to such certificates of stock. He is authorized to sign with the president or vice president in the name of the corporation all deeds, notes, mortgages and contracts including those in any way affecting real property or interests therein and shall affix the seal of the corporation thereto when required in the regular course of business. He shall submit such reports to the Board of Directors as may be requested by them from time to time. Section 7. Assistant Secretary. The assistant secretary shall, in the absence or disability of the secretary, exercise the powers and perform the duties of the secretary. He shall also exercise such other powers and perform such other duties as may be prescribed by the - 5 - Board of Directors and such powers and duties of the secretary as may be designated by the president or secretary. Section 8. Treasurer. The treasurer shall from time to time make such reports to the officers, Board of Directors and shareholders as may be required, and shall perform such other duties as the Board of Directors shall from time to time delegate to him. Section 9. Assistant Treasurer. The assistant treasurer shall, in the absence or disability of the treasurer, exercise the powers and perform the duties of the treasurer. He shall also exercise such other powers and perform such other duties as may be prescribed by the Board of Directors and such powers and duties of the treasurer as may be designated by the president or treasurer. ARTICLE V Section 1. Right to Indemnification. The corporation shall indemnify any director or former director of the corporation or any person who may have served at its request as a director of another corporation in which it owns shares of capital stock or of which it is a creditor against expenses and liability actually and necessarily incurred by such director in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which such director is a party by reason of being or having been such director, except in relation to matters as to which indemnification is prohibited by the Oregon Business Corporation Act as it shall be amended from time to time (the "Act"); but such indemnification shall not be deemed exclusive of any other rights to which such director may be entitled, under any bylaw, agreement, general or specific action of the Board of Directors, vote of shareholders or otherwise. As used herein, "expenses" shall include, without limitation, expenses of investigations, arbitrations, mediations, judicial or administrative proceedings or appeals, attorney fees and disbursements and any expenses of establishing a right to indemnification. "Liability" shall include the obligation to pay a judgment, settlement, penalty, fine, including an excise tax assessed with respect to an employee benefit plan, or reasonable expenses incurred with respect to an arbitration, mediation, action, suit or proceeding in which a director is entitled to indemnification hereunder. Section 2. Procedure for Indemnification. After the final disposition of any threatened, pending or completed arbitration, mediation, action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in which a director may be entitled to indemnification, such director may send to the corporation a written request for indemnification. The corporation shall, in accordance with the provisions of the Act regarding the determination and authorization of indemnification, make a finding whether the indemnification requested is permitted by the laws of the state of Oregon no later than 60 days following receipt by the corporation of such request. The corporation shall cause the indemnification requested to be authorized and paid unless the corporation finds that the indemnification requested is not so permitted. The director shall be given an opportunity to be heard and to present evidence in connection with the consideration of the party or parties determining the right to indemnification under the Act. If the corporation does not authorize - 6 - indemnification hereunder, the director shall have the right to seek court-ordered indemnification in accordance with the provisions of the Act. In any such action, neither the making of, nor the failure to make, any finding by the corporation that indemnification of the director is proper or not proper in the circumstances shall be a defense to such action or create a presumption that the director has not met the standard of conduct required by the Act. In making its determination and in any court proceeding, the corporation shall have the burden of proving that the director has not met the standards of conduct required by the Act to authorize indemnification. Section 3. Procedure for Advancement of Expenses. The corporation shall pay for or reimburse the reasonable expenses incurred by a director as a result of being party to a threatened, pending or completed arbitration, mediation, action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal, in advance of final disposition of such arbitration, mediation, action, suit or proceeding promptly upon receipt of a written request for payment of such expenses that is in accordance with requirements of the Act for such written statement. Such written statement shall also include or be accompanied by documentation of the expenses incurred and, when available, such documentation of expenses shall include copies of bills or statements evidencing the expenses incurred. If the requirements of this provision are met, the corporation shall pay the amount requested promptly notwithstanding the absence of a final disposition of the arbitration, mediation, action, claim or proceeding. Section 4. Indemnification of Officers, Employees and Agents. The corporation may, by action of its Board of Directors from time to time, provide indemnification and pay expenses in advance of the final disposition of a proceeding to officers, employees and agents of the corporation to the same extent and effect as provided in this Article with respect to the indemnification and advancement of expenses of directors of the corporation or pursuant to rights granted pursuant to, or provided by, the Act or otherwise. Section 5. Insurance. The corporation may, but shall not be required to, purchase and keep in force a policy or policies of liability insurance on behalf of its officers and directors against liability and expenses incurred in any arbitration, mediation, action, suit or proceeding, whether civil, criminal, administrative or investigative and whether formal or informal. Section 6. Nonexclusivity; Nature of Rights. The indemnification provided herein shall not be deemed exclusive of any other rights consistent with the laws of the state of Oregon to which a director may be entitled under the corporation's articles of incorporation, bylaws or any other agreement, vote of shareholders, or otherwise, both as to action in the director's official capacity and as to action in another capacity while holding office, and shall continue notwithstanding that the director may have ceased to be connected with the corporation. The right of indemnification provided for herein shall be deemed to create contractual rights in favor of directors entitled to indemnification hereunder and shall be applicable to claims commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended or - 7 - repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to any such amendment or repeal. ARTICLE VI Action Without a Meeting Section 1. Written Consent. Any action required to be taken or which may be taken at a meeting of the shareholders or directors may be taken without a meeting if a consent in writing setting forth the action so taken shall be signed by all of the shareholders or directors entitled to vote; and such consent shall have the same force and effect as a unanimous vote of such shareholders or directors. Section 2. Electronic Communications. The Board of Directors, or any committee designated by the directors, may hold any meeting of the directors or committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can simultaneously hear each other. Participation in such a meeting shall constitute presence in person at the meeting. ARTICLE VII Section 1. Certificates. Shares of stock of the corporation shall be represented by stock certificates which shall be in a form adopted by the Board of Directors, provided all such stock certificates within one series of the same class of stock shall be consecutively numbered, and shall express upon their face the number thereof, the date of issuance, the number of shares for which and the person to whom issued and the class and series, if any, thereof, and all such stock certificates shall be signed by the president or a vice president and by the secretary or assistant secretary and may be sealed with the corporate seal, if any. In addition, each certificate shall express upon its face that the corporation is organized under the laws of the state of Oregon and shall also express the par value of the shares represented by the certificate, or shall state that the shares are without par value, as may be appropriate. Each certificate shall state upon the face or back thereof, in full or in summary, all of the designations, preferences, limitations, restrictions on transfer and relative rights of the shares of each class and series authorized to be issued, or shall indicate where such information may be found. Section 2. Subscriptions. Subscriptions for shares of stock of the corporation shall be paid in full at such time, or in such installments and at such times, as the Board of Directors may determine. In case of default in the payment of any installment or call when such payment is due, the Board of Directors may declare the shares and all previous payments thereon forfeited for the use of the corporation, in the manner prescribed by the Oregon Business Corporation Act. Section 3. Transfer of Shares. Transfer of shares of the corporation shall be made only on the stock transfer books of the corporation by the holder of record thereof or by his legal representative, who shall furnish proper evidence of authority to transfer, or by his attorney - 8 - thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the corporation shall be deemed by the corporation to be owner thereof for all purposes. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a lost, destroyed or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. The record of shareholder and stock transfer books shall be kept at the principal or registered office of the corporation or at the office of its transfer agent or registrar, if any. ARTICLE VIII Amendments Bylaws may be adopted, altered, amended or repealed, in whole or in part, at any regular or special meeting of the Board of Directors. Approved by the Board of Directors December 17, 1996. Amended April 28, 1997. - 9 - EX-10.1 3 SETTLEMENT AGREEMENT AND RELEASE SETTLEMENT AGREEMENT AND RELEASE This Settlement Agreement and Release (the "Agreement") is between Epitope, Inc., an Oregon corporation ("Epitope"), Keith R. Andrew and Kevin S. Andrew as cotrustees under the Fred W. and Virginia S. Andrew 1990 Revocable Living Trust (collectively, the "Trustees"), Keith R. Andrew individually ("K. Andrew"), Fred L. Williamson ("Williamson, Sr."), Fred M. Williamson ("Williamson, Jr."), and Andrew and Williamson Sales, Co., a California corporation ("A&W") (collectively, the "Parties"). BACKGROUND Epitope acquired all of the outstanding capital stock of A&W on December 12, 1996 (the "Acquisition Date"), from Fred W. Andrew ("F. Andrew"), K. Andrew, Williamson, Sr., and Williamson, Jr. (collectively with the Trustees, the "Former Owners"), pursuant to an Acquisition and Merger Agreement among Epitope, Thamscoe, Inc., A&W, F. Andrew, K. Andrew, Williamson, Sr., and Williamson, Jr., dated November 6, 1996 (the "Acquisition Agreement"). As part of the acquisition, the number of outstanding shares of A&W common stock was reduced from 20,000 to 100 (the "A&W Shares"). Following the acquisition, Epitope made a $2.2 million subordinated loan to A&W (the "First Loan") and a subsequent $3.5 million loan to A&W (the "Second Loan"). On February 28, 1997, Agritope, Inc., purchased A&W's membership interest in Superior Tomato Associates, L.L.C., a Delaware limited liability company ("STA"), for $25,032, representing A&W's investment in STA and its share of losses through the purchase date, and assumed all ongoing obligations of such membership. Agritope, Inc., an Oregon corporation, is a wholly-owned subsidiary of Epitope. Epitope has filed a complaint against F. Andrew, K. Andrew, Williamson, Sr., and Williamson, Jr. in the United States District Court for the District of Oregon, Civil No. CV 97-506 (the "Complaint"), seeking damages and rescission of the A&W acquisition. The Former Owners have not yet answered the complaint, but dispute the allegations made by Epitope and do not admit any wrongdoing. The Parties have sought to settle their differences without litigation. Therefore, the Parties enter into this Agreement in consideration of the mutual promises contained herein. AGREEMENT The Parties therefore agree as follows: 1. Rescission of Stock Acquisition. At Closing, as defined below, subject to the terms and conditions of this Agreement, Epitope and the Former Owners shall mutually renounce and rescind Epitope's acquisition of A&W, including the issuance of - 1 - 520,000 shares of Epitope common stock (the "Epitope Shares") for the then-outstanding shares of A&W common stock. To effect the rescission, each of the Former Owners shall deliver to Epitope certificates for all Epitope Shares originally issued in his name, duly endorsed or accompanied by appropriate stock powers for transfer to Epitope. Epitope shall deliver the certificate for the A&W Shares, accompanied by stock powers transferring the outstanding A&W Shares as follows: Former Owner Shares ------------ ------ Trustees, for the Trust, as defined below 40 K. Andrew 10 Williamson, Jr. 10 Williamson, Sr. 40 2. Preferred Stock. a. As soon as practicable after execution of this Agreement, Epitope, as sole shareholder of A&W, shall take all steps necessary to cause A&W's articles of incorporation to be amended to read as set forth in Exhibit A and to cause an officer's certificate to be filed establishing the rights and preferences of preferred stock as stated in Exhibit B, subject to approval by A&W's board of directors. As a result of the amendment and filing of the officer's certificate, A&W shall have the ability to issue two series of preferred stock having the rights and preferences stated in Exhibits A and B. b. At Closing, as defined below, A&W shall issue 100 shares of Class A preferred stock to Epitope (the "Class A Preferred Shares"), having a redemption value equal to the First Loan amount. A&W shall redeem the Class A Preferred Shares beginning no later than three years after the Closing Date, as defined below, by payment of the redemption value as required by Exhibit A. The holders of the Class A Preferred Shares shall have the right to receive a dividend equal to 33.3 percent of any dividends paid by A&W to holders of A&W Common Stock, shall have a liquidation preference equal to the redemption value, and shall have no voting rights, except as required by law. c. At Closing, A&W shall issue 100 shares of Class B preferred stock to Epitope (the "Class B Preferred Shares"), having a redemption value for the first five years after the Closing Date equal to 80 percent of the Second Loan amount and thereafter equal to 90 percent of the Second Loan amount. The Class B Preferred Shares shall be subject to redemption, at the option of A&W, upon the terms set forth in Exhibit A. The holders of the Class B Preferred Shares shall have the right to receive a dividend equal to 66.7 percent of any dividends paid by A&W to holders of A&W Common Stock, shall have a liquidation preference equal to the Second Loan amount, and shall have no voting rights, except as required by law. 3. WFB Guaranty. - 2 - a. Epitope's guaranty of the operating credit facility and term loan (the "WFB Loan Facility") from Wells Fargo Bank, National Association ("WFB") shall remain in effect after Closing, subject to the terms and conditions of this Agreement. If required by a new lender (the "Replacement Facility Lender") providing any single new working capital credit facility to A&W to replace the WFB Loan Facility (the "Replacement Loan Facility"), Epitope shall guarantee the Replacement Loan Facility, provided (a) that the Replacement Loan Facility and guaranty have substantially the same terms and conditions as the WFB Loan Facility and guaranty and (b) the replacement occurs on or prior to November 1, 1998. Epitope may terminate the WFB guaranty or any replacement guaranty as to any advances after the date hereof if A&W fails to comply with its obligations under the loan documents or if A&W has not procured a new working capital credit facility (without Epitope's guaranty) to replace the then current working capital credit facility by November 1, 1998. b. K. Andrew, Williamson, Jr., and any transferee of either of their A&W Shares (together, the "Individual Guarantors") shall each guarantee the entire amount of the WFB Loan Facility and any Replacement Loan Facility, using the standard guaranty forms of WFB and the Replacement Facility Lender, respectively. No Individual Guarantor shall terminate his guaranty so long as Epitope's guaranty remains in effect. As between the Individual Guarantors and Epitope, Epitope shall have the right of full recourse (and immediate reimbursement) against the Individual Guarantors, jointly and severally, for any amounts paid by Epitope under its guaranty. c. Williamson, Sr. shall also guarantee the entire amount of the WFB Loan Facility and any Replacement Loan Facility. Except as hereinafter provided, as between Williamson, Sr., the Individual Guarantors and Epitope, Epitope shall have the right of full recourse (and immediate reimbursement) against the Individual Guarantors and Williamson, Sr., jointly and severally, for any amounts paid by Epitope under its guaranty. Notwithstanding the above, Williamson, Sr.'s guaranty shall provide that he will be unconditionally released from his guaranty if and when (1) he is no longer a shareholder of A&W or (2) Epitope's guaranty no longer remains in effect; at which time Williamson, Sr. shall have no further obligations of any kind whatsoever under his guaranty. 4. Releases. a. "Epitope Parties" means Epitope, its subsidiaries (other than A&W and its subsidiaries), and the directors, officers, agents, employees, accountants, partners, successors, and assigns of Epitope and each of its subsidiaries (other than A&W and its subsidiaries). b. "A&W Parties" means A&W, its subsidiaries, the Former Owners, and the respective directors, officers, agents, employees, accountants, partners, successors, and assigns of A&W, each of its subsidiaries, and each Former Owner. c. Effective upon Closing, Epitope, on behalf of the Epitope Parties, hereby releases the A&W Parties from any and all claims, losses, liabilities, and causes of - 3 - action, whether known or unknown (other than those created under this Agreement), including all claims stated in the Complaint, arising from events occurring before Closing. d. Effective upon Closing, A&W and each of the Former Owners, on behalf of the A&W Parties, hereby release the Epitope Parties from any and all claims, losses, liabilities, and causes of action, whether known or unknown (other than those created under this Agreement), arising from events occurring before Closing. e. Each of the releasing parties shall be deemed to have waived and relinquished, to the fullest extent permitted by law, the provisions, rights, and benefits of Section 1542 of the California Civil Code, which provides that: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Each of the releasing parties waives any and all provisions, rights, and benefits conferred by any laws of any state or territory of the United States, or principles of common law, which are similar, comparable, or equivalent to Section 1542 of the California Civil Code. The releasing parties may discover after Closing facts in addition to or different from those that they know or believe to be true with respect to the subject matter of the released claims but hereby stipulate and agree that as of Closing they each fully, finally, and forever settle and release any and all released claims, known or unknown, as described above. 