-----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, I0xawgdTG7pAK3orh6++hekY9ORiEGtfxbrffdQyjpfBKLzU+yUJwSgOCYLWGpgy zDTIgqh36u0gTnbMPIuCng== 0000892917-97-000174.txt : 19971230 0000892917-97-000174.hdr.sgml : 19971230 ACCESSION NUMBER: 0000892917-97-000174 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971229 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-K405 SEC ACT: SEC FILE NUMBER: 000-15337 FILM NUMBER: 97745761 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-K405 1 ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ FORM 10-K (Mark one) [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 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 No. 1-10492 EPITOPE, INC. (Exact name of registrant as specified in its charter) Oregon 93-0779127 (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 8505 S.W. Creekside Place Beaverton, Oregon 97008 (Address of principal executive offices) (Zip code) (503) 641-6115 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12 (g) of the Act: Common Stock, no par value (Title of Class) Preferred Stock Purchase Rights (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, as of December 1, 1997: $65,757,368 Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of December 1, 1997: Common Stock, no par value, 13,454,330 shares. Documents Incorporated by Reference: Definitive Proxy Statement for 1998 Annual Shareholders' Meeting: Part III Table of Contents PART I Page ITEM 1. Business 3 ITEM 2. Properties 14 ITEM 3. Legal Proceedings 14 ITEM 4. Submission of Matters to a Vote of Security Holders 14 PART II ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters 15 ITEM 6. Selected Financial Data 16 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 20 ITEM 8. Financial Statements and Supplementary Data 21 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21 PART III ITEM 10. Directors and Executive Officers of the Registrant 22 ITEM 11. Executive Compensation 22 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 22 ITEM 13. Certain Relationships and Related Transactions 22 PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 22 PART I ITEM 1. BUSINESS Epitope, Inc. (Epitope or the Company), is an Oregon corporation incorporated in 1981. Epitope develops and markets oral specimen collection kits and related diagnostic tests for the detection of the Human Immunodeficiency Virus (HIV), the cause of Acquired Immune Deficiency Syndrome (AIDS), and for the detection of other medical conditions and analytes. Epitope's lead product, the patented OraSure(R) collection device, is used as part of an oral specimen diagnostic system. The Company markets the device under the brand name EpiScreen(TM) in the United States for use in screening life insurance applicants, and in certain foreign countries for use in professional markets. In the balance of this document the product will be referred to only as OraSure. The OraSure device consists of a small, treated cotton-fiber pad on a nylon handle that is placed in the patient's mouth for two minutes. The device collects oral mucosal transudate (OMT), a serum-derived fluid that, unlike saliva, contains higher concentrations of HIV antibodies in people infected with the virus. As a result, OMT testing is a highly accurate method for detecting HIV infection. Because OraSure uses a noninvasive, needle-free collection method, the Company believes that oral fluid testing has several significant advantages over blood-based testing systems for both healthcare professionals and patients. Epitope also markets HIV-1 Western blot confirmatory test kits used to confirm positive results of initial screening tests for HIV-1 infection. Its OraSure HIV-1 Western blot confirmatory test kit is used in conjunction with oral-specimen based screening tests, while its EPIblot(R) HIV-1 Western blot confirmatory test kit is used in conjunction with blood-based screening tests. The kits are distributed worldwide under an exclusive agreement with Organon Teknika Corporation (Organon Teknika), a member of the Akzo Pharma group of Akzo Nobel, NV. , an international chemical and pharmaceutical manufacturer based in Arnhem, The Netherlands. The OraSure HIV-1 Oral Specimen Collection device and the OraSure HIV-1 Western blot and EPIblot confirmatory tests have all received clearance from the U.S. Food and Drug Administration (FDA) for sale to professional markets in the United States. In February 1995, the Company entered into a Development, License and Supply Agreement (the SB Agreement) with SmithKline Beecham plc (SB), under which SB would market the OraSure device on an exclusive basis in the U.S. and certain foreign countries as part of an integrated test system to physicians, hospitals and other healthcare professionals. The parties terminated the agreement in July 1997. As a result, the Company may now sell the OraSure directly or through other distributors to markets previously reserved to SB under the SB Agreement. During fiscal 1997, Agritope, Inc. (Agritope) was a wholly owned subsidiary of Epitope. Agritope is a biotechnology company specializing in the development of new fruit and vegetable plant varieties for sale to the fresh produce industry. Epitope expects to make a distribution of all of its ownership interest in Agritope to Epitope's shareholders (the Agritope Spin-off) in late December 1997. Following the Agritope spin-off, Epitope will no longer own or control any shares of Agritope stock. BACKGROUND Acquired Immune Deficiency Syndrome (AIDS) is caused by the Human Immunodeficiency Virus. HIV attacks the immune system, slowly weakening the body's ability to ward off infection and certain forms of cancer. When these complications develop, the HIV infection has progressed to clinically diagnosed AIDS. HIV is spread through sexual contact, blood transfusions, the sharing of intravenous needles, accidental needle sticks, or contact between a mother and her child during gestation, childbirth, or breast-feeding. There is currently no known cure for HIV/AIDS. However, the recent introduction of a new class of anti-HIV drugs called protease inhibitors, when used in combination with nucleoside analogs (e.g., AZT), has shown promising results in slowing progress of the disease. Clinical studies have demonstrated that the early detection and treatment of HIV can help to curb the effects of the disease and significantly prolong the life of the patient. Other studies have shown that treatment with AZT of an HIV-infected pregnant woman may prevent the transmission of HIV from the mother to her child. - 3 - According to the United Nations Program on HIV/AIDS, an estimated 30.6 million people worldwide are now living with HIV, the virus that causes AIDS. Data from 1997 show that the previous estimates of HIV transmission grossly underestimated the spread of the AIDS virus. The U.N. now believes that new infections are occurring almost twice as fast as they estimated a year ago. Instead of 8,200 new infections a day, the U.N. now believes that there are 16,000. In North America, an estimated 860,000 people have been infected with HIV. For children, the report estimates that 1,600 under 15 years old are infected each day compared to 1,000 per day a year ago. Based on industry estimates, the Company believes that approximately 100 million HIV tests were performed in the U.S. in 1996, with blood banks accounting for about 25 million. The Company feels that a large proportion of the non-blood bank HIV testing market should be available to OraSure because of the accuracy of the test and the benefits of not having to draw blood. Currently, most HIV tests are performed by testing a patient's blood. There are a number of blood tests for HIV, the most common of which is the enzyme-linked immunosorbent assay (ELISA or EIA). In order to reduce the possibility that an individual without HIV will be diagnosed as having the virus (a false positive), most industrialized countries require the retesting of the blood sample using a second, more specific test to confirm an initial positive test result. The most commonly used confirmatory test is the Western blot. The Company believes that blood-based testing, in a situation other than blood donation, has a number of disadvantages which increase healthcare costs and patient inconvenience, pose a risk of infection to healthcare professionals and make testing uneconomic or unavailable in certain applications or settings, and that the OraSure product overcomes these problems. The disadvantages of blood testing include: Risk of HIV Infection. Blood tests involve the use of needles or lancets to obtain blood from the patient. Healthcare professionals collecting blood risk contracting HIV if accidentally stuck by the needle or lancet used to obtain blood from an infected patient. Limited Access. Because blood must be collected by trained professionals, its collection is often difficult or prohibitively expensive in certain settings. For example, community-based outreach programs, homeless shelters, rural communities, and other remote settings often lack healthcare professionals trained in blood collection. As a result, blood testing may not be as readily available in some of these settings. Higher Overall Cost. The cost of collecting a blood specimen represents a significant component of the total cost of HIV testing. Furthermore, when a healthcare professional must travel to the subject's office or home to collect a blood sample, as is often the case with life insurance applicant testing, the cost of collecting the blood specimen is substantially increased. Patient Discomfort. Blood tests require the use of needles or lancets that are uncomfortable for patients. In addition, patients with small or damaged veins, such as intravenous drug users, the elderly and young children, may require multiple needle sticks in order to obtain an adequate blood sample. EPITOPE ORAL SPECIMEN COLLECTION TECHNOLOGY In order to address the significant drawbacks associated with blood-based tests, Epitope developed and patented a device to collect an oral specimen instead of blood. The OraSure device, shaped like a small toothbrush, consists of a cotton-fiber pad treated with a proprietary salt solution. The pad, which is mounted on a nylon handle, is placed in the patient's mouth between the lower cheek and gum for two minutes. The pad collects oral mucosal transudate, a serum-derived fluid that, unlike saliva, contains higher concentrations of antibodies. OMT contains approximately four times the amount of antibodies found in ordinary whole saliva. Following collection, the pad is sealed in a specimen vial containing a proprietary preservative solution. The treated pad enhances the collection, and the preservative solution enhances the stabilization, of antibodies and other analytes originating from the oral mucosae. The specimen in the vial is stable for three weeks at room temperature, although in most cases laboratory testing takes place within one to three days. - 4 - PRODUCTS OraSure. In December 1994, the Company received clearance from the FDA to sell OraSure to professional markets for the ELISA screening of HIV-1 antibodies. The device is marketed directly by the Company under the trade name