5. Indemnification. a. Tender. If any third party asserts a claim or institutes an action against Epitope and A&W and/or A&W's Former Owners, the parties shall first tender the third party claim to their insurance carriers. A&W shall not be obligated to indemnify or reimburse Epitope for any loss, liability, damage, cost, fees, or other expenses to the extent actually reimbursed by insurance. If the insurance carrier does not defend the third party claim, Epitope may at its option tender its defense to A&W and A&W will defend Epitope, along with itself, at its own expense. If Epitope elects to defend the third party claim (e.g., hires its own attorneys, etc.), then Epitope shall bear the cost of its defense subject to the terms of indemnification herein. A&W shall have no obligation to defend Epitope in actions where A&W and/or a Former Owner are not also named as party defendants. b. Reservation of Right to Cross Claim. Epitope and A&W reserve the right to bring the other into any action where they are not named as a co-defendant. In such cases Epitope and A&W shall have reciprocal rights against each other including the right of cross and/or counter claim, notwithstanding the releases provided elsewhere in this Agreement. c. Indemnity. A&W shall indemnify and hold harmless Epitope against judgments for damages awarded by a court of competent jurisdiction and damages payable - 4 - under all settlements entered into with A&W's consent (which shall not be unreasonably withheld), wherein A&W and Epitope are jointly and severally liable, and against reasonable attorney fees (up to a maximum of $125 per hour and only when no part of the fees is paid by insurance) incurred in defense of the relevant claim or action. d. Notice. If any third party claim is brought or asserted against Epitope but not against A&W, and Epitope claims it is or will be entitled to indemnity by A&W, Epitope shall notify A&W in writing. Any failure to so notify A&W shall relieve A&W of any obligation to indemnify Epitope regarding that third party claim. 6. Closing. a. Closing. The consummation of the transactions contemplated by this agreement (the "Closing") shall occur at a time and date mutually agreed upon by the Parties (the "Closing Date"), but in no event later than five business days after the conditions to Closing have been satisfied. Closing shall occur at such location, shall begin at such time, and shall be conducted in such manner, as may be agreed by the Parties. b. Actions at Closing. At Closing, subject to satisfaction or waiver of all conditions precedent set forth in this Agreement: (1) Epitope shall deliver the certificate for the A&W Shares and stock powers, as required by Section . (2) Each Former Owner shall deliver to Epitope certificates for the Epitope Shares issued in his name, as required by Section . (3) A&W shall issue the Class A Preferred Shares and the Class B Preferred Shares and deliver certificates for such shares to Epitope, as required by Section . (4) K. Andrew and Williamson, Jr., shall each execute the guaranty of the WFB Loan Facility. (5) A&W shall execute and deliver to Epitope such documents as are reasonably requested by Epitope to evidence the transfer of A&W's membership interest in STA to Agritope. (6) Adolph J. Ferro, Ph.D., Gilbert N. Miller, Matthew G. Kramer, and Richard K. Bestwick, Ph.D., shall deliver to A&W written resignations of their positions as A&W directors and officers. (7) The Parties shall each deliver the various other documents that are described elsewhere in this Agreement or reasonably requested by another Party at least three business days before Closing, and shall take any other - 5 - actions expressly required by this Agreement or reasonably requested by another Party at least three business days before Closing. 7. Representations and Warranties of Former Owners. Each Former Owner, as to Section , and each of Kevin S. Andrew, K. Andrew and Williamson, Jr., as to Sections and , represents and warrants to Epitope as follows: a. No Conflict; Title. The execution, delivery, and performance of this Agreement by the Former Owner will not conflict with any undertaking, agreement, decree, order, or judgment by which he is bound. The Former Owner has good and marketable title to his Epitope Shares, free and clear of all liens (statutory or otherwise), security interests, pledges, or other encumbrances of any nature whatsoever, and has not assigned any interest in his Epitope Shares to any third party. b. Investment Representations. (1) Access to Information. On account of his involvement in the day-to-day business of A&W, the Former Owner has had access to such information regarding A&W as he deems relevant to a decision to enter this Agreement. (2) Experience. The Former Owner has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in A&W common stock and has the ability to bear the economic risk of that investment. (3) Investment Intent. The Former Owner is acquiring A&W common stock for the Former Owner's own account and not on behalf of any other person. The Former Owner is not acquiring A&W common stock with a view to distribution or with the intent to divide the Former Owner's participation with others by reselling or otherwise distributing A&W common stock, other than in a registered offering, or pursuant to the will of F. Andrew. c. Nature of Shares. The Former Owner is aware that: (1) No SEC or State Registration. A&W common stock will not be registered under federal or state securities laws when transferred to the Former Owner, must be held indefinitely unless registered or unless an exemption from registration is available, and will bear substantially the following legend: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED UNLESS THE TRANSACTION IS REGISTERED OR UNLESS THE ISSUER IS FURNISHED A - 6 - SATISFACTORY OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED. (2) No Obligation. A&W has no obligation to register A&W common stock, comply with any exemptions from registration, or repurchase A&W common stock at any time. 8. Representations and Warranties of Epitope. Epitope represents and warrants to the Former Owners as follows: a. No Conflict. The execution, delivery, and performance of this Agreement by Epitope will not conflict with any undertaking, agreement, decree, order, or judgment by which Epitope is bound. b. Investment Representations. (1) Accredited Investor Status. Epitope is an "accredited investor" for purposes of the Securities Act of 1933, as amended. (2) Access to Information. On account of Epitope's ownership of the common stock of A&W, Epitope has had access to such information regarding A&W as it deems relevant to a decision to enter this Agreement. (3) Experience. Epitope has sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of an investment in A&W preferred stock and has the ability to bear the economic risk of that investment. (4) Investment Intent. Epitope is acquiring A&W preferred stock for Epitope's own account and not on behalf of any other person. Epitope is not acquiring A&W preferred stock with a view to distribution or with the intent to divide Epitope's participation with others by reselling or otherwise distributing A&W preferred stock, other than in a registered offering. c. Nature of Shares. Epitope is aware that: (1) No SEC or State Registration. A&W preferred stock will not be registered under federal or state securities laws when transferred to Epitope, must be held indefinitely unless registered or unless an exemption from registration is available, and will bear substantially the following legend: - 7 - THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER UNITED STATES FEDERAL OR STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, OR OTHERWISE TRANSFERRED UNLESS THE TRANSACTION IS REGISTERED OR UNLESS THE ISSUER IS FURNISHED A SATISFACTORY OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED. (2) No Obligation. A&W has no obligation to register A&W preferred stock or comply with any exemptions from registration. 9. Trust and Estate Matters. Trustees represent and warrant that they are the cotrustees of the Fred W. and Virginia S. Andrew 1990 Revocable Living Trust and of the Administration Trust, the Survivors Trust, the Marital Trust, the Residual Trust, and any other trust established under the 1990 Revocable Living Trust Agreement (the "Trust") and are nominated as alternate coexecutors of the will and estate of Fred W. Andrew in the event Virginia S. Andrew shall for any reason fail to qualify or cease to act as executor. Trustees further represent, covenant, and warrant that at the date of death of Fred W. Andrew on April 11, 1997, the Trust was the owner of 208,000 of the Epitope Shares (the "Trust Shares"); that the estate of Fred W. Andrew will not be probated; that no person, association, firm or corporation other than the Trustees has any claim or interest in or to the Trust Shares; that to the best of their knowledge, the assets of the Trust, other than the Trust Shares, are more than sufficient to satisfy all known claims, taxes, and expenses of administration of the decedent's estate and of the Trust; and that the Trustees have full power and authority to transfer the Trust Shares. The representations, covenants, and warranties of this section shall survive Closing. 10. Conditions. a. Conditions to Each Party's Obligations. The respective obligation of each Party to effect the Closing shall be subject to the satisfaction of the following condition: (1) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the transactions contemplated by this Agreement shall be in effect. No statute, rule, regulation, or Injunction shall have been enacted, entered, promulgated or enforced which prohibits, restricts or makes illegal consummation of the transactions. b. Conditions to Obligations of Epitope. The obligation of Epitope to effect the transactions contemplated by this Agreement is also subject to the satisfaction or waiver by Epitope of all the following conditions: - 8 - (1) Epitope's board of directors shall have approved the terms of this Agreement and authorized Epitope to consummate the transactions contemplated by this Agreement. (2) A&W's articles of incorporation shall have been amended to read as set forth in Exhibit A and A&W's board of directors shall have authorized the issuance of the Class A Preferred Shares and Class B Preferred Shares on the terms set forth in this Agreement. (3) A&W and the Former Owners shall have performed in all material respects all obligations required to be performed by them under this Agreement at or prior to the Closing Date, and Epitope shall have received a certificate signed on behalf of A&W by an officer of A&W and by each of the Former Owners to such effect. (4) Epitope shall have received a satisfactory opinion of its counsel, Miller, Nash, Wiener, Hager & Carlsen LLP, in form and substance reasonably satisfactory to Epitope, to the effect that the transfer of the A&W Shares as required by Section 1 does not require registration under the Securities Act or applicable state law. Such counsel may rely upon certificates of the Parties and upon the representations and warranties of the Parties in this Agreement and any document or agreement referred to in this Agreement or delivered in connection with the transactions contemplated hereby. The opinion shall not be provided to, and may not be relied upon by, any Party to this Agreement other than Epitope. (5) WFB shall have agreed to continue making advances to A&W on the current terms of the WFB Loan Facility agreements. c. Conditions to Obligations of Former Owners. The obligation of the Former Owners to effect the transactions contemplated by this Agreement is also subject to the satisfaction or waiver by the Former Owners of all the following conditions: (1) Adolph J. Ferro, Ph.D., Gilbert N. Miller, Matthew G. Kramer, and Richard Bestwick, Ph.D. shall have resigned as directors and officers of A&W. (2) Epitope shall have performed in all material respects all obligations required to be performed by it under this Agreement at or prior to the Closing Date, and the Former Owners shall have received a certificate signed on behalf of Epitope by the Chief Executive Officer of Epitope to such effect. 11. Management through Closing. So long as A&W and the Former Owners comply with this Agreement, K. Andrew and Williamson, Jr., shall have primary responsibility and authority for day-to-day management of A&W's business and - 9 - affairs from the date of this agreement through the Closing Date, subject only to the ultimate direction of A&W's board of directors as required by statute. 12. Covenants. Through and after Closing: a. The Parties shall continue to cooperate to minimize the costs of the recent recall of A&W frozen strawberries, through the date of the FDA's notice of termination of recall, and shall cooperate in asserting any mutual defenses. b. Epitope and A&W shall not take any action to terminate or reduce the coverage provided to A&W under their respective existing insurance policies, through the end of the current policy year. For the same period, Epitope and A&W shall use their best efforts to assure that no gaps occur in their present coverage, provided that each Party shall be responsible for paying any additional premiums charged to maintain coverage for that Party. c. A&W shall use its best efforts to obtain a working capital credit facility not guaranteed by Epitope to replace the WFB Loan Facility (and any other A&W credit facility guaranteed by Epitope) by November 1, 1998. d. So long as Epitope continues to be a guarantor of any credit facility extended to A&W, A&W shall provide Epitope with full access during normal business hours to its books and records upon reasonable notice, and shall provide Epitope with its unaudited monthly financial statements and any other financial information required to be delivered to WFB or any Replacement Facility Lender, when provided to WFB or the Replacement Facility Lender. The provisions of this section are in addition to any statutory rights Epitope may have as a holder of A&W preferred stock. e. So long as Epitope's guaranty of A&W indebtedness remains outstanding, neither K. Andrew nor Williamson, Jr., shall transfer any A&W shares unless Epitope gives its written consent to the transfer, which shall not be unreasonably withheld. 13. Termination and Amendment. a. Termination. This Agreement may be terminated at any time prior to Closing: (1) By mutual consent of Epitope and the Former Owners in a written instrument. (2) By any Party if the Closing shall not have occurred on or before June 1, 1997, unless the failure of the Closing to occur by such date shall be due to the breach by the Party seeking to terminate this Agreement of any representation, warranty, covenant, or other agreement of such Party set forth herein. - 10 - (3) By Epitope (provided that Epitope is not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of the Former Owners, which breach is not cured within fifteen (15) days following written notice to the Party committing such breach, or which breach, by its nature, cannot be cured prior to Closing. (4) By the Former Owners (provided that the Former Owners are not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of Epitope, which breach is not cured within fifteen (15) days following written notice to Epitope, or which breach, by its nature, cannot be cured prior to Closing. b. Effect of Termination. In the event of termination of this Agreement as provided in Section , this Agreement shall become void and have no effect. Notwithstanding anything to the contrary contained in this Agreement, no Party shall be relieved or released from any liabilities or damages arising out of its intentional or willful breach of any provision of this Agreement. c. Extension; Waiver. At any time prior to Closing, Epitope and the Former Owners, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other Parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a Party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such Party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. 14. General Provisions. a. Expenses. Except as otherwise stated herein, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the Party incurring such expense. b. Notices. All notices under this Agreement shall be in writing and shall be deemed given when delivered personally, when sent by fax (with prompt confirmation by mail), four business days after mailed by certified mail (return receipt requested), or one business day after being sent by a recognized overnight courier, to the - 11 - Parties at the following addresses (or at such other address for a Party as shall be specified by like notice): If to Epitope, or to A&W before Closing, to: 8505 S.W. Creekside Place Beaverton, Oregon 97005 Facsimile: (503) 641-8665 Attention: President with copies to: Miller, Nash, Wiener, Hager & Carlsen LLP 3500 U. S. Bancorp Tower 111 S.W. Fifth Avenue Portland, Oregon 97204 Facsimile: (503) 224-0155 Attention: Erich W. Merrill, Jr., P.C. If to A&W after Closing to: Andrew & Williamson Sales, Co. 9940 Marconi Drive San Diego, California 92173 Facsimile: (619) 661-6007 Attention: President with copies to: Klein, Wegis, DeNatale, Goldner & Muir, llp P.O. Box 11172 Bakersfield, California 93389-1172 Facsimile: (805) 395-0319 Attention: Claude P. Kimball and Huth, Lynett and Scudi 5440 Morehouse Drive Suite 4400 San Diego, California 92121-1798 Facsimile: (619) 558-1122 Attention: Morgan J. C. Scudi If to a Former Owner, to the address set forth in the records of A&W. - 12 - c. Interpretation. When a reference is made in this Agreement to Sections, Exhibits, or Schedules, such reference shall be to a Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes," and "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." No provision of this Agreement shall be construed to require any person to take any action that would violate any applicable law, rule, or regulation. d. Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become effective when counterparts have been signed by each of the Parties and delivered to the other Parties, it being understood that all Parties need not sign the same counterpart. Facsimile transmission of a signed original shall have the same effect as delivery of the original. e. Entire Agreement. This Agreement (including the documents and the instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the Parties with respect to the subject matter hereof other than the agreements specifically referred to herein. f. Severability. Any term or provision of this Agreement that is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. If any provision of this Agreement is so broad as to be unenforceable, the provision shall be interpreted to be only so broad as is enforceable. g. Assignment. Neither this Agreement nor any of the rights, interests, or obligations shall be assigned by any of the Parties hereto without the prior written consent of the other Parties. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of, and be enforceable by the Parties and their respective successors and assigns. This Agreement (including the documents and instruments referred to herein) is not intended to confer upon any person other than the Parties hereto any rights or remedies hereunder. h. Attorney Fees. In the event any Party shall seek construction or enforcement of any covenant, warranty, indemnity, or other term or provision of this Agreement, the Party that prevails in such construction or enforcement proceeding shall be entitled to recover such reasonable costs and attorney fees which shall be determined by the arbitrator or court (including any appellate court). - 13 - i. Governing Law. This Agreement shall be governed and interpreted pursuant to the law of the State of California, and the Parties consent to the jurisdiction of California courts for any action brought concerning this Agreement whether for declaratory judgment, breach of contract, damages, or otherwise. The Parties have executed this Agreement as of the 4th day of May, 1997. EPITOPE, INC. By Title: ANDREW AND WILLIAMSON SALES, CO. By Title: Kevin S. Andrew, as cotrustee under the Trust Keith R. Andrew, individually and as cotrustee under the Trust Fred L. Williamson Fred M. Williamson - 14 - The undersigned spouses of the Former Owners hereby consent and agree to the terms of this Agreement. Virginia S. Andrew, individually and as prospective executor of the estate of Fred W. Andrew Lisa B. Andrew Judith M. Williamson Stephanie Williamson - 15 - Exhibit A RESTATED ARTICLES OF INCORPORATION OF ANDREW AND WILLIAMSON SALES, CO. 1. Name. The name of this corporation is ANDREW AND WILLIAMSON SALES, CO. 2. Purpose. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. 3. Authorized Capital Stock. This corporation is authorized to issue two classes of stock, 100,000 shares of Common Stock and 200 shares of Preferred Stock. The Preferred Stock shall consist of 100 shares of Class A Preferred Stock and 100 shares of Class B Preferred Stock. (a) Common Stock. Holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders. No dividends shall be declared or paid on shares of Common Stock unless all obligations to pay dividends on Preferred Stock are satisfied. On dissolution of this corporation, after payment of all amounts that the holders of Preferred Stock are entitled to receive, the holders of Common Stock may receive, pro rata, any remaining assets of the corporation. (b) Preferred Stock. The Board of Directors is authorized, subject to limitations prescribed by the California General Corporation Law, to provide for the issuance of shares of Preferred Stock in two series of 100 shares each and to determine the relative rights, preferences, and limitations of the shares of each series. Holders of Preferred Stock shall be entitled to receive such dividends as shall be lawfully declared by this corporation's board of directors. 4. Limitation of Liability. The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permitted under California law. - 1 - Exhibit B RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF PREFERRED STOCK Class A Preferred Stock and Class B Preferred Stock shall have the following relative rights, privileges and limitations: 1. Dividend Preference. No dividends shall be declared or paid on shares of Common Stock unless a dividend of at least the aggregate amount indicated below is declared and paid simultaneously on shares of Preferred Stock: Class of Stock Aggregate Dividend Class A Preferred Stock 33.3 percent of aggregate dividend declared and paid on Common Stock Class B Preferred Stock 66.7 percent of aggregate dividend declared and paid on Common Stock 2. Voting Rights. Except as otherwise required by the California General Corporation Law, the Preferred Stock shall not be entitled to vote on any matter submitted to a vote of the shareholders. 3. Liquidation Preference. In the event of any liquidation, dissolution or winding up of the corporation, whether voluntary or involuntary, including any sale of substantially all assets of the corporation, each holder of shares of Preferred Stock shall be entitled to receive cash or other value out of the assets of the corporation equal to the liquidation value of their shares. If the assets of the corporation are insufficient to pay such amount in full, then the corporation shall distribute all its assets, pro rata in proportion to the liquidation value to which the shares are entitled, to holders of the Preferred Stock. 4. Liquidation Value. (a) Class A Preferred Stock. The liquidation value of each share of Class A Preferred Stock shall be $22,000. (b) Class B Preferred Stock. The liquidation value of each share of Class B Preferred Stock shall be $35,000. - 1 - 5. Redemption at Corporation's Option. The corporation, at the option of the Board of Directors, may at any time redeem all or any part of the outstanding Preferred Stock by paying the redemption value for each share to be redeemed. In the case of a redemption of only a portion of the outstanding Preferred Stock, the corporation shall designate the shares to be redeemed. In the case of either a complete or partial redemption, at least 30 days prior written notice shall be given to the holders of record of the Preferred Stock to be redeemed, such notice to be addressed to each shareholder at the address appearing for that shareholder in the corporation's records or at the address given to the corporation by such shareholder for the purpose of notice. Such notice shall state the date fixed for redemption and the total value of shares to be redeemed and shall designate the place for surrender of such holder's certificate or certificates representing the shares to be redeemed. On or after the date fixed for redemption in such notice, the holder of each share of Preferred Stock called for redemption shall surrender the certificate evidencing such shares to the corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption value of the shares surrendered. If less than all the shares represented by any surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. 6. Mandatory Redemption of Class A Preferred Stock. If less than all the outstanding shares of Class A Preferred Stock have been redeemed at the corporation's option as of April 15, 2000, the corporation shall redeem any outstanding shares of Class A Preferred Stock by annual redemption of shares of Class A Preferred Stock with an aggregate value of $440,000, beginning with an initial redemption on April 15, 2000, and continuing annually until all outstanding shares of Class A Preferred Stock have been redeemed. Such redemption shall otherwise be made in accordance with the provisions of Section 5 above applicable to the redemption of shares of Preferred Stock at the corporation's option. 7. Redemption Value. (a) Class A Preferred Stock. The redemption value of each share of Class A Preferred Stock shall be its liquidation value, $22,000. (b) Class B Preferred Stock. The redemption value of each share of Class B Preferred Stock shall be $28,000 until April 15, 2002. After April 15, 2002, the redemption value for each share of Class B Preferred Stock shall be $31,500. 8. Effect. If the corporation deposits funds equal to the aggregate redemption value of the Preferred Stock to be redeemed into a separate bank - 2 - account solely for the benefit of holders of Preferred Stock to be redeemed and not subject to claims of other creditors, then the Preferred Stock called for redemption shall represent only the right to receive the redemption value on and after the date fixed for redemption. Otherwise, the holders of the Preferred Stock called for redemption shall continue to have all rights as shareholders of such shares until such shares are surrendered for redemption and the full redemption value has been paid. - 3 - EX-10.2 4 CREDIT AGMT., CONT. GUARANTY, AND SUBORD. AGMT. CREDIT AGREEMENT THIS AGREEMENT is entered into as of December 17, 1996, by and between ANDREW AND WILLIAMSON SALES, CO., a California corporation ("Borrower"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITAL Borrower has requested from Bank the credit accommodations described below (each, a "Credit" and collectively, the "Credits"), and Bank has agreed to provide the Credits to Borrower on the terms and conditions contained herein. NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Bank and Borrower hereby agree as follows: ARTICLE I THE CREDITS SECTION 1.1. LINE OF CREDIT. (a) Line of Credit. Subject to the terms and conditions of this Agreement, Bank hereby agrees to make advances to Borrower from time to time up to and including February 5, 1998, not to exceed at any time the aggregate principal amount of Six Million Five Hundred Thousand Dollars ($6,500,000.00) ("Line of Credit"), the proceeds of which shall be used to finance working capital. Borrower's obligation to repay advances under the Line of Credit shall be evidenced by a promissory note substantially in the form of Exhibit A attached hereto ("Line of Credit Note"), all terms of which are incorporated herein by this reference. (b) Limitation on Borrowings. Outstanding borrowings under the Line of Credit, to a maximum of the principal amount set forth above, shall not at any time exceed an aggregate of ninety percent (90%) of Borrower's eligible accounts receivable less grower payables, plus fifty percent (50%) of the value of Borrower's eligible inventory (exclusive of work in process and inventory which is obsolete, unsaleable or damaged), with inventory defined as processed fruit and produce and with value defined as the lower of cost or market value. All of the foregoing shall be determined by Bank upon receipt and review of all collateral reports required hereunder and such other documents and collateral information as Bank may from time to time require. Borrower acknowledges that said borrowing base was established by Bank with the understanding that, among other items, the aggregate of all returns, rebates, discounts, credits and allowances for the immediately preceding three (3) months at all times shall be less than five percent - 1 - (5%) of Borrower's gross sales for said period. If such dilution of Borrower's accounts for the immediately preceding three (3) months at any time exceeds five percent (5%) of Borrower's gross sales for said period, or if there at any time exists any other matters, events, conditions or contingencies which Bank reasonably believes may affect payment of any portion of Borrower's accounts, Bank, in its sole discretion, may reduce the foregoing advance rate against eligible accounts receivable to a percentage appropriate to reflect such additional dilution and/or establish additional reserves against Borrower's eligible accounts receivable. As used herein, "eligible accounts receivable" shall consist solely of trade accounts created in the ordinary course of Borrower's business, upon which Borrower's right to receive payment is absolute and not contingent upon the fulfillment of any condition whatsoever, and in which Bank has a perfected security interest of first priority, and shall not include: (i) any account which is past due more than twice Borrower's standard selling, except with respect to any account for which Borrower has provided extended payment terms not to exceed one hundred eighty (180) days, any such account which is more than thirty (30) days past due; (ii) that portion of any account for which there exists any right of setoff, defense or discount (except regular discounts allowed in the ordinary course of business to promote prompt payment) or for which any defense or counterclaim has been asserted; (iii) any account which represents an obligation of any state or municipal government or of the United States government or any political subdivision thereof (except accounts which represent obligations of the United States government and for which Bank's forms N-138 and N-139 have been duly executed and acknowledged); (iv) any account which represents an obligation of an account debtor located in a foreign country; (v) any account which arises from the sale or lease to or performance of services for, or represents an obligation of, an employee, affiliate, partner, member, parent or subsidiary of Borrower; (vi) that portion of any account which represents interim or progress billings or retention rights on the part of the account debtor; - 2 - (vii) any account which represents an obligation of any account debtor when twenty percent (20%) or more of Borrower's accounts from such account debtor are not eligible pursuant to (i) above; (viii) that portion of any account from an account debtor which represents the amount by which Borrower's total accounts from said account debtor exceeds twenty-five percent (25%) of Borrower's total accounts; (ix) any account deemed ineligible by Bank when Bank, in its sole discretion, deems the creditworthiness or financial condition of the account debtor, or the industry in which the account debtor is engaged, to be unsatisfactory. (c) Borrowing and Repayment. Borrower may from time to time during the term of the Line of Credit borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions contained herein or in the Line of Credit Note; provided however, that the total outstanding borrowings under the Line of Credit shall not at any time exceed the maximum principal amount available thereunder, as set forth above. SECTION 1.2. TERM LOAN. (a) Term Loan. Bank has made a loan to Borrower in the original principal amount of Two Hundred Fifty-three Thousand Five Hundred Dollars ($253,500.00) ("Term Loan"), on which the outstanding principal balance as of the date hereof is Two Hundred Two Thousand Eight Hundred Dollars ($202,800.00). Borrower's obligation to repay the Term Loan shall be evidenced by a promissory note substantially in the form of Exhibit B attached hereto ("Term Note"), all terms of which are incorporated herein by this reference. Any reference in the Term Note to any prior loan agreement between Bank and Borrower shall be deemed a reference to this Agreement. (b) Repayment. The principal amount of the Term Loan shall be repaid in accordance with the provisions of the Term Note. (c) Prepayment. Borrower may prepay principal on the Term Loan at any time, in any amount and without penalty. All prepayments of principal shall be applied on the most remote principal installment or installments then unpaid. SECTION 1.3. INTEREST/FEES. (a) Interest. The outstanding principal balances of the Line of Credit and the Term Loan (collectively, the "Credits") - 3 - shall bear interest at the rates of interest set forth in the Line of Credit Note and Term Note (collectively, the "Notes"). (b) Computation and Payment. Interest shall be computed on the basis of a 360-day year, actual days elapsed. Interest shall be payable at the times and place set forth in the Notes. SECTION 1.5. COLLECTION OF PAYMENTS. Borrower authorizes Bank to collect all principal, interest and fees due under each Credit by charging Borrower's demand deposit account number 4160- 085460 with Bank, or any other demand deposit account maintained by Borrower with Bank, for the full amount thereof. Should there be insufficient funds in any such demand deposit account to pay all such sums when due, the full amount of such deficiency shall be immediately due and payable by Borrower. SECTION 1.6. COLLATERAL. As security for all indebtedness of Borrower to Bank under the Line of Credit, Borrower hereby grants to Bank security interests of first priority in all Borrower's accounts receivables and other rights to payment, general intangibles, inventory and equipment. As security for all indebtedness of Borrower to Bank under the Term Loan Borrower hereby grants to Bank a lien of not less than first priority on that certain real property located at Traver, California, as more fully described on Exhibit D attached hereto, all terms of which are incorporated herein by this reference. All of the foregoing shall be evidenced by and subject to the terms of such security agreements, financing statements, deeds of trust and other documents as Bank shall reasonably require, all in form and substance satisfactory to Bank. Borrower shall reimburse Bank immediately upon demand for all costs and expenses incurred by Bank in connection with any of the foregoing security, including without limitation, filing and recording fees and costs of appraisals, audits and title insurance. SECTION 1.7. GUARANTIES. All indebtedness of Borrower to Bank shall be guaranteed by Epitope, Inc. ("Guarantor") in the principal amount of Six Million Seven Hundred Fifty-six Thousand Eight Hundred Dollars ($6,756,800.00), as evidenced by and subject to the terms of guaranties in form and substance satisfactory to Bank. SECTION 1.8. SUBORDINATION OF DEBT. All obligations of Borrower to Epitope, Inc. shall be subordinated in right of repayment to all obligations of Borrower to Bank, as evidenced by and subject to the terms of subordination agreements in form and substance satisfactory to Bank. - 4 - ARTICLE II REPRESENTATIONS AND WARRANTIES Borrower makes the following representations and warranties to Bank, which representations and warranties shall survive the execution of this Agreement and shall continue in full force and effect until the full and final payment, and satisfaction and discharge, of all obligations of Borrower to Bank subject to this Agreement. SECTION 2.1. LEGAL STATUS. Borrower is a corporation, duly organized and existing and in good standing under the laws of the state of California, and is qualified or licensed to do business (and is in good standing as a foreign corporation, if applicable) in all jurisdictions in which such qualification or licensing is required or in which the failure to so qualify or to be so licensed could have a material adverse effect on Borrower. SECTION 2.2. AUTHORIZATION AND VALIDITY. This Agreement, the Notes, and each other document, contract and instrument required hereby or at any time hereafter delivered to Bank in connection herewith (collectively, the "Loan Documents") have been duly authorized, and upon their execution and delivery in accordance with the provisions hereof will constitute legal, valid and binding agreements and obligations of Borrower or the party which executes the same, enforceable in accordance with their respective terms. SECTION 2.3. NO VIOLATION. The execution, delivery and performance by Borrower of each of the Loan Documents do not violate any provision of any law or regulation, or contravene any provision of the Articles of Incorporation or By-Laws of Borrower, or result in any breach of or default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound. SECTION 2.4. LITIGATION. There are no pending, or to the best of Borrower's knowledge threatened, actions, claims, investigations, suits or proceedings by or before any governmental authority, arbitrator, court or administrative agency which could have a material adverse effect on the financial condition or operation of Borrower other than those disclosed by Borrower to Bank in writing prior to the date hereof. SECTION 2.5. CORRECTNESS OF FINANCIAL STATEMENT. The financial statement of Borrower dated September 30, 1996, a true copy of which has been delivered by Borrower to Bank prior to the date hereof, (a) is complete and correct and presents fairly the financial condition of Borrower, (b) discloses all liabilities of Borrower that are required to be reflected or reserved against under generally accepted accounting principles, whether liquidated or unliquidated, fixed