EpiScreen for use by the U.S. life insurance industry and in certain international markets, and under the trade name OraSure to healthcare professionals in the United States and a number of other countries. See "Marketing." The OraSure oral specimen collection and HIV-1 testing system is easily administered and involves three steps: (i) collection of an oral specimen using the OraSure collection device, (ii) ELISA screening of the specimen for HIV antibodies at a laboratory, and (iii) laboratory confirmation of positive screening test results with the FDA-cleared OraSure Western blot kit. A trained healthcare professional then conveys test results and provides appropriate counseling to the patient. The OraSure HIV-1 testing system represents a highly accurate alternative to traditional blood-based tests. In clinical trials, OraSure provided the correct result or triggered appropriate follow-up testing in 3,569 out of 3,570 cases (99.97 percent). The Company believes OraSure has several advantages over blood-based tests, as outlined in the following table. Feature Blood Test EpiScreen/OraSure Safety Poses risk of HIV Eliminates risk of infection through needle-stick accidents accidental needle sticks Invasiveness Requires use of a Uses noninvasive needle or lancet collection technique Ease of use Requires blood Sample collection collection by a requires minimal trained healthcare training professional Portability Generally performed in Can be used rapidly and a physician's office efficiently in almost or other healthcare any setting setting Cost Requires a nurse or Eliminates the need for other trained healthcare and costs associated professional with a trained healthcare professional Oral-based and Serum-based Western Blot Confirmatory Tests. Epitope has also developed, and in June 1996 received FDA clearance to market, an oral-based HIV-1 Western blot confirmatory test. This test uses the original oral specimen to confirm positive results of initial OraSure HIV-1 ELISA screening tests. Epitope has also marketed EPIblot, a serum-based Western blot HIV-1 confirmatory test kit, since 1987. The kit is used to confirm the positive results of initial blood-based screening tests for HIV-1 infection. - 5 - MARKETS Life Insurance Industry. Epitope believes there is a significant need in the life insurance industry for an easy-to-administer, noninvasive and cost-effective HIV testing system such as OraSure. In the United States, approximately 4.5 million HIV tests were administered in 1996 by the life insurance industry in connection with the issuance of new policies. In addition, data from the American Council of Life Insurance and the Health Insurance Association of America indicate that over $1.5 billion in AIDS-related death benefits were paid in 1995. The organizations also cautioned that, due to difficulty in identifying all AIDS-related claims, the data may significantly understate the financial impact of AIDS on the insurance industry. Traditional HIV testing of life insurance applicants involves the use of a paramedic or other trained healthcare professional to obtain a blood sample. The cost to the insurance company for an HIV test includes the cost of the paramedic as well as the cost of the collection kit and laboratory testing services. These costs range from approximately $55 to $70, of which $35 to $50 is the cost of the paramedic. As a result, insurance companies have generally limited HIV testing to policies with face amounts of $100,000 or more. Based on industry statistics, Epitope estimates that in 1994 approximately 9 million policies were issued for face amounts of less than $100,000, representing 66 percent of all policies issued. The Company believes that the use of OraSure can significantly reduce the cost of HIV testing to the insurance industry because collection of an oral fluid specimen can be performed by insurance agents or other persons without professional medical training, eliminating the cost of the paramedic and making testing at policy levels below $100,000 a cost-effective practice. Moreover, the Company has found that some insurance companies are adopting OraSure for use in connection with applications for insurance policies with face amounts at and above $100,000 because the tests for HIV-1, cocaine and cotinine give them sufficient information. John Hancock Mutual Life Insurance, one of the nation's largest life insurers, is now using OraSure to test applicants 40 years old and under for policies up to but not including $1 million, citing the elimination of the unpleasant blood and urine tests and other medical exams required for underwriting purposes. Epitope also believes that the use of OraSure will allow the insurance industry to address "anti-selection." Anti-selection occurs when an individual who knows that he or she is infected with HIV intentionally applies for one or more life insurance policies that do not entail HIV testing. The Company believes that the adoption of OraSure by a number of insurance companies, and the availability of a recently approved over-the-counter (OTC) HIV blood test, may increase the incidence of anti-selection. By allowing insurance companies to lower the policy level at which HIV testing is cost-effective, the use of OraSure may allow insurance companies to reduce their exposure to losses from anti-selection and thereby to lower overall claims costs. An additional advantage of the OraSure testing system is that the oral specimen used for HIV testing can also be used to identify smokers and users of cocaine. Cotinine, a metabolite of nicotine, can be detected using OraSure. The FDA has advised Epitope that OraSure may be used for cocaine testing for the purpose of life insurance risk assessment while a 510(k) notice is undergoing final review, and may be used for cotinine testing generally. In a presentation at the 105th annual meeting of The American Academy of Insurance Medicine, a major life insurance company reported results of the use of the OraSure testing system in Canada and in the Bahamas from 1992 to 1995. The life insurance company reported that agent collection reduced its testing costs by $65 per application. During the four-year study period, the insurer found that it saved $1.7 million by using OraSure for HIV and cocaine testing. In addition, the life insurance company determined that it realized $1.6 million in increased premiums as a result of identifying smokers who claimed on their applications that they were nonsmokers. In another study presented to this same Academy, Crown Life of Canada reported that the five year savings from testing for cocaine, cotinine and HIV were approximately $1.4 million. Physician and Public Health Clinical Market. The physician market consists primarily of individual doctor's offices which are supplied through the physician's supply house network. Selling to this market requires a substantial sales force to call on the many offices throughout the country, each making its own purchasing decision. SB was marketing to these customers through representatives of the physician supply network and advertising in trade journals. Since the termination of the SB Agreement, Epitope has chosen not to focus on this highly diverse market at this time because of the high cost of selling to these customers. - 6 - The public health market is more concentrated than the physician market, with typically more purchasing power in each decision maker. The customers consist of a broad range of clinics and laboratories such as states, counties, colleges and universities, prison systems and the military. There are also a number of smaller organizations in this market such as AIDS Service Organizations and various community based organizations set up for the primary purpose of encouraging and enabling HIV testing to combat the spread of AIDS. The OraSure device has received a warm welcome in much of this market because of its ease of use and reliability. In some cases there has been an issue of higher cost for OraSure testing as compared to blood-based testing. This has been principally in the smaller organizations or in customers who are starting with small volume testing and therefore not achieving volume price breaks for the OraSure device or the related tests. In order to avoid having cost be a major obstacle to growth in volume and adoption of this new testing format, Epitope is addressing the issue on several fronts. For example, to assist in the cost of testing and to provide fast turnaround with accurate test methods, Epitope has entered into an agreement with LabOne to provide a prepackaged OraSure test kit with prepaid testing and sample shipment to LabOne via overnight express. This product package will be sold directly to the public health customers by the Epitope sales force. OTC Market. The over-the-counter (OTC) market for HIV testing currently consists only of one test, distributed by Home Access Health Care, which uses a dried blood spot to provide the patient's sample. This sample is then sent to a laboratory for testing and the test results are communicated to the customer via an 800 number. In July 1997, citing lower sales than expected and the lower market estimates, Johnson & Johnson dropped its Confide product from the OTC market. Also in July 1997, SB and Epitope terminated their agreement. As a result, Epitope has significantly reduced the attention and resources it was devoting to preparation for the OTC market, and has shifted instead to the public health markets, including college health and corrections. The Company has not ruled out an eventual move into the OTC market, but it is not a high priority at this time. International. In light of the worldwide scope of the HIV epidemic, Epitope believes there are significant opportunities for sale of OraSure in international markets. The Company believes that the ease of use, portability, increased safety and aversion to blood draw in certain cultures will provide significant advantages over blood tests in international markets. Epitope has initiated an international marketing program that features direct assistance to distributors in establishing OraSure programs that include laboratory services, cooperation from screening test manufacturers, and provision of Western blot confirmatory kits in each country. Epitope is currently marketing OraSure directly to customers in Canada and through distributors in the United Kingdom, Thailand, Argentina, Brazil, South Africa, Greece, the Philippines, Taiwan, Mexico and Colombia. Epitope also has a joint venture in Japan. PRODUCTS UNDER DEVELOPMENT OraSure. Oral mucosal transudate (OMT) contains many constituents found in blood serum. Because of this feature, the Company believes OraSure is a platform technology with a wide variety of potential applications beyond HIV testing. For example, the OraSure device may be useful for the diagnosis of a variety of infectious diseases in addition to HIV, such as viral hepatitis and a number of childhood diseases. In addition, the Company believes that the use of oral specimens may allow physicians to diagnose diseases more readily in children without subjecting them to the discomfort of drawing a blood sample, thereby increasing the frequency of testing for diseases. The Company has demonstrated that the OraSure device has potential for the collection of samples which can be tested for drugs of abuse (NIDA-5) and cotinine, a derivative of nicotine. Under an agreement with Epitope, STC Technologies, Inc., has developed enzyme immunoassays (EIA's) for the detection of cocaine, methamphetamine, cannabanoids (THC), opiates, phencyclidine (PCP) and cotinine present in oral specimens. Four 510(k) notifications for cocaine, methamphetamines, cannabanoids (THC) and cotinine are currently undergoing FDA review. Additional 510(k) notifications for opiates and PCP are expected to be submitted within the next few months. If approved, these will allow Epitope to market OraSure to professional markets for drug abuse detection, in addition to the life insurance industry. Although cotinine is not currently regulated by the FDA for risk assessment, the 510(k) application for cotinine has been filed in anticipation that cotinine testing for non-insurance purposes will be performed at some time in the future. Physicians may also find the device useful for monitoring level of drugs and hormones that must be maintained within narrow therapeutic ranges. Monitoring of these - 7 - substances currently requires frequent blood tests to determine drug concentration. The Company believes that oral specimen testing would eliminate the discomfort and inconvenience associated with this frequent blood testing. OraQuick. Epitope is currently developing OraQuick(R), a one-step, rapid-format oral specimen testing system designed to provide test results within ten minutes. The Company believes that OraQuick has significant potential as a rapid test for professional use, and as an OTC home-based test. Epitope has substantially completed a prototype of OraQuick to test for HIV, with other tests in various stages of development. Like OraSure, OraQuick is a platform technology with a variety of potential applications in addition to HIV testing. Modifications of the basic OraQuick technology may allow use of this approach for detection of antibodies against the ulcer-causing bacterium helicobacter pylori, as well as for a variety of infectious diseases such as syphilis, viral hepatitis, and childhood infections. The application of this technology for drugs of abuse testing appears possible and is a high priority within the Epitope development group. DNA Forensic Testing. Epitope has conducted successful preliminary trials which have shown that it is possible to collect an excellent DNA sample using the OraSure device. This sample is in addition to the antibody sample that is used to test for HIV, making it possible to test for antibodies and produce a DNA "fingerprint" with a single OraSure collection. The Company has contracted with a well-established firm, experienced in the field of DNA testing, to conduct further tests. MARKETING Life Insurance Industry. Epitope currently markets its OraSure device for use in screening life insurance applicants for HIV, cocaine, and nicotine. The Company maintains a three-member direct sales force that markets OraSure directly to the insurance companies. The insurance companies then make their own decision regarding which insurance reference laboratory to use to supply their devices and testing service. The major laboratories currently using the OraSure device include LabOne, Inc., Osborn Laboratories and Clinical Reference Laboratory. As of November 1997, 24 of the top 100, and 6 of the top 10 life insurance companies were using OraSure to varying degrees for testing applicants for life insurance. Currently there are 62 insurance companies using OraSure. Because the insurance companies are in various stages of their launch plans with OraSure, there exists a wide range of policy limits where the product is being applied. Some insurance companies have chosen to extend their testing to lower policy limits where they did not test at all before, while others have used OraSure to replace some of their blood-based testing. The Company's sales focus is on converting additional insurance companies to the use of OraSure, and extending its use within the companies already using OraSure. Physician and Public Health Clinical Market. Through September 1997, SB marketed Epitope's oral HIV testing system to the physician, hospital and other professional healthcare provider markets under the brand name OraSure. The Company resumed direct marketing of the device to these markets in October 1997. Information about the product is accessible to consumers through a toll-free number (1-800-OraSure) and on the Internet (www.OraSure.com). Epitope is in the process of determining whether to merge the OraSure web site into the Epitope web site (www.Epitope.com). The SB product launch in 1996 and 1997 was accompanied by an advertising campaign featuring two-page spreads in major medical professional publications. The OraSure brand was also a major sponsor of the 1996 AIDS Candlelight March in Washington, D.C., conducted in connection with the display of the National AIDS Quilts. In addition, SB sponsored numerous AIDS testing programs through various public health organizations, further increasing the awareness of OraSure in these markets. During the period of the agreement (from Feb 1995 to July 1997), SB marketed and publicized the OraSure brand name, and the benefits of oral specimen testing, nationwide. SB set up a testing service for OraSure samples through its SB Clinical Laboratories (SBCL) division, which continues to operate following the termination of the SB Agreement. In addition, SB initiated customer contacts, and began the sales process in the public health arena with a dedicated sales force making significant inroads in this market. Epitope has hired some of the key sales personnel from SB that had been focused on the public health market, and has begun selling its products directly to these customers. - 8 - OTC Market. In addition to the sales efforts in the professional and public health markets, substantial work was put into preparation for launching the OraSure product into the OTC market. This market would have required an FDA approved testing laboratory (such as the one set up by SBCL), a counseling service to provide test results, advice and referrals to customers, and a system which would insure accurate and reliable handling of information related to the customer sample, test results and counseling data. Epitope and SB conducted clinical trials which demonstrated that ordinary untrained customers can reliably use the OraSure device to collect an adequate sample for HIV testing using only printed instructions supplied with the OraSure device. Although SB and Epitope have chosen not to pursue the OTC markets at this time, Epitope has begun discussions with other potential marketing partners. Epitope continues to believe that the benefits of oral specimen testing would offer a significant advantage in a consumer setting because it helps to overcome the aversion many people have to taking their own blood for a sample. International. Epitope markets to international customers primarily through carefully chosen distributors with knowledge of their local market. The distributor's expertise is supplemented by Epitope's contacts with the testing companies to assist in registering the necessary tests in each country, and Epitope's assistance with training and support materials. Western Blot Distribution. Epitope has entered into supply and distribution agreements with Organon Teknika. The supply agreement provides that Organon Teknika will supply the HIV-1 antigen used to manufacture Western blot confirmatory test kits. The distribution agreement grants Organon Teknika the exclusive right to purchase Western blot confirmatory test kits from Epitope and to market them worldwide. Epitope and Organon Teknika recently extended the expiration dates for the supply and distribution arrangements to March 31, 1998. COMPETITION Competition in the emerging market for HIV testing is intense and is expected to increase. The Company believes that the principal competition will come from existing blood-based HIV assays and from urine-based testing assays. Epitope's competitors include specialized biotechnology firms as well as pharmaceutical companies with biotechnology divisions and medical diagnostic companies, many of which have considerably greater financial, technical, and marketing resources than Epitope. Competition may intensify as technological advances are made and become more widely known and as products reach the market in greater numbers. Furthermore, new testing methodologies could be developed in the future that render Epitope's oral-based HIV test impractical, uneconomical or obsolete. There can be no assurance that Epitope's competitors will not succeed in developing or marketing technologies and products that are more effective than those developed by Epitope or that would render its technologies or products obsolete or otherwise commercially unattractive. In addition, there can be no assurance that competitors will not succeed in obtaining regulatory approval for these products, or in introducing or commercializing them before Epitope. Such developments could have a material adverse effect on the Company's business, financial condition and results of operations. Three companies have submitted applications to the FDA for OTC HIV blood testing: Direct Access Diagnostics, Home Access Health Corp., and ChemTrak Incorporated. The FDA has approved home collection kits for HIV blood testing developed by Direct Access Diagnostics (Johnson & Johnson) and by Home Access Health Corp. In July 1997 Johnson & Johnson withdrew its HIV home test from the market, citing weak sales. Cambridge Biotech Corporation and BioRad Laboratories, Inc. manufacture HIV Western blot confirmatory tests, and Waldheim Pharmazeutika manufactures immunofluorescent HIV confirmatory tests, which compete with Epitope's EPIblot HIV-1 Western blot serum-based confirmatory test kits. Several other companies market or have announced plans to market oral specimen collection devices and tests outside the United States and have announced plans to seek FDA approval of such tests in the United States. Epitope expects the number of devices competing with its OraSure device to increase as the benefits of oral specimen-based testing become more widely accepted. The Company expects that FDA approval of the OraSure device will also encourage potential competitors to develop oral diagnostic products. No such devices have yet been approved by the FDA for HIV testing. See "Government Regulation". - 9 - The FDA has approved an HIV ELISA screening test for use with a urine sample. More recently the FDA notified Cambridge Biotech Corp that it had completed the review of its HIV-1 Western Blot confirmatory test for use with urine samples, and that the application was approvable, pending the completion of product labeling and restrictions on its use. Until a confirmatory test for HIV testing with urine is approved, a patient who gives an initial positive urine screening result must return to give a second, blood-based sample for confirmatory testing. The Company believes that urine collection can be logistically more