or contingent, and (c) has been - 5 - prepared in accordance with generally accepted accounting principles consistently applied. Since the date of such financial statement there has been no material adverse change in the financial condition of Borrower, nor has Borrower mortgaged, pledged, granted a security interest in or otherwise encumbered any of its assets or properties except in favor of Bank or as otherwise permitted by Bank in writing. SECTION 2.6. INCOME TAX RETURNS. Borrower has no knowledge of any pending assessments or adjustments of its income tax payable with respect to any year. SECTION 2.7. NO SUBORDINATION. There is no agreement, indenture, contract or instrument to which Borrower is a party or by which Borrower may be bound that requires the subordination in right of payment of any of Borrower's obligations subject to this Agreement to any other obligation of Borrower. SECTION 2.8. PERMITS, FRANCHISES. Borrower possesses, and will hereafter possess, all permits, consents, approvals, franchises and licenses required and rights to all trademarks, trade names, patents, and fictitious names, if any, necessary to enable it to conduct the business in which it is now engaged in compliance with applicable law. SECTION 2.9. ERISA. Borrower is in compliance in all material respects with all applicable provisions of the Employee Retirement Income Security Act of 1974, as amended or recodified from time to time ("ERISA"); Borrower has not violated any provision of any defined employee pension benefit plan (as defined in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no Reportable Event as defined in ERISA has occurred and is continuing with respect to any Plan initiated by Borrower; Borrower has met its minimum funding requirements under ERISA with respect to each Plan; and each Plan will be able to fulfill its benefit obligations as they come due in accordance with the Plan documents and under generally accepted accounting principles. SECTION 2.10. OTHER OBLIGATIONS. Borrower is not in default on any obligation for borrowed money, any purchase money obligation or any other material lease, commitment, contract, instrument or obligation. SECTION 2.11. ENVIRONMENTAL MATTERS. Except as disclosed by Borrower to Bank in writing prior to the date hereof, Borrower is in compliance in all material respects with all applicable federal or state environmental, hazardous waste, health and safety statutes, and any rules or regulations adopted pursuant thereto, which govern or affect any of Borrower's operations and/or properties, including without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Superfund Amendments and Reauthorization Act of - 6 - 1986, the Federal Resource Conservation and Recovery Act of 1976, and the Federal Toxic Substances Control Act, as any of the same may be amended, modified or supplemented from time to time. None of the operations of Borrower is the subject of any federal or state investigation evaluating whether any remedial action involving a material expenditure is needed to respond to a release of any toxic or hazardous waste or substance into the environment. Borrower has no material contingent liability in connection with any release of any toxic or hazardous waste or substance into the environment. SECTION 2.12. REAL PROPERTY COLLATERAL. Except as disclosed by Borrower to Bank in writing prior to the date hereof, with respect to any real property collateral required hereby: (a) All taxes, governmental assessments, insurance premiums, and water, sewer and municipal charges, and rents (if any) which previously became due and owing in respect thereof have been paid as of the date hereof. (b) There are no mechanics' or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under law could give rise to any such lien) which affect all or any interest in any such real property and which are or may be prior to or equal to the lien thereon in favor of Bank. (c) None of the improvements which were included for purpose of determining the appraised value of any such real property lies outside of the boundaries and/or building restriction lines thereof, and no improvements on adjoining properties materially encroach upon any such real property. (d) There is no pending, or to the best of Borrower's knowledge threatened, proceeding for the total or partial condemnation of all or any portion of any such real property, and all such real property is in good repair and free and clear of any damage that would materially and adversely affect the value thereof as security and/or the intended use thereof. ARTICLE III CONDITIONS SECTION 3.1. CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Bank to grant any of the Credits is subject to - 7 - the fulfillment to Bank's satisfaction of all of the following conditions: (a) Approval of Bank Counsel. All legal matters incidental to the granting of each of the Credits shall be satisfactory to Bank's counsel. (b) Documentation. Bank shall have received, in form and substance satisfactory to Bank, each of the following, duly executed: (i) This Agreement and the Notes. (ii) Articles of Incorporation (Borrower and Guarantor). (iii) Continuing Guaranty. (iv) Subordination Agreement. (v) Security Agreement: Equipment and Fixtures. (vi) Security Agreement: Crops. (vii) Continuing Security Agreement: Rights to Payment and Inventory. (viii) Deed of Trust. (ix) UCC Financing Statements. (x) Such other documents as Bank may require under any other Section of this Agreement. (c) Financial Condition. There shall have been no material adverse change, as determined by Bank, in the financial condition or business of Borrower or any guarantor hereunder, nor any material decline, as determined by Bank, in the market value of any collateral required hereunder or a substantial or material portion of the assets of Borrower or any such guarantor. (d) Insurance. Borrower shall have delivered to Bank evidence of insurance coverage on all Borrower's property, in form, substance, amounts, covering risks and issued by companies satisfactory to Bank, and where required by Bank, with loss payable endorsements in favor of Bank, including without limitation, policies of fire and extended coverage insurance covering all real property collateral required hereby, with replacement cost and mortgagee loss payable endorsements, and such policies of insurance against specific hazards affecting any such real property as may be required by governmental regulation or Bank. (e) Appraisals. Bank shall have obtained, at Borrower's cost, an appraisal of all real property collateral required hereby, and all improvements thereon, issued by an appraiser acceptable to Bank and in form, substance and reflecting values satisfactory to Bank, in its discretion. (f) Title Insurance. Bank shall have received an ALTA Policy of Title Insurance, with such endorsements as Bank - 8 - may require, including without limitation, CLTA endorsements issued by a company and in form and substance satisfactory to Bank, in such amount as Bank shall require, insuring Bank's lien on the real property collateral required hereby to be of first priority, subject only to such exceptions as Bank shall approve in its discretion, with all costs thereof to be paid by Borrower. (g) Tax Service Contract. Borrower shall have procured and delivered to Bank, at Borrower's cost, such tax service contract as Bank shall require for any real property collateral required hereby, to remain in effect as long as such real property secures any obligations of Borrower to Bank as required hereby. SECTION 3.2. CONDITIONS OF EACH EXTENSION OF CREDIT. The obligation of Bank to make each extension of credit requested by Borrower hereunder shall be subject to the fulfillment to Bank's satisfaction of each of the following conditions: (a) Compliance. The representations and warranties contained herein and in each of the other Loan Documents shall be true on and as of the date of the signing of this Agreement and on the date of each extension of credit by Bank pursuant hereto, with the same effect as though such representations and warranties had been made on and as of each such date, and on each such date, no Event of Default as defined herein, and no condition, event or act which with the giving of notice or the passage of time or both would constitute such an Event of Default, shall have occurred and be continuing or shall exist. (b) Documentation. Bank shall have received all additional documents which may be required in connection with such extension of credit. ARTICLE IV AFFIRMATIVE COVENANTS Borrower covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower shall, unless Bank otherwise consents in writing: SECTION 4.1. PUNCTUAL PAYMENTS. Punctually pay all principal, interest, fees or other liabilities due under any of the Loan Documents at the times and place and in the manner specified therein, and immediately upon demand by Bank, the amount by which the outstanding principal balance of any of the - 9 - Credits at any time exceeds any limitation on borrowings applicable thereto. SECTION 4.2. ACCOUNTING RECORDS. Maintain adequate books and records in accordance with generally accepted accounting principles consistently applied, and permit any representative of Bank, at any reasonable time, to inspect, audit and examine such books and records, to make copies of the same, and to inspect the properties of Borrower. SECTION 4.3. FINANCIAL STATEMENTS. Provide to Bank all of the following, in form and detail satisfactory to Bank: (a) not later than 90 days after and as of the end of each fiscal year, an audited financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement, statement of cash flow and all footnotes; (b) not later than 45 days after and as of the end of each fiscal quarter, a financial statement of Borrower, prepared by Borrower, to include balance sheet and income statement; (c) not later than 15 days after and as of the end of each month, a borrowing base certificate, an inventory collateral report, an aged listing of accounts receivable and accounts payable and grower accounts payable; (d) not later than 90 days after and as of the end of each fiscal year, an audited financial statement of Guarantor, prepared by a certified public accountant acceptable to Bank, to include balance sheet, income statement, statement of cash flow and all footnotes; (e) not later than 45 days after and as of the end of each fiscal quarter, a financial statement of Guarantor, prepared by Guarantor, to include balance sheet and income statement; (f) from time to time such other information as Bank may reasonably request, including without limitation, copies of rent rolls and other information with respect to any real property collateral required hereby. SECTION 4.4. COMPLIANCE. Preserve and maintain all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of its business; and comply with the provisions of all documents pursuant to which Borrower is organized and/or which govern Borrower's continued existence and with the requirements of all laws, rules, regulations and orders of any governmental authority applicable to Borrower and/or its business. - 10 - SECTION 4.5. INSURANCE. Maintain and keep in force insurance of the types and in amounts customarily carried in lines of business similar to that of Borrower, including but not limited to fire, extended coverage, public liability, flood, property damage and workers' compensation, with all such insurance carried with companies and in amounts satisfactory to Bank, and deliver to Bank from time to time at Bank's request schedules setting forth all insurance then in effect. SECTION 4.6. FACILITIES. Keep all properties useful or necessary to Borrower's business in good repair and condition, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained. SECTION 4.7. TAXES AND OTHER LIABILITIES. Pay and discharge when due any and all indebtedness, obligations, assessments and taxes, both real or personal, including without limitation federal and state income taxes and state and local property taxes and assessments, except such (a) as Borrower may in good faith contest or as to which a bona fide dispute may arise, and (b) for which Borrower has made provision, to Bank's satisfaction, for eventual payment thereof in the event Borrower is obligated to make such payment. SECTION 4.8. LITIGATION. Promptly give notice in writing to Bank of any litigation pending or threatened against Borrower with a claim in excess of $250,000.00. SECTION 4.9. FINANCIAL CONDITION. Maintain Borrower's financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices (except to the extent modified by the definitions herein): (a) Working Capital not at any time less than $1,500,000.00, with "Working Capital" defined as total current assets minus total current liabilities. (b) Tangible Net Worth not at any time less than $2,600,000.00, with "Tangible Net Worth" defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets. (c) Total Liabilities divided by Tangible Net Worth not at any time greater than 3.5 to 1.0, with "Total Liabilities" defined as the aggregate of current liabilities and non-current liabilities less subordinated debt, and with "Tangible Net Worth" as defined above. (d) Net income after taxes not less than $1.00 on an annual basis, determined as of each fiscal year end. - 11 - SECTION 4.10. NOTICE TO BANK. Promptly (but in no event more than five (5) days after the occurrence of each such event or matter) give written notice to Bank in reasonable detail of: (a) the occurrence of any Event of Default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute an Event of Default; (b) any change in the name or the organizational structure of Borrower; (c) the occurrence and nature of any Reportable Event or Prohibited Transaction, each as defined in ERISA, or any funding deficiency with respect to any Plan; or (d) any termination or cancellation of any insurance policy which Borrower is required to maintain, or any uninsured or partially uninsured loss through liability or property damage, or through fire, theft or any other cause affecting Borrower's property. ARTICLE V NEGATIVE COVENANTS Borrower further covenants that so long as Bank remains committed to extend credit to Borrower pursuant hereto, or any liabilities (whether direct or contingent, liquidated or unliquidated) of Borrower to Bank under any of the Loan Documents remain outstanding, and until payment in full of all obligations of Borrower subject hereto, Borrower will not without Bank's prior written consent: SECTION 5.1. USE OF FUNDS. Use any of the proceeds of any of the Credits except for the purposes stated in Article I hereof. SECTION 5.2. CAPITAL EXPENDITURES. Make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $150,000.00. SECTION 5.3. OTHER INDEBTEDNESS. Create, incur, assume or permit to exist any indebtedness or liabilities resulting from borrowings, loans or advances, whether secured or unsecured, matured or unmatured, liquidated or unliquidated, joint or several, except (a) the liabilities of Borrower to Bank, and (b) any other liabilities of Borrower existing as of, and disclosed to Bank prior to, the date hereof. SECTION 5.4. MERGER, CONSOLIDATION, TRANSFER OF ASSETS. Merge into or consolidate with any other entity; make any substantial change in the nature of Borrower's business as conducted as of the date hereof; acquire all or substantially all of the assets of any other entity; nor sell, lease, transfer or otherwise dispose of all or a substantial or material portion of Borrower's assets except in the ordinary course of its business. SECTION 5.6. GUARANTIES. Guarantee or become liable in any way as surety, endorser (other than as endorser of negotiable - 12 - instruments for deposit or collection in the ordinary course of business), accommodation endorser or otherwise for, nor pledge or hypothecate any assets of Borrower as security for, any liabilities or obligations of any other person or entity, except any of the foregoing in favor of Bank. ARTICLE VI EVENTS OF DEFAULT SECTION 6.1. The occurrence of any of the following shall constitute an "Event of Default" under this Agreement: (a) Borrower shall fail to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents; provided, however, that no Event of Default shall be deemed to have occurred under this subsection (a) unless (i) Bank sends written notice to Borrower and to Epitope, Inc. of such failure to pay and (ii) Borrower and/or Epitope, Inc. fail to pay such amount within five (5) Business Days of the date Bank sends such notice. As used herein, "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. (b) Any financial statement or certificate furnished to Bank in connection with, or any representation or warranty made by Borrower or any other party under this Agreement or any other Loan Document shall prove to be incorrect, false or misleading in any material respect when furnished or made. (c) Any default in the performance of or compliance with any obligation, agreement or other provision contained herein or in any other Loan Document (other than those referred to in subsections (a) and (b) above), and with respect to any such default which by its nature can be cured, such default shall continue for a period of thirty (30) days from its occurrence. (d) Any default in the payment or performance of any obligation, or any defined event of default, under the terms of any contract or instrument (other than any of the Loan Documents) pursuant to which Borrower or any guarantor hereunder has incurred any debt or other liability to any person or entity, including Bank; provided, however, that in the case of a default or defined event of default under the terms of indebtedness to a person or entity other than Bank, such indebtedness is in excess of $100,000.00 individually or in the aggregate for all such defaults by Borrower or any guarantor hereunder combined. - 13 - (e) The filing of a notice of judgment lien against Borrower or any guarantor hereunder; or the recording of any abstract of judgment against Borrower or any guarantor hereunder in any county in which Borrower or such guarantor has an interest in real property; or the service of a notice of levy and/or of a writ of attachment or execution, or other like process, against the assets of Borrower or any guarantor hereunder; or the entry of a judgment against Borrower or any guarantor hereunder. (f) Borrower or any guarantor hereunder shall become insolvent, or shall suffer or consent to or apply for the appointment of a receiver, trustee, custodian or liquidator of itself or any of its property, or shall generally fail to pay its debts as they become due, or shall make a general assignment for the benefit of creditors; Borrower or any guarantor hereunder shall file a voluntary petition in bankruptcy, or seeking reorganization, in order to effect a plan or other arrangement with creditors or any other relief under the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time ("Bankruptcy Code"), or under any state or federal law granting relief to debtors, whether now or hereafter in effect; or any involuntary petition or proceeding pursuant to the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors is filed or commenced against Borrower or any guarantor hereunder, or Borrower or any such shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition; or Borrower or any such guarantor shall be adjudicated a bankrupt, or an order for relief shall be entered against Borrower or any such guarantor by any court of competent jurisdiction under the Bankruptcy Code or any other applicable state or federal law relating to bankruptcy, reorganization or other relief for debtors. (g) The dissolution or liquidation of