difficult, inconvenient and potentially embarrassing for the patient, and that privacy and chain-of-custody issues are further impediments to routine use of urine-based HIV tests. GOVERNMENT REGULATION General. Many of Epitope's proposed and existing diagnostic products are subject to regulation by the FDA, other federal, state, and local agencies, and comparable bodies in foreign countries. Such regulation governs almost all aspects of development and marketing, including the introduction, advertising, promotion, manufacturing practices, labeling, distribution, and record keeping for the products. In the United States, different types of diagnostic products are regulated differently by the FDA, as discussed below. As part of the FDA clearance process, Epitope often must demonstrate that its products are both safe and effective for a particular indication or application. Drugs and Biological Products. Generally, drugs and biological products require FDA approval before marketing. The steps required before a drug or biological product may be marketed in the United States include: (1) preclinical laboratory and animal tests; (2) submission of an application for an investigational new drug or biological product, which must become effective before human clinical trials may commence; (3) human clinical trials; (4) submission of a Product License Application (PLA) for the biological product or a New Drug Application (NDA) for most other new drug products; and (5) approval of the PLA or NDA. Preclinical safety and initial efficacy testing is usually undertaken in animals. Results of such preclinical and other laboratory tests are submitted to the FDA before human clinical trials can begin. Clinical trials are typically conducted in three phases. Phase I uses human subjects to determine safety and tolerance. Phase II uses a limited patient population to determine effectiveness and dosage and to identify side effects. Compounds found effective and safe in Phase II are further tested in Phase III with an expanded patient population at geographically dispersed clinical study sites. Each phase may last from one to two years or more. Most products are not approved because of the failure to demonstrate safety, effectiveness, or both. The FDA may suspend clinical trials at any time if it is felt that subjects or patients are being exposed to an unacceptable health risk. Obtaining FDA approval requires substantial time and effort. There can be no assurance that any approval will be granted to Epitope on a timely basis, if at all. As part of the approval process, the FDA may require the Company to initiate post-approval marketing studies. Medical Devices. Medical devices are classified either in Class I, Class II, or Class III. Class I devices are subject only to general control provisions of the Federal Food, Drug, and Cosmetic Act, as amended (the FDC Act). These provisions include requirements that a device not be adulterated or misbranded. Class II devices are those for which general controls are insufficient to provide a reasonable assurance of safety and efficacy and for which a "generic" performance standard or other special controls are appropriate. Devices that do not meet the criteria for Class I or II are placed in Class III. Class I and II devices, those Class III devices initially marketed prior to passage of the Medical Device Amendments of 1976 (MDA) for which premarket approval applications (PMAs) are not yet required, and devices substantially equivalent to such devices, may be marketed upon FDA clearance of a Premarket Notification (a 510(k)). Other Class III devices may be commercially marketed only after FDA approval of a PMA. Generally, the process of obtaining FDA approval of a PMA is similar to that for obtaining approval of a biological or other drug product. Based upon the information provided in a 510(k) Notice regarding the device's intended use and technological features, the FDA will determine whether the device is "substantially equivalent" to a predicate device, i.e., a device legally marketed which did not require a PMA. If a device is found to be substantially equivalent to a predicate device, it may be freely marketed in the United States so long as the device is otherwise in compliance with the FDC Act. If it is not so found, it will be considered a Class III device requiring a PMA. Substantial equivalence means - 10 - that the FDA has found that the device has the same intended use as the predicate device, and either has the same technological characteristics or has different characteristics, but there is information in the 510(k) Notice that shows the device is as safe and effective as the predicate and does not present different questions of safety and effectiveness. OraSure Collection Device. Use of the OraSure collection device for applications involving the detection of antibodies to HIV is regulated by the FDA as use of a Class III medical device requiring a PMA. In December 1994, the FDA approved Epitope's PMA for use of the OraSure device in HIV screening. Post-approval marketing studies are under way as required as part of the FDA's approval of the OraSure device. In June 1996, the FDA approved the PMA for use of the OraSure oral specimen-based Western blot confirmatory test kit for HIV-1 diagnosis. A second generation HIV-1 antibody EIA test for OraSure samples is currently under review by the FDA. The Company has also applied for regulatory clearance of the use of the OraSure device for HIV testing (device, screening test, and Western Blot confirmatory test) in Canada. Epitope has submitted 510(k) Notices for use of OraSure in testing for several drugs of abuse. These submissions are currently undergoing FDA review. See "Business-- Products Under Development--OraSure." In the meantime, the FDA has advised Epitope that OraSure may be used for cocaine testing for the purposes of life insurance risk assessment. Western Blot Test Kits. Epitope's HIV-1 Western blot serum-based confirmatory test kits are used to confirm whether individuals are infected with HIV-1. They are regulated by the FDA as biological products, unlike most other diagnostic tests which are regulated as medical devices. In March 1991, the FDA cleared the EPIblot HIV-1 serum-based confirmatory test kit for commercial distribution. As noted above, a PMA seeking permission to market the OraSure oral specimen-based Western blot confirmatory test kit for HIV-1 diagnosis was approved by the FDA in June 1996. Manufacturing Regulations. Every company that manufactures drugs, biological products, or medical devices distributed in the United States is subject to inspections by the FDA and must comply with the FDA's Quality Systems regulations. These regulations govern, among other matters, manufacture, testing, release, packaging, distribution, documentation, purchasing and design control. Other. Epitope is also subject to regulation by the Occupational Safety and Health Administration and may be subject to regulation by the U.S. Environmental Protection Agency (EPA) under the Toxic Substances Control Act (TSCA), the Resource Conservation and Recovery Act, and other legislation. Epitope is also subject to foreign regulations governing, for example, human clinical trials and marketing with respect to products distributed outside the United States. Approval processes vary from country to country, and the length of time required for approval or to obtain other clearances may in some cases be longer than that required for U.S. governmental approvals. The extent of potentially adverse governmental regulation affecting Epitope that might arise from future legislative or administrative action cannot be predicted. TARGETED STOCK AND AGRITOPE SPIN-OFF In November 1996, the Epitope board of directors (the Epitope Board) proposed creating two separate classes of Epitope common stock, one to reflect the business and operations of the Epitope Medical Products business and the other to reflect the business and operations of Agritope, then a wholly owned subsidiary engaged in the agricultural biotechnology business (the Targeted Stock Proposal). In May 1997, prior to a shareholder vote on the Targeted Stock Proposal, the Epitope Board withdrew the Targeted Stock Proposal from consideration. In July 1997, the Epitope Board approved a proposal to spin off Agritope, subject to obtaining financing for Agritope and the satisfaction of certain other conditions, in a distribution to Epitope shareholders (the Agritope Spin-off). In late December 1997, Epitope expects to distribute all of its ownership interest in Agritope to Epitope's shareholders through a stock dividend. Epitope will then no longer own or control any shares of Agritope stock. - 11 - DISCONTINUED OPERATIONS Agritope. Agritope (then named Agricultural Genetic Systems, Inc.) was acquired by Epitope in 1987. Agritope consists of two units: Agritope Research and Development (Agritope R&D) and Vinifera, Inc. (Vinifera). Agritope R&D uses biotechnology in the development of new fruit and vegetable plant varieties for sale to the fresh produce industry. To date, Agritope has not completed commercialization of this technology. A portion of the research and development efforts conducted by Agritope has been performed under various research grants and contracts. Vinifera is engaged in the grapevine propagation and distribution business. During 1995, Vinifera was in the development stage and generated minimal product sales. Vinifera commenced commercial stage operations in 1996. Agritope's results of operations are presented as discontinued operations in the consolidated financial statements included in this Annual Report on Form 10-K for all periods presented. Agritope's net assets are presented in the September 30, 1997 balance sheet as net assets of discontinued operations. All intercompany loans from Epitope to Agritope have been reflected as capital contributions to Agritope consistent with the separation agreement dated between Agritope and Epitope dated December 1, 1997, which also provides that net expenses of Agritope after that date will be borne by Agritope, subject to the completion of the Agritope Spin-off. Andrew and Williamson Sales, Co. On December 12, 1996, a subsidiary of the Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a 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 Epitope common stock in exchange for all of the outstanding common stock of A&W. On May 27, 1997, in accordance with the terms of a rescission agreement, the former shareholders of A&W returned the 520,000 shares of Epitope common stock they received, and Epitope returned all of the outstanding shares of A&W common stock. Epitope also received A&W preferred stock in satisfaction of intercompany loans made to A&W between December 12, 1996 and March 19, 1997. This A&W preferred stock carries a $5.7 million liquidation preference, dividend preferences, and various redemption features. In addition, the Company has provided a guarantee to Wells Fargo Bank for a credit facility provided to A&W which has a borrowing limit of $6.5 million. This credit line is secured by A&W's accounts receivable, inventory and equipment, as well as by personal guarantees from the owners of A&W, who have