Borrower or any guarantor hereunder; or Borrower or any such guarantor, or any of its their directors, stockholders or members, shall take action seeking to effect the dissolution or liquidation of Borrower or such guarantor. (h) The sale, transfer, hypothecation, assignment or encumbrance, whether voluntary, involuntary or by operation of law, without Bank's prior written consent, of all or any part of or interest in any real property collateral required hereby. (i) The failure of Guarantor to maintain Tangible Net Worth at all times greater than or equal to $20,000,000.00, with "Tangible Net Worth" defined as the - 14 - aggregate of total stockholders' equity plus subordinated debt less any intangible assets. SECTION 6.2. REMEDIES. Upon the occurrence of any Event of Default: (a) all indebtedness of Borrower under each of the Loan Documents, any term thereof to the contrary notwithstanding, shall at Bank's option and without notice become immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are hereby expressly waived by each Borrower; (b) the obligation, if any, of Bank to extend any further credit under any of the Loan Documents shall immediately cease and terminate; and (c) Bank shall have all rights, powers and remedies available under each of the Loan Documents, or accorded by law, including without limitation the right to resort to any or all security for any of the Credits and to exercise any or all of the rights of a beneficiary or secured party pursuant to applicable law. All rights, powers and remedies of Bank may be exercised at any time by Bank and from time to time after the occurrence of an Event of Default, are cumulative and not exclusive, and shall be in addition to any other rights, powers or remedies provided by law or equity. Notwithstanding anything to the contrary contained herein, if Borrower fails to pay when due any principal, interest, fees or other amounts payable under any of the Loan Documents, Bank shall have no obligation to extend any further credit under any of the Loan Documents unless and until such amount is paid within the five (5) Business-Day period specified in Section 6.1 (a) above. ARTICLE VII MISCELLANEOUS SECTION 7.1. NO WAIVER. No delay, failure or discontinuance of Bank in exercising any right, power or remedy under any of the Loan Documents shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of or default under any of the Loan Documents must be in writing and shall be effective only to the extent set forth in such writing. SECTION 7.2. NOTICES. All notices, requests and demands which any party is required or may desire to give to any other party under any provision of this Agreement must be in writing delivered to each party at the following address: BORROWER: ANDREW AND WILLIAMSON, SALES CO. 9940 Marconi Drive San Diego, CA 92173 with copies of any notices of payment defaults to - 15 - EPITOPE, INC. 8505 S.W. Creekside Place Beaverton, Oregon 97008 BANK: WELLS FARGO BANK, NATIONAL ASSOCIATION Bakersfield Regional Commercial Banking Office 5401 California Avenue, 2nd Floor Bakersfield, CA 93309 or to such other address as any party may designate by written notice to all other parties. Each such notice, request and demand shall be deemed given or made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by mail, upon the earlier of the date of receipt or three (3) days after deposit in the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy, upon receipt. SECTION 7.3. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with (a) the negotiation and preparation of this Agreement and the other Loan Documents, Bank's continued administration hereof and thereof, and the preparation of any amendments and waivers hereto and thereto, (b) the enforcement of Bank's rights and/or the collection of any amounts which become due to Bank under any of the Loan Documents, and (c) the prosecution or defense of any action in any way related to any of the Loan Documents, including without limitation, any action for declaratory relief, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to any Borrower or any other person or entity. SECTION 7.4. SUCCESSORS, ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Borrower may not assign or transfer its interest hereunder without Bank's prior written consent. Bank reserves the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, Bank's rights and benefits under each of the Loan Documents. In connection therewith, Bank may disclose all documents and information which Bank now has or may hereafter acquire relating to any of the Credits, Borrower or its business, any guarantor hereunder or the business of such guarantor, or any collateral required hereunder. Prior to disclosing any confidential information relating to Borrower or any guarantor hereunder, Bank shall use its best efforts to cause the proposed - 16 - purchaser, assignee or participant to enter into a confidentiality agreement relating to such confidential information. SECTION 7.5. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the other Loan Documents constitute the entire agreement between Borrower and Bank with respect to the Credits and supersede all prior negotiations, communications, discussions and correspondence concerning the subject matter hereof. This Agreement may be amended or modified only in writing signed by each party hereto. If Borrower requests an amendment or modification to this Agreement or to any of the other Loan Documents, Bank shall consider such request in good faith and in a reasonable period of time. SECTION 7.6. NO THIRD PARTY BENEFICIARIES. This Agreement is made and entered into for the sole protection and benefit of the parties hereto and their respective permitted successors and assigns, and no other person or entity shall be a third party beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any other of the Loan Documents to which it is not a party. SECTION 7.7. TIME. Time is of the essence of each and every provision of this Agreement and each other of the Loan Documents. SECTION 7.8. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity without invalidating the remainder of such provision or any remaining provisions of this Agreement. SECTION 7.9. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when executed and delivered shall be deemed to be an original, and all of which when taken together shall constitute one and the same Agreement. SECTION 7.10. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. SECTION 7.11. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, any of the Loan Documents, or any past, present or future extensions of credit - 17 - and other activities, transactions or obligations of any kind related directly or indirectly to any of the Loan Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Loan Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AA") or such other administrator as the parties shall mutually agree upon in accordance with the AA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Loan Documents. The arbitration shall be conducted at a location in California selected by the AA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive laws applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of - 18 - the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to - 19 - arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Loan Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Loan Documents or any relationship between the parties. - 20 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first written above. WELLS FARGO BANK, ANDREW AND WILLIAMSON SALES, CO. NATIONAL ASSOCIATION By: /s/ Fred L. Williamson By: /s/ Steven M. Del Papa Title: President/Chief Steven M. Del Papa Executive Officer Vice President - 21 - Acknowledged by the undersigned ("Guarantor"), which specifically acknowledges that the failure of Guarantor to maintain Tangible Net Worth (defined as the aggregate of total stockholders' equity plus subordinated debt less any intangible assets) at all times greater than or equal to $20,000,000.00 shall constitute an "Event of Default" under the foregoing Credit Agreement. EPITOPE, INC. By: /s/ Gilbert N. Miller Gilbert N. Miller Executive Vice President/ Chief Financial Officer - 22 - Exhibit A REVOLVING LINE OF CREDIT NOTE $6,500,000.00 Bakersfield, California December 17, 1996 FOR VALUE RECEIVED, the undersigned ANDREW AND WILLIAMSON SALES, CO. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at Bakersfield RCBO, 5401 California Avenue, 2nd Floor, Bakersfield, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Six Million Five Hundred Thousand Dollars ($6,500,000.00), or so much thereof as may be advanced and be outstanding, with interest thereon, to be computed on each advance from the date of its disbursement (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate per annum equal to the Prime Rate in effect from time to time, or (ii) at a fixed rate per annum determined by Bank to be two and one-half percent (2.50%) above Bank's LIBOR in effect on the first day of the applicable Fixed Rate Term. When interest is determined in relation to the Prime Rate, each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within Bank. With respect to each LIBOR option selected hereunder, Bank is hereby authorized to note the date, principal amount, interest rate and Fixed Rate Term applicable thereto and any payments made thereon on Bank's books and records (either manually or by electronic entry) and/or on any schedule attached to this Note, which notations shall be prima facie evidence of the accuracy of the information noted. A. DEFINITIONS: As used herein, the following terms shall have the meanings set forth after each: 1. "Business Day" means any day except a Saturday, Sunday or any other day designated as a holiday under Federal or California statute or regulation. 2. "Fixed Rate Term" means a period commencing on a Business Day and continuing for one (1), two (2), three (3), six (6) or twelve (12) months, as designated by Borrower, during which all or a portion of the outstanding principal balance of this Note bears interest determined in relation to Bank's LIBOR; provided however, that no Fixed Rate Term may be selected for a principal amount less than Two Hundred Fifty Thousand Dollars ($250,000.00); and provided further, that no Fixed Rate Term shall extend beyond the scheduled maturity date hereof. If any - 23 - Fixed Rate Term would end on a day which is not a Business Day, then such Fixed Rate Term shall be extended to the next succeeding Business Day. 3. "LIBOR" means the rate per annum (rounded upward, if necessary, to the nearest whole 1/8 of 1%) and determined pursuant to the following formula: LIBOR = Base LIBOR 100% - LIBOR Reserve Percentage (a) "Base LIBOR" means the rate per annum for United States dollar deposits quoted by Bank as the Inter-Bank Market Offered Rate, with the understanding that such rate is quoted by Bank for the purpose of calculating effective rates of interest for loans making reference thereto, on the first day of a Fixed Rate Term for delivery of funds on said date for a period of time approximately equal to the number of days in such Fixed Rate Term and in an amount approximately equal to the principal amount to which such Fixed Rate Term applies. Borrower understands and agrees that Bank may base its quotation of the Inter-Bank Market Offered Rate upon such offers or other market indicators of the Inter-Bank Market as Bank in its discretion deems appropriate including, but not limited to, the rate offered for U.S. dollar deposits on the London Inter-Bank Market. (b) "LIBOR Reserve Percentage" means the reserve percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor) for "Eurocurrency Liabilities" (as defined in Regulation D of the Federal Reserve Board, as amended), adjusted by Bank for expected changes in such reserve percentage during the applicable Fixed Rate Term. 4. "Prime Rate" means at any time the rate of interest most recently announced within Bank at its principal office in San Francisco as its Prime Rate, with the understanding that the Prime Rate is one of Bank's base rates and serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto, and is evidenced by the recording thereof after its announcement in such internal publication or publications as Bank may designate. B. INTEREST: 1. Payment of Interest. Interest accrued on this Note shall be payable on the fifth day of each month, commencing January 5, 1997. 2. Selection of Interest Rate Options. At any time any portion of this Note bears interest determined in relation to Bank's LIBOR, it may be continued by Borrower at the end of the Fixed Rate Term applicable thereto so that all or a portion thereof bears interest determined in relation to the Prime Rate - 24 - or in relation to Bank's LIBOR for a new Fixed Rate Term designated by Borrower. At any time any portion of this Note bears interest determined in relation to the Prime Rate, Borrower may convert all or a portion thereof so that it bears interest determined in relation to Bank's LIBOR for a Fixed Rate Term designated by Borrower. At the time each advance is requested hereunder or Borrower wishes to select the LIBOR option for all or a portion of the outstanding principal balance hereof, and at the end of each Fixed Rate Term, Borrower shall give Bank notice specifying (a) the interest rate option selected by Borrower, (b) the principal amount subject thereto, and (c) if the LIBOR option is selected, the length of the applicable Fixed Rate Term. Any such notice may be given by telephone so long as, with respect to each LIBOR selection, (i) Bank receives written confirmation from Borrower not later than three (3) Business Days after such telephone notice is given, and (ii) such notice is given to Bank prior to 10:00 a.m., California time, on the first day of the Fixed Rate Term. For each LIBOR option requested hereunder, Bank will quote the applicable fixed rate to Borrower at approximately 10:00 a.m., California time, on the first day of the Fixed Rate Term. If Borrower does not immediately accept the rate quoted by Bank, any subsequent acceptance by Borrower shall be subject to a redetermination by Bank of the applicable fixed rate; provided however, that if Borrower fails to accept any such rate by 11:00 a.m., California time, on the Business Day such quotation is given, then the quoted rate shall expire and Bank shall have no obligation to permit a LIBOR option to be selected on such day. If no specific designation of interest is made at the time any advance is requested hereunder or at the end of any Fixed Rate Term, Borrower shall be deemed to have made a Prime Rate interest selection for such advance or the principal amount to which such Fixed Rate Term applied. 3. Additional LIBOR Provisions. (a) If Bank at any time shall determine that for any reason adequate and reasonable means do not exist for ascertaining Bank's LIBOR, then Bank shall promptly give notice thereof to Borrower. If such notice is given and until such notice has been withdrawn by Bank, than (i) no new LIBOR option may be selected by Borrower, and (ii) any portion of the outstanding principal balance hereof which bears interest determined in relation to Bank's LIBOR, subsequent to the end of the Fixed Rate Term applicable thereto, shall bear interest determined in relation to the Prime Rate. (b) If any law, treaty, rule, regulation or determination of a court or governmental authority or any change therein or in the interpretation or application thereof (each, a "Change in Law") shall make it unlawful for Bank (i) to make LIBOR options available hereunder, or (ii) to maintain interest rates based on Bank's LIBOR, then in the former event, any obligation of Bank to make available such unlawful LIBOR options shall immediately be - 25 - canceled, and in the latter event, any such unlawful LIBOR-based interest rates then outstanding shall be converted, at Bank's option, so that interest on the portion of the outstanding principal balance subject thereto is determined in relation to the Prime Rate; provided however, that if any such Change in Law shall permit any LIBOR-based interest rates to remain in effect until the expiration of the Fixed Rate Term applicable thereto, then such permitted LIBOR-based interest rates shall continue in effect until the expiration of such Fixed Rate Term. Upon the occurrence of any of the foregoing events, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any fines, fees, charges, penalties or other costs incurred or payable by Bank as a result thereof and which are attributable to any LIBOR options made available to Borrower hereunder, and any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. (c) If any Change in Law or compliance by Bank with any request or directive (whether or not having the force of law) from any central bank or other governmental authority shall: (i) subject Bank to any tax, duty or other charge with respect to any LIBOR options, or change the basis of taxation of payments to Bank of principal, interest, fees or any other amount payable hereunder (except for changes in the rate of tax on the overall net income of Bank); or (ii) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances or loans by, or any other acquisition of funds by any office of Bank; or (iii) impose on Bank any other condition; and the result of any of the foregoing is to increase the cost to Bank of making, renewing or maintaining any LIBOR options hereunder and/or to reduce any amount receivable by Bank in connection therewith, then in any such case, Borrower shall pay to Bank immediately upon demand such amounts as may be necessary to compensate Bank for any additional costs incurred by Bank and/or reductions in amounts received by Bank which are attributable to such LIBOR options. In determining which costs incurred by Bank and/or reductions in amounts received by Bank are attributable to any LIBOR options made available to Borrower hereunder, any reasonable allocation made by Bank among its operations shall be conclusive and binding upon Borrower. 4. Default Interest. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the - 26 - outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. C. BORROWING AND REPAYMENT: 1. Borrowing and Repayment. Borrower may from time to time during the term of this Note borrow, partially or wholly repay its outstanding borrowings, and reborrow, subject to all of the limitations, terms and conditions of this Note and of any document executed in connection with or governing this Note; provided however, that the total outstanding borrowings under this Note shall not at any time exceed the principal amount stated above. The unpaid principal balance of this obligation at any time shall be the total amounts advanced hereunder by the holder hereof less the amount of principal payments made hereon by or for any Borrower, which balance may be endorsed hereon from time to time by the holder. The outstanding principal balance of this Note shall be due and payable in full on February 5, 1998. 2. Advances. Advances hereunder, to the total amount of the principal sum stated above, may be made by the holder at the oral or written request of (a) Fred W. Andrew or Fred L. Williamson or Alma Chavez or Ira Gershow, any one acting alone, who are authorized to request advances and direct the disposition of any advances until written notice of the revocation of such authority is received by the holder at the office designated above, or (b) any person, with respect to advances deposited to the credit of any account of any Borrower with the holder, which advances, when so deposited, shall be conclusively presumed to have been made to or for the benefit of each Borrower regardless of the fact that persons other than those authorized to request advances may have authority to draw against such account. The holder shall have no obligation to determine whether any person requesting an advance is or has been authorized by any Borrower. 