agreed to reimburse Epitope for any amounts the Company is required to pay under the guarantee. SUPPLIES The HIV-1 antigen needed to manufacture Epitope's Western blot HIV confirmatory test kits is available from only a limited number of sources. Organon Teknika, the exclusive distributor of the test kits, is required to supply Epitope's requirements for antigen for the term of its distribution agreement with Epitope, which ends March 31, 1998. If for any reason Organon Teknika should no longer be able to supply the Company's antigen needs, management believes Epitope would be able to obtain its own supply of antigen at a competitive cost. A change in the antigen would require FDA approval. Epitope has obtained a license from the National Technical Information Service which is required for the production of the HIV-1 antigen currently used in the Company's Western blot test kits, although it is unlikely that Epitope would choose to manufacture its own antigen because of its availability from other suppliers. Other materials used by Epitope in manufacturing, production, and research and development operations are widely available from a variety of sources. GRANTS AND CONTRACTS Epitope has received funding in the past from the National Institute of Allergy and Infectious Diseases (NIAID), for work in developing a rapid test to detect HIV antibodies in oral fluid specimens, and from the National Cancer Institute (NCI) to fund research for the treatment of cancer by exploiting a deficiency of certain compounds in cancer cells. As a part of the SB Agreement, various R&D projects at Epitope were funded by SB, in exchange for certain marketing rights to products which would have resulted from the development. With the termination of the SB Agreement, Epitope regained the rights to the results of the work that had been accomplished under this funding. The Company intends to continue to participate in grant programs and projects with strategic partners as it deems - 12 - appropriate. The Company regularly makes applications for new grants, but there is no assurance that grant support will be continued. PATENTS AND PROPRIETARY INFORMATION Epitope has obtained patents in the United States and certain foreign countries for the OraSure and OraQuick devices and related technology. Epitope has applied for additional patents, both in the United States and in certain foreign countries, on the OraSure collection device and a number of other technologies and products. The Company anticipates filing patent applications for protection on future products and technology. United States patents generally have a maximum term of 20 years from the date an application is filed or 17 years from issuance, whichever is longer. Much of the technology developed by the Company is subject to trade secret protection. To reduce the risk of loss of trade secret protection through disclosure, the Company requires its employees and consultants to enter into confidentiality agreements. The Company believes that patent and trade secret protection is important to its business. However, the issuance of a patent or existence of trade secret protection does not in itself ensure the Company's success. Competitors may be able to produce products competing with a patented Company product without infringing on the Company's patent rights. Issuance of a patent in one country generally does not prevent manufacture or sale of the patented product in other countries. The issuance of a patent to the Company or to a licenser is not conclusive as to validity or as to the enforceable scope of the patent. The validity or enforceability of a patent can be challenged by litigation after its issuance, and, if the outcome of such litigation is adverse to the owner of the patent, the owner's rights could be diminished or withdrawn. Trade secret protection does not prevent independent discovery and exploitation of the secret product or technique. PERSONNEL At September 30, 1997, the Company and its subsidiaries had 130 full-time employees, including 85 persons employed by Epitope, and 45 employed by Agritope. Epitope employees included 15 persons in research and product development, 25 in administration and marketing, 34 in manufacturing and production, and 11 in regulatory affairs and quality assurance. Agritope employees included 22 in research and development and 23 at the Vinifera grape plant nursery operation which also employs seasonal part-time employees as needed. The Company considers its relations with its employees to be excellent. None of its employees are represented by labor unions. The Company and its subsidiaries employ 12 persons holding Ph.D. or M.D. degrees with specialties in the following disciplines: analytical chemistry, bacteriology and public health, biochemistry, biophysics, hematology and internal medicine, immunology, molecular biology, organic chemistry, plant biology and plant pathology. From time to time, the Company also engages the services of scientists as consultants to augment the skills of its scientific staff. SCIENTIFIC ADVISORY BOARD The Company also utilizes the services of a Scientific Advisory Board. The Scientific Advisory Board meets periodically to review the Company's research and development efforts and to apprise the Company of scientific developments pertinent to the Company's business. The Scientific Advisory Board comprises chair Daniel Malamud, Ph.D., Professor and Chair, Department of Biochemistry, University of Pennsylvania School of Dental Medicine; J. Richard George, Ph.D., Vice President of Scientific Affairs of Epitope; Lesley M. Hallick, Ph.D., Vice President for Academic Affairs, Oregon Health Sciences University; and James I. Mullins, Ph.D., Professor of Microbiology and Medicine, University of Washington; and John V. Parry, Ph.D, Deputy Director, Hepatitis and Retrovirology Laboratory, Central Public Health Laboratory, Virus Reference Division, London. - 13 - NOTE REGARDING FORWARD-LOOKING STATEMENTS The previous discussion of the Company's business should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Statements regarding future events or performance set forth in this report 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 loss or impairment of sources of capital; ability of the Company to develop product distribution channels; development of competing products; market acceptance of oral testing products; 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. ITEM 2. PROPERTIES. The Company leases approximately 35,600 square feet of office, manufacturing, and laboratory space in Beaverton, Oregon, under two leases that terminate January 31, 2000. Each lease calls for fixed monthly payments over its term. The Company also entered into a three-year lease, effective October 1, 1996, for 2,265 square feet of warehouse space used to store inventory and equipment. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. - 14 - PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is listed for trading on the National Market tier of The Nasdaq Stock Market ("NASDAQ") under the symbol EPTO. Prior to Jan 2, 1997, the Company's Common Stock was listed for trading on the American Stock Exchange ("AMEX") under the symbol EPT. High and low sales prices reported by NASDAQ and AMEX during the periods indicated are shown below. SALES PRICES PER SHARE YEAR ENDED SEPTEMBER 30 1997 1996 HIGH LOW HIGH LOW First Quarter $ 16.375 $ 10.875 $ 18.00 $ 9.50 Second Quarter 17.375 9.75 19.50 13.875 Third Quarter 11.125 6.25 22.875 15.50 Fourth Quarter 8.625 4.625 16.125 11.75 On December 1, 1997, there were 1,004 holders of record of the Common Stock, and the closing price of the Common Stock was $5.75. The Company has never paid any cash dividends, and the Board of Directors does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any future earnings to provide funds for the operation and expansion of its business. On September 30, 1997, the Company issued 209,368 shares of Common Stock to SmithKline Beecham plc in a private placement in exchange for $1,500,000 in cash. The shares were issued in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. SB is an accredited investor, as defined in Regulation D. The Company filed a Form D regarding sale of the shares. - 15 - ITEM 6. SELECTED FINANCIAL DATA. COMPARATIVE FINANCIAL DATA (In thousands, except per share data) The following table sets forth selected historical consolidated income and balance sheet data of Epitope, Inc. and its subsidiaries. The balance sheet data at September 30, 1997 and 1996 and the operating results data for the years ended September 30, 1997, 1996, and 1995 have been derived from audited consolidated financial statements and notes thereto included in this Annual Report on Form 10-K. The balance sheet data at September 30, 1995, 1994 and 1993 and operating results data for the years ended September 30, 1994 and 1993 have been derived from audited consolidated financial statements and notes thereto not included in this Annual Report on Form 10-K and, in the opinion of management, include all adjustments necessary for fair presentation. This information should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 herein and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPARATIVE FINANCIAL DATA (In thousands, except per share data) YEAR ENDED SEPTEMBER 30 1997 1996 1995 1994 1993 OPERATING RESULTS Revenues......................................... $ 9,360 $ 5,594 $ 2,856 $ 2,605 $ 2,759 Operating costs and expenses..................... 14,324 10,881 14,463 8,890 9,376 Other income (expense), net...................... 882 6,388(1) 1,157 456 (1,154) Profit (loss) from continuing operations......... (4,081) 1,101 (10,451) (5,829) (7,771) Discontinued operations.......................... (18,359) (2,501) (8,045) (9,804) (6,958) Net loss......................................... (22,440) (1,400) (18,496) (15,633) (14,729) Profit (loss) per share from continuing operations..................................... (.30) .08(2) (.88) (.58) (.88) Net loss per share............................... (1.67) (.11) (1.56) (1.56) (1.67) Shares used in per share calculations.................................... 13,404 12,661(2) 11,886 10,050 8,828 BALANCE SHEET DATA Working capital.................................. $ 9,538 $ 24,793 $ 20,686 $ 16,766 $ 8,703 Total assets..................................... 17,012 29,784 26,142 19,993 9,071 Accumulated deficit.............................. (95,426) (72,985) (71,585) (53,090) (37,457) Shareholders' equity............................. 15,014 27,967 22,347 18,470 7,970