3. Application of Payments. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. All payments credited to principal shall be applied first, to the outstanding principal balance of this Note which bears interest determined in relation to the Prime Rate, if any, and second, to the outstanding principal balance of this Note which bears interest determined in relation to Bank's LIBOR, with such payments applied to the oldest Fixed Rate Term first. 4. Prepayment. (a) Prime Rate. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to the Prime Rate at any time, in any amount and without penalty. - 27 - (b) LIBOR. Borrower may prepay principal on any portion of this Note which bears interest determined in relation to Bank's LIBOR at any time and in the minimum amount of One Hundred Thousand Dollars ($100,000.00); provided however, that if the outstanding principal balance of such portion of this Note is less than said amount, the minimum prepayment amount shall be the entire outstanding principal balance thereof. In consideration of Bank providing this prepayment option to Borrower, or if any such portion of this Note shall become due and payable at any time prior to the last day of the Fixed Rate Term applicable thereto by acceleration or otherwise, Borrower shall pay to Bank immediately upon demand a fee which is the sum of the discounted monthly differences for each month from the month of prepayment through the month in which such Fixed Rate Term matures, calculated as follows for each such month: (i) Determine the amount of interest which would have accrued each month on the amount prepaid at the interest rate applicable to such amount had it remained outstanding until the last day of the Fixed Rate Term applicable thereto. (ii) Subtract from the amount determined in (i) above the amount of interest which would have accrued for the same month on the amount prepaid for the remaining term of such Fixed Rate Term at Bank's LIBOR in effect on the date of prepayment for new loans made for such term and in a principal amount equal to the amount prepaid. (iii) If the result obtained in (ii) for any month is greater than zero, discount that difference by Bank's LIBOR used in (ii) above. Each Borrower acknowledges that prepayment of such amount may result in Bank incurring additional costs, expenses and/or liabilities, and that it is difficult to ascertain the full extent of such costs, expenses and/or liabilities. Each Borrower, therefore, agrees to pay the above-described prepayment fee and agrees that said amount represents a reasonable estimate of the prepayment costs, expenses and/or liabilities of Bank. If Borrower fails to pay any prepayment fee when due, the amount of such prepayment fee shall thereafter bear interest until paid at a rate per annum four percent (4%) above the Prime Rate in effect from time to time (computed on the basis of a 360-day year, actual days elapsed). D. EVENTS OF DEFAULT: This Note is made pursuant to and is subject to the terms and conditions of that certain Credit Agreement between Borrower and Bank dated as of December 17, 1996, as amended from time to time (the "Credit Agreement"). Any default in the payment or performance of any obligation under this Note, or any defined - 28 - event of default under the Credit Agreement, shall constitute an "Event of Default" under this Note. E. MISCELLANEOUS: 1. Remedies. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower, and the obligation, if any, of the holder to extend any further credit hereunder shall immediately cease and terminate. Each Borrower shall pay to the holder immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any action in any way related to this Note, including without limitation, any action for declaratory relief, and including any of the foregoing incurred in connection with any bankruptcy proceeding relating to any Borrower. 2. Obligations Joint and Several. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. 3. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. ANDREW AND WILLIAMSON SALES, CO. By: ____________________________ Title: _______________________ - 29 - April 19, 1996 Andrew & Williamson Sales, Co. 9940 Marconi Dr. San Diego, CA 92173 Re: Your $253,500.00 credit accommodation evidenced by promissory note dated as of March 18, 1993 (the "Note") Dear Sirs: This letter is to advise you that, effective as of April 19, 1996, the variable rate of interest applicable to the above-described credit accommodation from Wells Fargo Bank, National Association ("Bank.) is hereby reduced to one-half percent (0.50%) above the Prime Rate in effect from time to time. The Note is hereby deemed modified by this letter to reflect said interest rate reduction. Except as expressly set forth herein, all terms and conditions of the Note remain in full force and effect, without waiver or modification. Sincerely, WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Mary R. Grider Mary R. Grider Vice President Acknowledged and agreed as of May 6, 1996: ANDREW & WILLIAMSON SALES, CO. By: /s/ Fred W. Andrew Title: Secretary - 30 - WELLS FARGO BANK PROMISSORY NOTE $253,500.00 Bakersfield, California March 18, 1993 FOR VALUE RECEIVED, the undersigned ANDREW AND WILLIAMSON SALES, CO. ("Borrower") promises to pay to the order of WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank") at its office at 5401 California Avenue, Bakersfield, California, or at such other place as the holder hereof may designate, in lawful money of the United States of America and in immediately available funds, the principal sum of Two Hundred Fifty-Three Thousand Five Hundred and No/100 Dollars ($253.500.00), with interest thereon at a rate per annum (computed on the basis of a 360-day year, actual days elapsed) 1.25% above the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that the Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. Each change in the rate of interest hereunder shall become effective on the date each Prime Rate change is announced within the Bank. Interest accrued on this Note shall be payable on the fifth day of each month, commencing April 5, 1993. Principal shall be payable in installments as follows: Principal shall be payable annually on the fifth day of each March in four (4) equal successive installments of Sixteen Thousand Nine Hundred and No/100 Dollars ($16,900.00) each, commencing March 5, 1994, and continuing up to and including March 5, 1997, with a final installment consisting of all remaining unpaid principal due and payable in full on March 5, 1998. Each payment made on this Note shall be credited first, to any interest then due and second, to the outstanding principal balance hereof. From and after the maturity date of this Note, or such earlier date as all principal owing hereunder becomes due and payable by acceleration or otherwise, the outstanding principal balance of this Note shall bear interest until paid in full at an increased rate per annum (computed on the basis of a 360-day year, actual days elapsed) equal to four percent (4%) above the rate of interest from time to time applicable to this Note. The occurrence of any of the following shall constitute an "Event of Default" under this Note: 1. The failure to pay any principal, interest, fees or other charges when due under this Note or any contract, instrument or document executed in connection with this Note. - 31 - 2. The filing of a petition by or against any Borrower, any guarantor of this Note or any general partner or joint venturer in any Borrower which is a partnership or a joint venture (with each such guarantor, general partner and/or joint venturer referred to herein as a "Third Party Obligor") under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, as amended or recodified from time to time, or under any similar or other law relating to bankruptcy, insolvency, reorganization or other relief for debtors; the appointment of a receiver, trustee, custodian or liquidator of or for any part of the assets or property of any Borrower or Third Party Obligor; any Borrower or Third Party Obligor becomes insolvent, makes a general assignment for the benefit of creditors or is generally not paying its debts as they become due; or any attachment or like levy on any property of any Borrower or Third Party Obligor. 3. The death or incapacity of any individual Borrower or Third Party Obligor, or the dissolution or liquidation of any Borrower or Third Party Obligor which is a corporation. partnership, joint venturer or any other type of entity. 4. Any default in the payment or performance of any obligation, or any defined event of default, under any provisions of any contract, instrument or document pursuant to which any Borrower or Third Party Obligor has incurred any obligation for borrowed money, any purchase obligation or any other liability of any kind to any person or entity, including the holder. 5. Any financial statement provided by any Borrower or Third Party Obligor to Bank proves false. 6. Any sale or transfer of all or a substantial or material part of the assets of any Borrower or Third Party Obligor other than in the ordinary course of business. 7. Any violation or breach of any provision of, or any defined event of default under, any addendum to this Note or any loan agreement, guaranty, security agreement, deed of trust or other document executed in connection with or securing this Note. Upon the occurrence of any Event of Default, the holder of this Note, at the holder's option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor, all of which are expressly waived by each Borrower. Each Borrower shall pay to the holder immediately upon demand the full amount of all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of the holder's in-house counsel), incurred by the holder in connection with the enforcement of the holder's rights and/or the collection of any amounts which become due to the holder under this Note, and the prosecution or defense of any - 32 - action in any way related to this Note, including without limitation, any action for declaratory relief. Should more than one person or entity sign this Note as a Borrower, the obligations of each such Borrower shall be joint and several. This Note shall be governed by and construed in accordance with the laws of the State of California, except to the extent Bank has greater rights or remedies under Federal law, whether as a national bank or otherwise, in which case such choice of California law shall not be deemed to deprive Bank of any such rights and remedies as may be available under Federal law. See Addendum to Promissory Note attached hereto, all terms of which are incorporated herein by this reference. ANDREW AND WILLIAMSON SALES, CO. This Note is secured by a Deed of Trust of even date herewith. By: /s/ Fred W. Andrew Fred W. Andrew, Secretary - 33 - ADDENDUM TO PROMISSORY NOTE THIS ADDENDUM is attached to and made a part of that certain promissory note executed by ANDREW AND WILLIAMSON SALES, CO. ("Borrower") and payable to WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), or order, dated as of March 18, 1993, in the principal amount of Two Hundred Fifty-Three Thousand Five Hundred Dollars ($253,500.00) (the "Note"). The following provisions are hereby incorporated into the Note: 1. So long as Bank remains committed to extend credit to Borrower under this Note and until payment in full of all obligations of Borrower hereunder, Borrower shall unless Bank otherwise consents in writing: (a) Provide to Bank all of the following, in form and detail satisfactory to Bank: (i) not later than 90 days after and as of the end of each fiscal year, a reviewed financial statement of Borrower, prepared by a certified public accountant acceptable to Bank, to include a balance sheet, income statement, statement of retained earnings, cash flow and accompanying footnotes; (ii) not later than 20 days after and as of the end of each quarter, a compiled financial statement of Borrower, prepared by Borrower, to include a balance sheet and income statement; (iii) not later than each May 15, a financial statement of each Guarantor, dated not more than 12 months after the date of the most recent financial statement received by Bank from each Guarantor, prepared by each Guarantor, to include a balance sheet, and within 30 days after filing, but in no event later than each May 15, a copy of each Guarantor's filed federal income tax return for such year; (iv) from time to time such other information as Bank may reasonably request. (b) Maintain its financial condition as follows using generally accepted accounting principles consistently applied and used consistently with prior practices, except to the extent modified by the following definitions: - 34 - (i) Working Capital (defined as total current assets, excluding prepaids, less total current liabilities) not at any time less than $450,000.00. (ii) Tangible Net Worth (defined as the aggregate of total stockholders' equity plus subordinated debt less the aggregate of any treasury stock, any intangible assets and any obligations due from stockholders, employees and/or affiliates) not at any time less than $1,100,000.00 on an annual basis, determined as of each fiscal year end. (iii) Cash Flow Coverage Ratio (defined as the aggregate of net income after taxes plus depreciation and other non-cash expenses, less gain on sale of assets, dividends, withdrawals and treasury stock purchases divided by the aggregate of the current portion of long-term debt) not less than 1.5 to 1.0 on an annual basis, determined as of each fiscal year end. (iv) not make any additional investment in fixed assets in any fiscal year in excess of an aggregate of $150,000.00. (v) not declare or pay any dividend or distribution either in cash, stock or any other property on Borrower's stock now or hereafter outstanding; nor redeem, retire, repurchase or otherwise acquire any shares of any class of Borrower's stock now or hereafter outstanding; provided however, that so long as Borrower maintains its valid election as an S corporation, Borrower may pay cash dividends or distributions to its shareholders in any fiscal year to cover its shareholders' federal income tax liability for the immediately preceding fiscal year arising as a direct result of Borrower's reported income for such fiscal year, but not to exceed the minimum amount so required, and Borrower shall provide to Bank, upon request, any documentation required by Bank to substantiate the appropriateness of amounts paid or to be paid. (vi) give notice in writing to Bank of any litigation pending or threatened against Borrower in excess of $50,000.00. 2. All obligations of Borrower to Fred L. Williamson and Fred W. Andrew shall be subordinated in right of repayment to all obligations of Borrower to Bank, up to an aggregate of $460,000.00, as evidenced by and subject to the terms of - 35 - subordination agreements in form and substance satisfactory to Bank. 3. Borrower shall pay to Bank a non-refundable commitment fee for the Note in the amount of $3,802.50, which commitment fee shall be due and payable in full upon execution of loan documents. IN WITNESS WHEREOF, this Addendum has been executed as of the same date as the Note. ANDREW AND WILLIAMSON SALES, CO. By: /s/ Fred W. Andrew Fred W. Andrew, Secretary - 36 - EXHIBIT C Exhibit A to Deed of Trust executed by ANDREW AND WILLIAMSON SALES, CO. as Trustor, to AMERICAN SECURITIES COMPANY, as Trustee, for the benefit of WELLS FARGO BANK, NATIONAL ASSOCIATION, as Beneficiary, dated as of March 18, 1993. DESCRIPTION OF PROPERTY The land referred to in this report is situated in the State of California, County of Tulare and is described as follows: The South half of the West half of the Norwest quarter and the East half of the Norwest quarter of the Norwest quarter, Section 22, Township 17 South, Range 23 East, Mount Diablo Base and Meridian, according to the official plat thereof. EXCEPTING from the North half of the Southwest quarter of the Norwest quarter all oil and mineral rights in and to said property as reserved from Dolly E. Edmiston to J. B. Bare, dated December 1, 1933, recorded December 8, 1933, in Book 533, Page 371, Official Records. - 37 - CONTINUING GUARANTY TO: WELLS FARGO BANK, NATIONAL ASSOCIATION 1. GUARANTY; DEFINITIONS. In consideration of any credit or other financial accommodation heretofore, now or hereafter extended or made to ANDREW & WILLIAMSON SALES CO., INC. ("Borrower") by WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"), and for other valuable consideration, the undersigned EPITOPE, INC. ("Guarantor"), jointly and severally unconditionally guarantees and promises to pay to Bank, or order, on demand in lawful money of the United States of America and in immediately available funds, any and all Indebtedness of Borrower to Bank. The term "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrower, heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrower may be liable individually or jointly with others, or whether recovery upon such Indebtedness may be or hereafter becomes unenforceable. 2. MAXIMUM LIABILITY; SUCCESSIVE TRANSACTIONS; REVOCATION; OBLIGATION UNDER OTHER GUARANTIES. The liability of Guarantor shall not exceed at any one time the sum of Six Million Seven Hundred Fifty-Six Thousand Eight Hundred Dollars ($6,756,800.00) for principal, plus all interest thereon and costs and expenses pertaining to the enforcement of this Guaranty and/or the collection of the Indebtedness of Borrower to Bank. Notwithstanding the foregoing, Bank may permit the Indebtedness of Borrower to exceed Guarantor's liability. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all past, present and future Indebtedness of Borrower to Bank, including that arising under successive transactions which shall either continue the Indebtedness, increase or decrease it, or from time to time create new Indebtedness after all or any prior Indebtedness has been satisfied, and notwithstanding the death, incapacity, dissolution, liquidation or bankruptcy of Borrower or Guarantor or any other event or proceeding affecting Borrower or Guarantor. This Guaranty shall not apply to any new Indebtedness created after actual receipt by Bank of written notice of its revocation as to such new Indebtedness; provided however, that loans or advances made by Bank to Borrower after revocation under commitments existing prior to receipt by Bank of such revocation, and extensions, renewals or modifications, of any kind, of Indebtedness incurred by Borrower or committed by Bank prior to receipt by Bank of such revocation, shall not be considered new Indebtedness. Any such notice must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its office at Bakersfield Regional Commercial Banking Office, 5401 California - 1 - Avenue, 2nd Floor, Bakersfield, California 93309, or at such other address as Bank shall from time to time designate. Any payment by Guarantor shall not reduce Guarantor's maximum obligation hereunder unless written notice to that effect is actually received by Bank at or prior to the time of such payment. The obligations of Guarantor hereunder shall be in addition to any obligations of Guarantor under any other guaranties of any liabilities or obligations of Borrower or any other person heretofore or hereafter given to Bank unless said other guaranties are expressly modified or revoked in writing; and this Guaranty shall not, unless expressly herein provided, affect or invalidate any such other guaranties. 