(1) Includes one-time licensing fee of $5.0 million. (2) 13,440,000 shares used in calculation of profit per share from continuing operations due to common stock equivalents. - 16 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion of operations and financial condition should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. 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 loss or impairment of sources of capital; ability of the Company to develop product distribution channels; development of competing products; market acceptance of oral testing products; 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. TARGETED STOCK AND AGRITOPE SPIN-OFF In November 1996, the Epitope Board proposed creating two separate classes of Epitope common stock, one to reflect the business and operations of the Epitope medical products business and the other to reflect the business and operations of Agritope (the "Targeted Stock Proposal"). In May 1997, prior to a shareholder vote on the Targeted Stock Proposal, the Epitope Board withdrew the Targeted Stock Proposal from consideration. In July 1997, the Epitope Board approved the Agritope Spin-off, subject to obtaining financing for Agritope and the satisfaction of certain other conditions. In October 1997, commitments for financing for Agritope considered to be adequate by the Epitope Board were obtained. In late December 1997, Epitope expects to distribute all of its ownership interest in Agritope to Epitope's shareholders through a stock dividend. Epitope will then no longer own or control any shares of Agritope stock. DISCONTINUED OPERATIONS Agritope. Agritope is a wholly owned subsidiary of Epitope acquired in 1987. Agritope consists of two units: Agritope R&D and Vinifera. Agritope R&D uses biotechnology in the development of new fruit and vegetable plant varieties for sale to the fresh produce industry. To date, Agritope has not completed commercialization of this technology. A portion of the research and development efforts conducted by Agritope has been performed under various research grants and contracts. Vinifera is engaged in the grapevine propagation and distribution business. During 1995, Vinifera was in the development stage and generated minimal product sales. Vinifera commenced commercial stage operations in 1996. Agritope's results of operations and net assets are presented as discontinued operations in the consolidated financial statements included in this Annual Report on Form 10-K for all periods presented. All intercompany loans from Epitope to Agritope have been reflected as capital contributions to Agritope consistent with the separation agreement dated December 1, 1997. The 1997 loss from discontinued operations of Agritope includes an accrual of $1.2 million for Agritope's operating losses from October 1, 1997 through December 1, 1997 and for costs of the Agritope Spin-off. The separation agreement provides that net expenses of Agritope after December 1, 1997 will be borne by Agritope. Andrew and Williamson Sales, Co. On December 12, 1996, a subsidiary of the Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a 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 Epitope common stock in exchange for all of the outstanding common stock of A&W. On May 27, 1997, in accordance with the terms of a rescission agreement, the former shareholders of A&W returned the 520,000 shares of Epitope common stock they received, and Epitope returned all of the outstanding shares of A&W common stock. Epitope also received A&W preferred stock in satisfaction of intercompany loans made to A&W between December 12, 1996 and March 19, 1997. This A&W preferred stock carries a $5.7 million liquidation preference, dividend preferences, and various redemption features. - 17 - A&W's results of operations for the period from December 13, 1996 through May 27, 1997 are presented in the consolidated financial statements included in this Annual Report on Form 10-K as discontinued operations. 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 $5.7 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 write-off of $633,000 in A&W acquisition costs, and the accrual of $262,000 in estimated costs associated with the rescission. RESULTS OF OPERATIONS The table below shows the amount (in thousands) and percentage of Epitope's total revenue contributed by each of its principal products and by grants and contracts. FISCAL YEAR 1997 1996 1995 Product Sales Oral specimen collection devices..................... $6,279 67% $3,311 59% $ 981 34% Western blot HIV confirmatory tests.................. 1,791 19 1,540 28 1,811 64 Other product sales.................................. 14 - 14 - 15 - ------ --- ------ --- ------ --- 8,084 86 4,865 87 2,807 98 Grants and contracts................................. 1,276 14 729 13 49 2 ------- --- ------ --- ------ --- $9,360 100% $5,594 100% $2,856 100%
Revenues. Product sales increased by $3.2 million or 66 percent from 1996 to 1997 and by $2.1 million or 73 percent from 1995 to 1996 primarily as a result of expanded sales volume of Epitope's lead product, the EpiScreen/OraSure oral specimen collection device. Approximately 39 percent of 1996 sales were attributable to shipments in the fourth quarter. The significant increase in sales volume of the OraSure device is primarily due to increased purchases of the device by the Company's distributors for the life insurance testing market following approval of the device by the FDA in June 1996 for use in conjunction with an oral-based confirmatory test. Sales of the device to the life insurance testing market in the fourth quarter of fiscal 1997 were adversely affected by reductions in orders as several of the Company's distributors reduced existing inventory levels. Sales in the life insurance market are expected to continue to be at reduced levels in the first quarter of fiscal 1998, with growth expected in both the insurance and public health markets in the second quarter. Sales in 1997 also reflect increased sales in the public health market due to the marketing efforts of SB, the Company's former marketing partner. In July 1997, as a result of SB's decision to discontinue pursuit of a plan to develop and market over-the-counter products for disease detection, SB terminated its development, license and supply agreement with Epitope. Because the agreement was terminated, Epitope regained OraSure marketing rights from SB. During the transition period in August and September of 1997, SB continued to market the OraSure testing system to the medical community. Beginning in October 1997, the product is being marketed through Epitope's direct sales force. As of September 30, 1997, the Company had firm orders and contractual commitments for the OraSure device and the Western Blot confirmatory tests respectively totaling approximately $900,000 and $450,000 scheduled for shipment within 90 days, as compared to firm orders for delivery within 90 days of $1.8 million and $450,000 respectively as of September 30, 1996. Sales of the Company's Western blot HIV confirmatory test increased by $251,000 or 16 percent from 1996 to 1997 and decreased by $271,000 or 15 percent from 1995 to 1996. Sales in 1996 were negatively affected by a reduction in orders from the Company's exclusive distributor for this product as the distributor lowered inventory levels. In addition, 1997 sales of the oral-based Western blot HIV confirmatory test have increased as a result of increased use of the related oral specimen collection device and screening test. As of September 30, 1997, the Company had firm orders for the Western blot HIV confirmatory test totaling $450,000 scheduled for shipment before December 31, 1997. - 18 - Grant and contract revenues increased by $547,000 or 75 percent from 1996 to 1997 and by $681,000 or 14 fold from 1995 to 1996 due to funding of research projects by the Company's former development partner, SB. In July 1997, the Company's development, license and supply agreement with SB was terminated, and the R&D funding by SB was curtailed. Discussions are underway with other potential partners who might replace some or all of this R&D funding. Gross Margin on product sales was 57 percent in 1997, 45 percent in 1996, and negative in 1995. The improvement in gross margins is attributable to increased sales and production volumes for the OraSure device which resulted in lower per unit costs and to the shift in product mix towards the OraSure device which carries a higher gross margin than does the Western blot HIV confirmatory test. The gross margin in the fourth quarter of 1997 was adversely affected by the disposal of inventory on hand which was manufactured with SB labeling and packaging when the development, license and supply agreement with SB was terminated. Excluding the inventory adjustment, the gross margin would have been 59 percent in 1997. Research and Development Expenses. Research and development expenses increased by $991,000 or 31 percent from 1996 to 1997 and decreased by $1.5 million or 31 percent from 1995 to 1996. The decrease in 1996 was primarily attributable to cost reductions associated with the Company's September 1995 restructuring program as well as lower levels of clinical trials activity. The increase in 1997 was primarily the result of increased levels of research activity, including several clinical studies, conducted under arrangements with SB and for other projects performed by the Company. Plans are in place to reduce the R&D expense for 1998, unless additional funding is forthcoming from potential new partners. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $1.6 million or 32 percent from 1996 to 1997 and decreased by $1.6 million or 25 percent from 1995 to 1996. The increase in 1997 was primarily attributable to higher corporate and marketing expenses as the Company expanded its direct sales efforts. The decrease in 1996 was primarily due to the results of the Company's September 1995 restructuring program. Selling, general and administrative expenses for 1995 included approximately $607,000 for severance payments and other costs associated with implementing the restructuring program. In addition, marketing expenses in 1996 were $754,000 lower than in 1995 as a result of the restructuring program. 1998 sales expenses are expected to increase as a result of direct marketing efforts by the Company in the public health market. Selling, general and administrative expenses have been reduced by $1.4 million, $1.1 million and $1.9 million in 1997, 1996 and 1995, respectively, for amounts allocated to Agritope (see "Discontinued Operations"). Certain corporate overhead services such as accounting, annual meeting costs, annual report preparation, audit, executive management, facilities, finance, general management, human resources, information systems, investor relations, legal services, payroll and SEC filings were provided by Epitope on a centralized basis for the benefit of the medical products business and for Agritope ("Shared Services"). Such expenses have been allocated between the medical products business and Agritope using activity indicators which, in the opinion of management, represent a reasonable measure of each business's utilization of such Shared Services. Epitope and Agritope have entered into a transitional services agreement whereby, following the Agritope Spin-off, Epitope will continue to provide certain of these services to Agritope and Agritope will reimburse Epitope for the cost of such services during a transitional period. The allocation of Shared Services to Agritope is expected to significantly decrease in 1998 as Agritope eventually moves to separate facilities. However, the Company has implemented a cost reduction plan for 1998 that is expected to result in savings in selling, general, and administrative expenses to off-set the reduction in allocations to Agritope. Other Income (Expense), Net. Other income for 1996 included $5.0 million related to license fees received from SB as a result of FDA approval of an extension of dating for the OraSure/EpiScreen device. Interest income decreased in 1997, primarily due to lower levels of invested funds. - 19 - LIQUIDITY AND CAPITAL RESOURCES (IN THOUSANDS) 9/30/97 9/30/96 Cash and cash equivalents................ $ 1,934 $ 5,223 Marketable securities.................... 7,142 18,818 Working capital.......................... 9,532 24,793 Net cash flows from operating activities improved significantly from 1995 to 1996 as a result of improved operating results and the receipt of a $5.0 million license fee from SB in 1996. Cash flows from operations in 1997 did not include such a payment. Proceeds from the issuance of equity securities of the Company, augmented by funding from strategic partners and other research grants, have represented the primary sources of funds for meeting the Company's requirements for operations, working capital and business expansion. Epitope received $1.5 million for the issuance of common stock in a 1997 private placement. The Company also received proceeds of $168,000, $5.9 million and $21.0 million from the exercise of warrants and options to purchase common stock in 1997, 1996 and 1995, respectively. Research grant funding from strategic partners was $1.3 million, $729,000 and $49,000 in 1997, 1996 and 1995, respectively. Funding of the Company's discontinued operations, Agritope and A&W, required $13.9 million, $3.2 million and $7.8 million in 1997, 1996 and 1995, respectively. The Company anticipates that it will continue to need funds to support ongoing research and development projects as well as to provide additional manufacturing capacity and related increases in working capital to support growth. The Company intends to utilize cash reserves, cash generated from sales of products and research funding from strategic partners to provide some of the necessary funds. The Company is also exploring opportunities to generate additional funds from the sale of equity securities, and may receive funds through the exercise of outstanding stock options and warrants. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. - 20 - ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Information with respect to this Item is (i) set forth below and (ii) contained in the Company's Consolidated Financial Statements included in Item 14 of this Annual Report on Form 10-K. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (In thousands, except income (loss) per share) The following table presents summarized quarterly results of operations for each of the fiscal quarters in the Company's fiscal years ended September 30, 1997 and 1996. These quarterly results are unaudited, but, in the opinion of management, have been prepared on the same basis as the Company's audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The data should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Item 14 of this Annual Report on Form 10-K. FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER TOTAL YEAR ENDED SEPTEMBER 30, 1997 Revenues......................................... $ 2,641 $ 2,336 $ 2,884 $ 1,500 $ 9,360 Operating costs and expenses..................... 3,251 3,574 4,005 3,494 14,324 Other income, net................................ 319 274 173 116 882 Loss from continuing operations.................. (291) (964) (948) (1,878) (4,081) Discontinued operations.......................... (4,093) (9,202) (1,366) (3,698) (18,359) Net loss......................................... (4,384) (10,166) (2,314) (5,576) (22,440) Loss per share from continuing operations........ (.02) (.07) (.07) (.14) (.30) Net loss per share............................... (.34) (.74) (.17) (.42) (1.67) YEAR ENDED SEPTEMBER 30, 1996 Revenues......................................... $ 1,225 $ 1,207 $ 1,107 $ 2,055 $ 5,594 Operating costs and expenses..................... 2,510 2,819 2,507 3,045 10,881 Other income, net................................ 293 283 5,485(1) 327 6,388 Income (loss) from continuing operations......... (992) (1,329) 4,085 (663) 1,101 Discontinued operations.......................... (660) (488) (585) (768) (2,501) Net income (loss)................................ (1,652) (1,817) 3,500 (1,431) (1,400) Income (loss) per share from continuing operations.................................... (.08) (.11) .30 (.05) .08 Net income (loss) per share...................... (.13) (.14) .25 (.11) (.11)
(1) Includes license fee of $5.0 million from SmithKline Beecham, plc. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. - 21 - PART III The Company has omitted from Part III the information that will appear in the Company's definitive proxy statement for its 1998 annual meeting of shareholders (the "Proxy Statement"), which will be filed within 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item is incorporated by reference to the information under the captions "Election of Directors" and "Executive Officers" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item is incorporated by reference to the information under the caption "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item is incorporated by reference to the information under the caption "Principal Shareholders" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item is incorporated by reference to the information under the caption "Certain Transactions" in the Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) and (a)(2) Consolidated Financial Statements and Schedules. - 22 - INDEX TO FINANCIAL STATEMENTS Page Report of Independent Accountants............................................ 24 Consolidated Balance Sheets at September 30, 1997 and 1996................... 25 Consolidated Statements of Operations for years ended September 30, 1997, 1996, and 1995........................................ 26 Consolidated Statements of Changes in Shareholders' Equity for years ended September 30, 1997, 1996, and 1995........................................ 27 Consolidated Statements of Cash Flows for years ended September 30, 1997, 1996, and 1995........................................ 28 Notes to Consolidated Financial Statements................................... 29 - 23 - REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Epitope, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of changes in shareholders' equity, and of cash flows present fairly, in all material respects, the financial position of Epitope, Inc. and its subsidiaries at September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Portland, Oregon October 31, 1997, except for Note 3, as to which the date is December 1, 1997 - 24 - EPITOPE, INC. CONSOLIDATED BALANCE SHEETS SEPTEMBER 30 1997 1996 ASSETS Current assets Cash and cash equivalents.............................................. $ 1,934,480 $ 5,222,749 Marketable securities.................................................. 7,141,640 18,818,120 Trade accounts receivable, net (Note 2)................................ 928,047 1,147,599 Other accounts receivable.............................................. 128,949 174,083 Inventories (Note 2)................................................... 1,324,647 1,157,930 Prepaid expenses....................................................... 78,240 89,518 ------------ ------------ Total current assets................................................... 11,536,003 26,609,999 Property and equipment, net (Note 4)................................... 1,200,988 1,542,757 Patents and proprietary technology, net (Note 2)....................... 657,487 601,233 Other assets and deposits.............................................. 55,099 22,759 Net assets of discontinued operations (Note 3)......................... 3,562,726 1,007,607 ------------ ------------ $ 17,012,303 $ 29,784,355 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable....................................................... $ 110,285 $ 449,169 Salaries, benefits and other accrued liabilities ...................... 1,887,825 1,368,166 ------------ ------------ Total current liabilities.............................................. 1,998,110 1,817,335 Commitments and contingencies (Notes 3 and 9).......................... - - Shareholders' equity (Note 5) Preferred stock, no par value - 1,000,000 shares authorized; no shares outstanding................................................... - - Common stock, no par value - 30,000,000 shares authorized; 13,454,330 and 12,937,383 shares issued and outstanding, respectively........... 110,439,726 100,952,282 Accumulated deficit.................................................... (95,425,533) (72,985,262) ------------ ------------ 15,014,193 27,967,020 $ 17,012,303 $ 29,784,355
The accompanying notes are an integral part of these statements. - 25 - EPITOPE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30 1997 1996 1995 Revenues Product sales............................................. $ 8,083,606 $ 4,864,378 $ 2,806,850 Grants and contracts...................................... 1,276,454 729,271 48,672 ------------ ----------- ------------ 9,360,060 5,593,649 2,855,522 Costs and expenses Product costs............................................. 3,512,054 2,681,429 3,163,012 Research and development costs............................ 4,156,996 3,165,838 4,617,246 Selling, general and administrative expenses.............. 6,654,553 5,033,491 6,682,860 ------------ ----------- ------------ 14,323,603 10,880,758 14,463,118 Loss from operations...................................... (4,963,543) (5,287,109) (11,607,596) Other income (expense), net Interest income........................................... 885,583 1,386,968 1,157,305 Interest expense.......................................... (8,165) - - License fee............................................... - 5,000,000 - Other, net................................................ 4,861 1,493 (319) ------------ ----------- ------------- 882,279 6,388,461 1,156,986 Net income (loss) from continuing operations.............. (4,081,264) 1,101,352 (10,450,610) Discontinued operations (Note 3) Loss from discontinued operations; Agritope............... (9,890,599) (2,501,268) (8,045,218) Income from discontinued operations; A&W.................. 170,646 - - Estimated loss on disposal of A&W......................... (8,639,054) - - ------------ ----------- ------------ (18,359,007) (2,501,268) (8,045,218) Net loss.................................................. $ (22,440,271) $ (1,399,916) $ (18,495,828) Income (loss) per share from continuing operations........ $ (.30) $ .08 $ (.88) Net loss per share........................................ $ (1.67) $ (.11) $ (1.56) Weighted average number of shares outstanding.............................................. 13,404,402 12,661,420* 11,886,234