3. OBLIGATIONS JOINT AND SEVERAL; SEPARATE ACTIONS; WAIVER OF STATUTE OF LIMITATIONS; REINSTATEMENT OF LIABILITY. The obligations hereunder are joint and several and independent of the obligations of Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether action is brought against Borrower or any other person, or whether Borrower or any other person is joined in any such action or actions. Guarantor acknowledges that this Guaranty is absolute and unconditional, there are no conditions precedent to the effectiveness of this Guaranty, and this Guaranty is in full force and effect and is binding on Guarantor as of the date written below, regardless of whether Bank obtains collateral or any guaranties from others or takes any other action contemplated by Guarantor. Guarantor waives the benefit of any statute of limitations affecting Guarantor's liability hereunder or the enforcement thereof, and Guarantor agrees that any payment of any Indebtedness or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to Guarantor's liability hereunder. The liability of Guarantor hereunder shall be reinstated and revived and the rights of Bank shall continue if and to the extent for any reason any amount at any time paid on account of any Indebtedness guaranteed hereby is rescinded or must otherwise be restored by Bank, whether as a result of any proceedings in bankruptcy or reorganization or otherwise, all as though such amount had not been paid. The determination as to whether any amount so paid must be rescinded or restored shall be made by Bank in its sole discretion; provided however, that if Bank chooses to contest any such matter at the request of Guarantor, Guarantor agrees to indemnify and hold Bank harmless from and against all costs and expenses, including reasonable attorneys' fees, expended or incurred by Bank in connection therewith, including without limitation, in any litigation with respect thereto. 4. AUTHORIZATIONS TO BANK. Guarantor authorizes Bank either before or after revocation hereof, without notice to or demand on Guarantor, and without affecting Guarantor's liability hereunder, from time to time to: (a) alter, compromise, renew, extend, accelerate or otherwise change the time for payment of, - 2 - or otherwise change the terms of the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon; (b) take and hold security for the payment of this Guaranty or the Indebtedness or any portion thereof, and exchange, enforce, waive, subordinate or release any such security; (c) apply such security and direct the order or manner of sale thereof, including without limitation, a non-judicial sale permitted by the terms of the controlling security agreement or deed of trust, as Bank in its discretion may determine; (d) release or substitute any one or more of the endorsers or any other guarantors of the Indebtedness, or any portion thereof, or any other party thereto; and (e) apply payments received by Bank from Borrower to any Indebtedness of Borrower to Bank, in such order as Bank shall determine in its sole discretion, whether or not such Indebtedness is covered by this Guaranty, and Guarantor hereby waives any provision of law regarding application of payments which specifies otherwise. Bank may without notice assign this Guaranty in whole or in part. Upon Bank's request, Guarantor agrees to provide to Bank copies of Guarantor's financial statements. 5. REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to Bank that: (a) this Guaranty is executed at Borrower's request; (b) Guarantor shall not, without Bank's prior written consent, sell, lease, assign, encumber, hypothecate, transfer or otherwise dispose of all or a substantial or material part of Guarantor's assets other than in the ordinary course of Guarantor's business; (c) Bank has made no representation to Guarantor as to the creditworthiness of Borrower; and (d) Guarantor has established adequate means of obtaining from Borrower on a continuing basis financial and other information pertaining to Borrower's financial condition. Guarantor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Guarantor's risks hereunder, and Guarantor further agrees that Bank shall have no obligation to disclose to Guarantor any information or material about Borrower which is acquired by Bank in any manner. 6. GUARANTOR'S WAIVERS. (a) Guarantor waives any right to require Bank to: (i) proceed against Borrower or any other person; (ii) marshal assets or proceed against or exhaust any security held from Borrower or any other person; (iii) give notice of the terms, time and place of any public or private sale of personal property security held from Borrower or any other person, or otherwise comply with the provisions of Section 9504 of the California Uniform Commercial Code; (iv) take any action or pursue any other remedy in Bank's power; or (v) make any presentment or demand for performance, or give any notice of nonperformance, protest, notice of protest or notice of dishonor hereunder or in connection with any obligations or evidences of indebtedness held by Bank as security for or which constitute in whole or in part - 3 - the Indebtedness guaranteed hereunder, or in connection with the creation of new or additional Indebtedness. (b) Guarantor waives any defense to its obligations hereunder based upon or arising by reason of: (i) any disability or other defense of Borrower or any other person; (ii) the cessation or limitation from any cause whatsoever, other than payment in full, of the Indebtedness of Borrower or any other person; (iii) any lack of authority of any officer, director, partner, agent or any other person acting or purporting to act on behalf of Borrower which is a corporation, partnership or other type of entity, or any defect in the formation of such Borrower; (iv) the application by Borrower of the proceeds of any Indebtedness for purposes other than the purposes represented by Borrower to, or intended or understood by, Bank or Guarantor; (v) any act or omission by Bank which directly or indirectly results in or aids the discharge of Borrower or any portion of the Indebtedness by operation of law or otherwise, or which in any way impairs or suspends any rights or remedies of Bank against Borrower; (vi) any impairment of the value of any interest in any security for the Indebtedness or any portion thereof, including without limitation, the failure to obtain or maintain perfection or recordation of any interest in any such security, the release of any such security without substitution, and/or the failure to preserve the value of, or to comply with applicable law in disposing of, any such security; or (vii) any modification of the Indebtedness, in any form whatsoever, including any modification made after revocation hereof to any Indebtedness incurred prior to such revocation, and including without limitation the renewal, extension, acceleration or other change in time for payment of, or other change in the terms of, the Indebtedness or any portion thereof, including increase or decrease of the rate of interest thereon. Until all Indebtedness shall have been paid in full, Guarantor shall have no right of subrogation, and Guarantor waives any right to enforce any remedy which Bank now has or may hereafter have against Borrower or any other person, and waives any benefit of, or any right to participate in, any security now or hereafter held by Bank. Guarantor further waives all rights and defenses Guarantor may have arising out of (A) any election of remedies by Bank, even though that election of remedies, such as a non-judicial foreclosure with respect to any security for any portion of the Indebtedness, destroys Guarantor's rights of subrogation or Guarantor's rights to proceed against Borrower for reimbursement, or (B) any loss of rights Guarantor may suffer by reason of any rights, powers or remedies of Borrower in connection with any anti-deficiency laws or any other laws limiting, qualifying or discharging Borrower's Indebtedness, whether by operation of Sections 726, 580a or 580d of the Code of Civil Procedure as from time to time amended, or otherwise, including any rights Guarantor may have to a Section 580a fair market value hearing to determine the size of a deficiency following any trustee's foreclosure sale or other disposition of any real property security for any portion of the Indebtedness. - 4 - 7. BANK'S RIGHTS WITH RESPECT TO GUARANTOR'S PROPERTY IN BANK'S POSSESSION. In addition to all liens upon and rights of setoff against the monies, securities or other property of Guarantor given to Bank by law, Bank shall have a lien upon and a right of setoff against all monies, securities and other property of Guarantor now or hereafter in the possession of or on deposit with Bank, whether held in a general or special account or deposit or for safekeeping or otherwise, and every such lien and right of setoff may be exercised without demand upon or notice to Guarantor. No lien or right of setoff shall be deemed to have been waived by any act or conduct on the part of Bank, or by any neglect to exercise such right of setoff or to enforce such lien, or by any delay in so doing, and every right of setoff and lien shall continue in full force and effect until such right of setoff or lien is specifically waived or released by Bank in writing. 8. SUBORDINATION. Any Indebtedness of Borrower now or hereafter held by Guarantor is hereby subordinated to the Indebtedness of Borrower to Bank. Such Indebtedness of Borrower to Guarantor is assigned to Bank as security for this Guaranty and the Indebtedness and, if Bank requests, shall be collected and received by Guarantor as trustee for Bank and paid over to Bank on account of the Indebtedness of Borrower to Bank but without reducing or affecting in any manner the liability of Guarantor under the other provisions of this Guaranty. Any notes or other instruments now or hereafter evidencing such Indebtedness of Borrower to Guarantor shall be marked with a legend that the same are subject to this Guaranty and, if Bank so requests, shall be delivered to Bank. Guarantor will, and Bank is hereby authorized in the name of Guarantor from time to time to, execute and file financing statements and continuation statements and execute such other documents and take such other action as Bank deems necessary or appropriate to perfect, preserve and enforce its rights hereunder. 9. REMEDIES; NO WAIVER. All rights, powers and remedies of Bank hereunder are cumulative. No delay, failure or discontinuance of Bank in exercising any right, power or remedy hereunder shall affect or operate as a waiver of such right, power or remedy; nor shall any single or partial exercise of any such right, power or remedy preclude, waive or otherwise affect any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver, permit, consent or approval of any kind by Bank of any breach of this Guaranty, or any such waiver of any provisions or conditions hereof, must be in writing and shall be effective only to the extent set forth in writing. 10. COSTS, EXPENSES AND ATTORNEYS' FEES. Guarantor shall pay to Bank immediately upon demand the full amount of all payments, advances, charges, costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and - 5 - all allocated costs of Bank's in-house counsel), expended or incurred by Bank in connection with the enforcement of any of Bank's rights, powers or remedies and/or the collection of any amounts which become due to Bank under this Guaranty, and the prosecution or defense of any action in any way related to this Guaranty, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Guarantor or any other person or entity. All of the foregoing shall be paid by Guarantor with interest from the date of demand until paid in full at a rate per annum equal to the greater of ten percent (10%) or the Prime Rate in effect from time to time. The "Prime Rate" is a base rate that Bank from time to time establishes and which serves as the basis upon which effective rates of interest are calculated for those loans making reference thereto. 11. SUCCESSORS; ASSIGNMENT. This Guaranty shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties; provided however, that Guarantor may not assign or transfer any of its interests or rights hereunder without Bank's prior written consent. Guarantor acknowledges that Bank has the right to sell, assign, transfer, negotiate or grant participations in all or any part of, or any interest in, any Indebtedness of Borrower to Bank and any obligations with respect thereto, including this Guaranty. In connection therewith, Bank may disclose all documents and information which Bank now has or hereafter acquires relating to Guarantor and/or this Guaranty, whether furnished by Borrower, Guarantor or otherwise. Guarantor further agrees that Bank may disclose such documents and information to Borrower. 12. AMENDMENT. This Guaranty may be amended or modified only in writing signed by Bank and Guarantor. 13. OBLIGATIONS OF MARRIED PERSONS. Any married person who signs this Guaranty as a Guarantor hereby expressly agrees that recourse may be had against his or her separate property for all his or her obligations under this Guaranty. 14. UNDERSTANDING WITH RESPECT TO WAIVERS; SEVERABILITY OF PROVISIONS. Guarantor warrants and agrees that each of the waivers set forth herein is made with Guarantor's full knowledge of its significance and consequences, and that under the circumstances, the waivers are reasonable and not contrary to public policy or law. If any waiver or other provision of this Agreement shall be held to be prohibited by or invalid under applicable public policy or law, such waiver or other provision shall be ineffective only to the extent of such prohibition or - 6 - invalidity, without invalidating the remainder of such waiver or other provision or any remaining provisions of this Agreement. 15. GOVERNING LAW. This Guaranty shall be governed by and construed in accordance with the laws of the State of California. 16. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Guaranty. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, this Guaranty and each other document, contract and instrument required hereby or now or hereafter delivered to Bank in connection herewith (collectively, the "Documents"), or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss. 91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure - 7 - against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming - 8 - an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Documents or any relationship between the parties. 17. PAYMENT DEFAULT BY BORROWER. Notwithstanding anything to the contrary contained herein, no "Event of Default" shall be deemed to have occurred under that certain Credit Agreement dated as of December 17, 1996 between Borrower and Bank as a consequence of Borrower's failure to pay when due any principal, interest, fees or other amounts payable thereunder or under any of the loan documents related thereto unless (a) Bank sends written notice to Borrower and to Guarantor of such failure to pay and (b) Borrower and/or Guarantor fail to pay such amount - 9 - within five (5) Business Days of the date Bank sends such notice. As used herein, "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. IN WITNESS WHEREOF, the undersigned Guarantor has executed this Guaranty as of December 17, 1996. EPITOPE, INC. By: /s/ Gilbert N. Miller Gilbert N. Miller Executive Vice President/ Chief Financial Officer - 10 - SUBORDINATION AGREEMENT THIS AGREEMENT is entered into by and among ANDREW & WILLIAMSON SALES CO., INC. ("Borrower"), EPITOPE, INC. ("Creditor"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Bank"). RECITALS A. Borrower is indebted to Creditor, and Borrower proposes to obtain credit or has obtained credit from Bank; and B. Bank has indicated that it will extend or continue credit to Borrower if certain conditions are met, including without limitation, the requirement that Creditor execute this Agreement. NOW, THEREFORE, as an inducement to Bank to extend or continue credit and for other valuable consideration, the parties hereto agree as follows: 1. INDEBTEDNESS SUBORDINATED. Creditor subordinates all Indebtedness now or at any time hereafter owing from Borrower to Creditor (including without limitation, interest thereon which may accrue subsequent to Borrower becoming subject to any state or federal debtor-relief statute) ("Junior Debt") to all Indebtedness now or at any time hereafter owing from Borrower to Bank ("Senior Debt"). Creditor irrevocably consents and directs that all Senior Debt shall be paid in full prior to Borrower making any payment on any Junior Debt, except such payments as are expressly permitted by Section 3 of this Agreement. Creditor will, and Bank is authorized in the name of Creditor from time to time to, execute and file such financing statements and other documents as Bank may require in order to give notice to other persons and entities of the terms and provisions of this Agreement. As long as this Agreement is in effect, Creditor will not take any action or initiate any proceedings, judicial or otherwise, to enforce Creditor's rights or remedies with respect to any Junior Debt, including without limitation, any action to enforce remedies with respect to any collateral securing any Junior Debt or to obtain any judgment or prejudgment remedy against Borrower or any such collateral. 2. INDEBTEDNESS DEFINED. The word "Indebtedness" is used herein in its most comprehensive sense and includes any and all advances, debts, obligations and liabilities of Borrower heretofore, now or hereafter made, incurred or created, whether voluntary or involuntary and however arising, whether due or not due, absolute or contingent, liquidated or unliquidated, determined or undetermined, and whether Borrower may be liable individually or jointly with others, including without limitation, obligations and liabilities arising from notes, repurchase agreements and trust receipts. - 1 - 3. RESTRICTION OF PAYMENT OF JUNIOR DEBT; DISPOSITION OF PAYMENTS RECEIVED BY CREDITOR. Borrower will not make, and Creditor will not accept or receive, any payment or benefit in cash, by setoff or otherwise, directly or indirectly, on account of principal, interest or any other amounts owing on any Junior Debt, except such payments as are expressly permitted herein. Borrower is permitted to make and Creditor to receive payments of principal and interest on the Junior Debt; provided however, that no payment of principal or interest on the Junior Debt shall be made by Borrower, or received by Creditor, if (a) a default, or any condition, event or act which with the giving of notice or the passage of time or both would constitute a default, has occurred under the terms of any Senior Debt, or (b) a default would exist under the terms of any Senior Debt after giving effect to any such payment. Borrower agrees that Bank may disclose to Creditor at any time (i) the existence of a default under any Senior Debt, (ii) the existence of any condition, event or act which with the giving of notice or the passage of time or both would constitute a default under any Senior Debt, and/or (iii) whether a default under any Senior Debt would or might exist after giving effect to any payment on the Junior Debt. If any payment is made in violation of this Agreement, Creditor shall promptly deliver the same to Bank in the form received, with any endorsement or assignment necessary for the transfer of such payment or amounts setoff from Creditor to Bank, to be either (in Bank's sole discretion) held as cash collateral securing the Senior Debt or applied in reduction of the Senior Debt in such order as Bank shall determine, and until so delivered, Creditor shall hold such payment in trust for and on behalf of, and as the property of, Bank. 4. DISPOSITION OF EVIDENCE OF INDEBTEDNESS. If there is any existing promissory note or other evidence of any of the Junior Debt, or if any promissory note or other evidence of Indebtedness is executed at any time hereafter with respect thereto, then Borrower and Creditor will mark the same with a legend stating that it is subject to this Agreement, and if asked to do so, will deliver the same to Bank. Creditor shall not, without Bank's prior written consent, assign, transfer, hypothecate or otherwise dispose of any claim it now has or may at any time hereafter have against Borrower at any time that any Senior Debt remains outstanding and/or Bank remains committed to extend any credit to Borrower. 5. AGREEMENT TO BE CONTINUING; APPLIES TO BORROWER'S EXISTING INDEBTEDNESS AND ANY INDEBTEDNESS HEREAFTER ARISING. This Agreement shall be a continuing agreement and shall apply to any and all Indebtedness of Borrower to Bank or Creditor now existing or hereafter arising, including any Indebtedness arising under successive transactions, related or unrelated, and notwithstanding that from time to time all Indebtedness theretofore existing may have been paid in full. - 2 - 6. TERMINATION BY CREDITOR. Creditor may, to the extent provided herein, terminate this Agreement by delivering written notice to Bank. Any such notice must be sent to Bank by registered U.S. mail, postage prepaid, addressed to its office at Bakersfield Regional Commercial Banking Office, 5401 California Avenue, 2nd Floor, Bakersfield, California, 93309, or at such other address as Bank shall from time to time designate. If such notice is received by Bank, this Agreement shall terminate as of the date of receipt, except that the obligations of Creditor and the rights of Bank hereunder shall continue with respect to all Senior Debt which existed at the time of Bank's receipt of such notice, or thereafter arose pursuant to any agreement to extend credit by which Bank is bound at the time of its receipt of such notice, and any extensions, renewals or modifications of any such then existing or committed Senior Debt, including without limitation, modifications to the amount of principal or interest payable on any Senior Debt and the release of any security for or any guarantors of all or any portion of any Senior Debt. 7. REPRESENTATIONS AND WARRANTIES; INFORMATION. Borrower and Creditor represent and warrant to Bank that: (a) no interest in the Junior Debt has been assigned or otherwise transferred to any person or entity; (b) payment of the Junior Debt has not been heretofore subordinated to any other creditor of Borrower; and (c) Creditor has the requisite power and authority to enter into and perform its obligations under this Agreement. Creditor further represents and warrants to Bank that Creditor has established adequate, independent means of obtaining from Borrower on a continuing basis financial and other information pertaining to Borrower's financial condition. Creditor agrees to keep adequately informed from such means of any facts, events or circumstances which might in any way affect Creditor's risks hereunder, and Creditor agrees that Bank shall have no obligation to disclose to Creditor information or material about Borrower which is acquired by Bank in any manner. Bank may, at Bank's sole option and without obligation to do so, disclose to Creditor any information or material relating to Borrower which is acquired by Bank by any means, and Borrower hereby agrees to and authorizes any such disclosure by Bank. 8. TRANSFER OF ASSETS OR REORGANIZATION OF BORROWER. If any petition is filed or any proceeding is instituted by or against Borrower under any provisions of the Bankruptcy Reform Act, Title 11 of the United States Code, or any other or similar law relating to bankruptcy, insolvency, reorganization or other relief for debtors, or generally affecting creditors' rights, or seeking the appointment of a receiver, trustee, custodian or liquidator of or for Borrower or any of its assets, any payment or distribution of any of Borrower's assets, whether in cash, securities or any other property, which would be payable or deliverable with respect to any Junior Debt, shall be paid or delivered to Bank until all Senior Debt is paid in full. Creditor grants to Bank the right to enforce, collect and receive - 3 - any such payment or distribution and to give releases or acquittances therefor, and Creditor authorizes Bank as its attorney-in-fact to vote and prove the Junior Debt in any of the above-described proceedings or in any meeting of creditors of Borrower relating thereto. 9. OTHER AGREEMENTS; NO THIRD PARTY BENEFICIARIES. Bank shall have no direct or indirect obligations to Creditor of any kind with respect to the manner or time in which Bank exercises (or refrains from exercising) any of its rights or remedies with respect to the Senior Debt, Borrower or any of Borrower's assets. Creditor understands that there may be various agreements between Bank and Borrower evidencing and governing the Senior Debt, and Creditor acknowledges and agrees that such agreements are not intended to confer any benefits on Creditor. Creditor further acknowledges that Bank may administer the Senior Debt and any of Bank's agreements with Borrower in any way Bank deems appropriate, without regard to Creditor or the Junior Debt. Creditor waives any right Creditor might otherwise have to require a marshalling of any security held by Bank for all or any part of the Senior Debt or to direct or affect the manner or timing with which Bank enforces any of its security. Nothing in this Agreement shall impair or adversely affect any right, privilege, power or remedy of Bank with respect to the Senior Debt, Borrower or any assets of Borrower, including without limitation, Bank's right to: (a) waive, release or subordinate any of Bank's security or rights; (b) waive or ignore any defaults by Borrower; and/or (c) restructure, renew, modify or supplement the Senior Debt, or any portion thereof, or any agreement with Borrower relating to any Senior Debt. All rights, privileges, powers and remedies of Bank may be exercised from time to time by Bank without notice to or consent of Creditor. 10. BREACH OF AGREEMENT BY BORROWER OR CREDITOR. In the event of any breach of this Agreement by Borrower or Creditor, then and at any time thereafter Bank shall have the right to declare immediately due and payable all or any portion of the Senior Debt without presentment, demand, notice of nonperformance, protest, notice of protest or notice of dishonor, all of which are hereby expressly waived by Borrower and Creditor. No delay, failure or discontinuance of Bank in exercising any right, privilege, power or remedy hereunder shall be deemed a waiver of such right, privilege, power or remedy; nor shall any single or partial exercise of any such right, privilege, power or remedy preclude, waive or otherwise affect the further exercise thereof or the exercise of any other right, privilege, power or remedy. Any waiver, permit, consent or approval of any kind by Bank with respect to this Agreement must be in writing and shall be effective only to the extent set forth in such writing. 11. LIQUIDATED DAMAGES. Inasmuch as the actual damages which could result from a breach by Creditor of its duties under - 4 - Section 3 hereof are uncertain and would be impractical or extremely difficult to fix, Creditor shall pay to Bank, in the event of any such breach by Creditor, as liquidated and agreed damages, and not as a penalty, all sums received by Creditor in violation of this Agreement on account of the Junior Debt, which sums represent a reasonable endeavor to estimate a fair compensation for the foreseeable losses that might result from such a breach. 12. COSTS, EXPENSES AND ATTORNEYS' FEES. If any party hereto institutes any arbitration or judicial or administrative action or proceeding to enforce any provisions of this Agreement, or alleging any breach of any provision hereof or seeking damages or any remedy, the losing party or parties shall pay to the prevailing party or parties all costs and expenses, including reasonable attorneys' fees (to include outside counsel fees and all allocated costs of such prevailing party's in-house counsel), expended or incurred by the prevailing party or parties in connection therewith, whether incurred at the trial or appellate level, in an arbitration proceeding or otherwise, and including any of the foregoing incurred in connection with any bankruptcy proceeding (including without limitation, any adversary proceeding, contested matter or motion brought by Bank or any other person) relating to Borrower, Creditor or any other person or entity. 13. SUCCESSORS; ASSIGNS; AMENDMENT. This Agreement shall be binding upon and inure to the benefit of the heirs, executors, administrators, legal representatives, successors and assigns of the parties. This Agreement may be amended or modified only in writing signed by all parties hereto. If Borrower or Creditor requests an amendment or modification to this Agreement, Bank shall consider such request in good faith and in a reasonable period of time. 14. OBLIGATIONS JOINT AND SEVERAL; CONSTRUCTION. If this Agreement is executed by more than one Creditor, it shall bind them jointly and severally. All words used herein in the singular shall be deemed to have been used in the plural where the context so requires. 15. SEVERABILITY OF PROVISIONS. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such waiver or other provision or any remaining provisions of this Agreement. 16. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. - 5 - 17. ARBITRATION. (a) Arbitration. Upon the demand of any party, any Dispute shall be resolved by binding arbitration (except as set forth in (e) below) in accordance with the terms of this Agreement. A "Dispute" shall mean any action, dispute, claim or controversy of any kind, whether in contract or tort, statutory or common law, legal or equitable, now existing or hereafter arising under or in connection with, or in any way pertaining to, this Agreement and each other document, instrument or contract required hereby or now or hereafter delivered to Bank in connection herewith (collectively, the "Documents"), or any past, present or future extensions of credit and other activities, transactions or obligations of any kind related directly or indirectly to any of the Documents, including without limitation, any of the foregoing arising in connection with the exercise of any self-help, ancillary or other remedies pursuant to any of the Documents. Any party may by summary proceedings bring an action in court to compel arbitration of a Dispute. Any party who fails or refuses to submit to arbitration following a lawful demand by any other party shall bear all costs and expenses incurred by such other party in compelling arbitration of any Dispute. (b) Governing Rules. Arbitration proceedings shall be administered by the American Arbitration Association ("AAA") or such other administrator as the parties shall mutually agree upon in accordance with the AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be resolved in accordance with the Federal Arbitration Act (Title 9 of the United States Code), notwithstanding any conflicting choice of law provision in any of the Documents. The arbitration shall be conducted at a location in California selected by the AAA or other administrator. If there is any inconsistency between the terms hereof and any such rules, the terms and procedures set forth herein shall control. All statutes of limitation applicable to any Dispute shall apply to any arbitration proceeding. All discovery activities shall be expressly limited to matters directly relevant to the Dispute being arbitrated. Judgment upon any award rendered in an arbitration may be entered in any court having jurisdiction; provided however, that nothing contained herein shall be deemed to be a waiver by any party that is a bank of the protections afforded to it under 12 U.S.C. ss.91 or any similar applicable state law. (c) No Waiver; Provisional Remedies, Self-Help and Foreclosure. No provision hereof shall limit the right of any party to exercise self-help remedies such as setoff, foreclosure against or sale of any real or personal property collateral or security, or to obtain provisional or ancillary remedies, including without limitation injunctive relief, sequestration, attachment, garnishment or the appointment of a receiver, from a court of competent jurisdiction before, after or during the pendency of any arbitration or other proceeding. The exercise of any such remedy shall not waive the right of any party to compel arbitration or reference hereunder. - 6 - (d) Arbitrator Qualifications and Powers; Awards. Arbitrators must be active members of the California State Bar or retired judges of the state or federal judiciary of California, with expertise in the substantive law applicable to the subject matter of the Dispute. Arbitrators are empowered to resolve Disputes by summary rulings in response to motions filed prior to the final arbitration hearing. Arbitrators (i) shall resolve all Disputes in accordance with the substantive law of the state of California, (ii) may grant any remedy or relief that a court of the state of California could order or grant within the scope hereof and such ancillary relief as is necessary to make effective any award, and (iii) shall have the power to award recovery of all costs and fees, to impose sanctions and to take such other actions as they deem necessary to the same extent a judge could pursuant to the Federal Rules of Civil Procedure, the California Rules of Civil Procedure or other applicable law. Any Dispute in which the amount in controversy is $5,000,000 or less shall be decided by a single arbitrator who shall not render an award of greater than $5,000,000 (including damages, costs, fees and expenses). By submission to a single arbitrator, each party expressly waives any right or claim to recover more than $5,000,000. Any Dispute in which the amount in controversy exceeds $5,000,000 shall be decided by majority vote of a panel of three arbitrators; provided however, that all three arbitrators must actively participate in all hearings and deliberations. (e) Judicial Review. Notwithstanding anything herein to the contrary, in any arbitration in which the amount in controversy exceeds $25,000,000, the arbitrators shall be required to make specific, written findings of fact and conclusions of law. In such arbitrations (i) the arbitrators shall not have the power to make any award which is not supported by substantial evidence or which is based on legal error, (ii) an award shall not be binding upon the parties unless the findings of fact are supported by substantial evidence and the conclusions of law are not erroneous under the substantive law of the state of California, and (iii) the parties shall have in addition to the grounds referred to in the Federal Arbitration Act for vacating, modifying or correcting an award the right to judicial review of (A) whether the findings of fact rendered by the arbitrators are supported by substantial evidence, and (B) whether the conclusions of law are erroneous under the substantive law of the state of California. Judgment confirming an award in such a proceeding may be entered only if a court determines the award is supported by substantial evidence and not based on legal error under the substantive law of the state of California. (f) Real Property Collateral; Judicial Reference. Notwithstanding anything herein to the contrary, no Dispute shall be submitted to arbitration if the Dispute concerns indebtedness secured directly or indirectly, in whole or in part, by any real - 7 - property unless (i) the holder of the mortgage, lien or security interest specifically elects in writing to proceed with the arbitration, or (ii) all parties to the arbitration waive any rights or benefits that might accrue to them by virtue of the single action rule statute of California, thereby agreeing that all indebtedness and obligations of the parties, and all mortgages, liens and security interests securing such indebtedness and obligations, shall remain fully valid and enforceable. If any such Dispute is not submitted to arbitration, the Dispute shall be referred to a referee in accordance with California Code of Civil Procedure Section 638 et seq., and this general reference agreement is intended to be specifically enforceable in accordance with said Section 638. A referee with the qualifications required herein for arbitrators shall be selected pursuant to the AAA's selection procedures. Judgment upon the decision rendered by a referee shall be entered in the court in which such proceeding was commenced in accordance with California Code of Civil Procedure Sections 644 and 645. (g) Miscellaneous. To the maximum extent practicable, the AAA, the arbitrators and the parties shall take all action required to conclude any arbitration proceeding within 180 days of the filing of the Dispute with the AAA. No arbitrator or other party to an arbitration proceeding may disclose the existence, content or results thereof, except for disclosures of information by a party required in the ordinary course of its business, by applicable law or regulation, or to the extent necessary to exercise any judicial review rights set forth herein. If more than one agreement for arbitration by or between the parties potentially applies to a Dispute, the arbitration provision most directly related to the Documents or the subject matter of the Dispute shall control. This arbitration provision shall survive termination, amendment or expiration of any of the Documents or any relationship between the parties. 18. PAYMENT DEFAULT BY BORROWER. Notwithstanding anything to the contrary contained herein, no "Event of Default" shall be deemed to have occurred under the Senior Debt subject to that certain Credit Agreement dated as of December 17, 1996 between Borrower and Bank as a consequence of Borrower's failure to pay when due any principal, interest, fees or other amounts payable thereunder or under any of the loan documents related thereto unless (a) Bank sends written notice to Borrower and to Creditor of such failure to pay and (b) Borrower and/or Creditor fail to pay such amount within five (5) Business Days of the date Bank sends such notice. As used herein "Business Day" means any day except a Saturday, Sunday or any other day on which commercial banks in California are authorized or required by law to close. - 8 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of December 17, 1996. BORROWER: WELLS FARGO BANK, NATIONAL ASSOCIATION ANDREW AND WILLIAMSON SALES, CO. By: /s/ Steven M. Del Papa Steven M. Del Papa By: /s/ Gilbert N. Miller Vice President Gilbert N. Miller Executive Vice President CREDITOR: EPITOPE, INC. By: /s/ Gilbert N. Miller Gilbert N. Miller Executive Vice President/ Chief Financial Officer - 9 - EX-27 5 FDS FOR ARTICLE 5 OF REGULATION S-X
5 This schedule contains summary financial information extracted from the condensed consolidated financial statements included herein and is qualified in its entirety by reference to such financial statements. 1 OCT-01-1996 MAR-31-1997 6-MOS SEP-30-1997 189,400 12,805,638 1,310,799 (6,642) 2,926,574 17,914,727 8,563,073 (5,019,757) 29,989,634 4,626,450 0 0 0 112,778,014 (87,536,158) 29,989,634 4,674,993 5,228,654 1,914,001 9,135,480 (513,699) (1,900,000) (23,871) (6,344,396) 0 (6,344,396) (8,206,500) 0 0 (14,550,896) (1.08) 0
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