* Income per share from continuing operations calculated using 13,440,396 weighted average shares outstanding due to common stock equivalents. The accompanying notes are an integral part of these statements. - 26 - EPITOPE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY COMMON STOCK ACCUMULATED SHARES DOLLARS DEFICIT TOTAL BALANCES AT SEPTEMBER 30, 1994.............. 10,926,551 $ 71,559,900 $ (53,089,518) $ 18,470,382 Common stock issued upon exercise of options....................... 183,525 2,145,673 - 2,145,673 Common stock issued as compensation.............................. 16,013 266,800 - 266,800 Compensation expense for stock option grants....................... - 1,374,710 - 1,374,710 Common stock issued upon exercise of warrants...................... 1,336,000 18,892,750 - 18,892,750 Common stock issued upon exchange of convertible notes........................ 23,041 449,991 - 449,991 Equity issuance costs....................... - (757,877) - (757,877) Net loss for the year....................... - - (18,495,828) (18,495,828) ----------- ------------ ------------ ----------- BALANCES AT SEPTEMBER 30, 1995.............. 12,485,130 93,931,947 (71,585,346) 22,346,601 Common stock issued upon exercise of options....................... 386,550 4,886,118 - 4,886,118 Common stock issued as compensation......... 19,353 263,586 - 263,586 Compensation expense for stock option grants............................. - 1,044,183 - 1,044,183 Common stock issued upon exercise of warrants...................... 46,350 826,600 - 826,600 Equity issuance costs....................... - (152) - (152) Net loss for the year....................... - - (1,399,916) (1,399,916) ---------- ------------ ------------ ----------- BALANCES AT SEPTEMBER 30, 1996.............. 12,937,383 100,952,282 (72,985,262) 27,967,020 Common stock issued upon exercise of options....................... 16,124 168,211 - 168,211 Common stock issued as compensation.............................. 41,088 323,938 - 323,938 Compensation expense for stock option grants....................... - 489,668 - 489,668 Common stock issued upon exchange of convertible notes (Note 3)............. 250,367 4,529,009 - 4,529,009 Equity issuance costs....................... - (86,134) - (86,134) Capital contributed in rescission (Note 3).. - 1,820,000 - 1,820,000 Common stock issued for cash................ 209,368 1,500,000 - 1,500,000 Minority interest investment in Vinifera.... - 742,752 - 742,752 Net loss for the year....................... - - (22,440,271) (22,440,271) ---------- ------------ ------------ ----------- BALANCES AT SEPTEMBER 30, 1997.............. 13,454,330 $ 110,439,726 $ (95,425,533) $ 15,014,193
The accompanying notes are an integral part of these statements. - 27 - EPITOPE, INC. COMBINED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED SEPTEMBER 30 1997 1996 1995 Cash flows from operating activities Net loss.................................................. $ (22,440,271) $ (1,399,916) $ (18,495,828) Adjustments to reconcile Net loss to Net cash used in operating activities: Loss from discontinued operations......................... 18,359,007 - - Depreciation and amortization............................. 729,970 1,086,930 1,458,675 Loss (gain) on disposition of property.................... 17,888 (1,098) 819 Decrease (increase) in receivables........................ 264,686 125,025 (1,022,050) Increase in inventories................................... (166,717) (233,929) (286,903) Decrease (increase) in prepaid expenses................... 11,278 69,133 (17,608) (Increase) decrease in other assets and deposits.......... (32,340) 20,649 (33,521) Increase (decrease) in accounts payable and accrued liabilities............................................. 180,773 (1,656,478) 2,168,684 Common stock issued as compensation for services.......... 323,938 263,586 266,800 Compensation expense for stock option grants and deferred salary increases ........................... 489,668 1,044,183 1,374,710 ------------ ----------- ------------ Net cash used in operating activities..................... (2,262,120) (723,213) (14,586,222) Cash flows from investing activities Investment in marketable securities....................... (20,106,837) (47,608,270) (16,194,994) Proceeds from sale of marketable securities............... 31,783,317 45,870,396 4,718,162 Additions to property and equipment....................... (196,910) (1,066,758) (1,350,850) Proceeds from sale of property............................ - 7,432 14,343 Expenditures for patents and proprietary technology....... (265,435) (770,262) (305,135) Investment in affiliated companies........................ (6,702,299) (331,280) 652,698 Minority interest in affiliated companies................. - 215,407 - ------------ ----------- ------------ Net cash provided by (used in) investing activities....... 4,511,836 (3,683,335) (12,465,776) Cash flows from financing activities Principal payments under installment purchase and capital lease obligations............................... - (39,507) (16,137) Proceeds from issuance of common stock.................... 1,668,211 5,885,573 21,060,912 Cost of common stock issuance............................. - (152) (757,877) Cash to Agritope.......................................... (7,206,196) - - ------------ ----------- ------------ Net cash (used in) provided by financing activities....... (5,537,985) 5,845,914 20,286,898 Net (decrease) increase in cash and cash equivalents...... (3,288,269) 1,439,366 (6,765,100) Cash and cash equivalents at beginning of year............ 5,699,263 4,259,897 11,024,997 ------------ ----------- ------------ Cash and cash equivalents at end of year (Note 3)......... $ 1,934,480 $ 5,699,263 $ 4,259,897
The accompanying notes are an integral part of these statements. - 28 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 THE COMPANY Epitope, Inc. (the "Company" or "Epitope") is an Oregon company incorporated in 1981. Epitope develops and markets oral specimen collection kits and related diagnostic tests for the detection of the Human Immunodeficiency Virus ("HIV"), the cause of Acquired Immune Deficiency Syndrome ("AIDS"), and for the detection of other medical conditions and analytes. The Company markets the device under the brand name EpiScreen in the United States and in certain foreign countries for use in screening life insurance applicants and under the brand name OraSure for use in the public health and medical professional markets. The Company also conducts joint research and development projects under contracts and grants. See Note 3, Discontinued Operations, below. NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. Assets and liabilities of majority-owned subsidiaries are included in these statements. Minority-owned investments and joint ventures are accounted for using the equity method. Cash and Cash Equivalents; Marketable Securities. The Company considers all highly liquid investments with maturities at time of purchase of three months or less to be cash equivalents. At September 30, 1997, marketable securities consisted of commercial paper and U.S. Treasury securities with an original maturity period greater than three months, but generally less than 12 months. The Company's policy is to invest its excess cash in securities that maximize (a) safety of principal, (b) liquidity for operating needs, and (c) after-tax yields. Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company has categorized all of its investments as available-for-sale securities and, accordingly, unrealized gains and losses on such investments, if material, are carried as a separate component of shareholders' equity. Such unrealized gains and losses were immaterial as of September 30, 1997 and 1996. Trade Accounts Receivable. Accounts receivable are stated net of an allowance for doubtful accounts of $32,284 and $6,872, respectively, at September 30, 1997 and 1996. Inventories. Inventories are recorded at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Inventory components are summarized as follows: SEPTEMBER 30 1997 1996 Raw materials.......................................................... $ 296,432 $ 522,824 Work-in-process........................................................ 343,585 389,642 Finished goods......................................................... 670,175 192,882 Supplies............................................................... 14,455 52,582 ---------- ---------- $ 1,324,647 $ 1,157,930
Depreciation and Capitalization Policies. Property and equipment are stated at cost less accumulated depreciation. Expenditures for repairs and maintenance are charged to operating expense as incurred. Expenditures for renewals and betterments are capitalized. Depreciation and amortization of property and equipment are calculated primarily under the straight-line method over the estimated lives of the related assets (three to seven years). Leasehold improvements are amortized over the shorter of estimated useful lives or the terms of the related leases. When assets are sold or otherwise disposed of, cost and the related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in operations. - 29 - Accounting for Long-Lived Assets. The Company periodically reviews its long-lived assets for impairment or as events or circumstances indicate that the carrying amount of long-lived assets may not be recoverable. If the estimated net cash flows are less than the carrying amount of the long-lived assets, the Company recognizes an impairment loss in an amount necessary to write down long-lived assets to fair value as determined from expected discounted future cash flows. This accounting policy is consistent with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." There has been no significant impact to the Company's financial position or results of operations as the carrying amount of all long-lived assets is considered recoverable. Patents and Proprietary Technology. Direct costs associated with patent submissions and acquired technology are capitalized and amortized over their minimum estimated economic useful lives, generally five years. Amortization and accumulated amortization are summarized as follows: 1997 1996 1995 Amortization expense for the year ended September 30...... $ 209,180 $ 172,095 $ 130,313 Accumulated amortization at September 30.................. 830,290 621,110 449,015
Fair Value of Financial Instruments. The carrying amounts for cash equivalents, accounts receivable, and accounts payable approximate fair value because of the immediate or short-term maturity of these financial instruments. Revenue Recognition. Product revenues are generally derived from the sale of products and are recognized as revenue when the related products are shipped. Grant and contract revenues include funds received under research and development agreements with various entities. Such revenues are recognized in accordance with the contract terms. Research and Development. Research and development expenditures are comprised of those costs associated with the Company's own ongoing research and development activities including the costs to prepare for, obtain and compile clinical studies and other information to support product license applications. Expenditures for research and development also include costs incurred under contracts to develop certain products, including those contracts resulting in grant and contract revenues. All research and development costs are expensed as incurred. Shared Services. Certain corporate overhead services such as accounting, annual meeting costs, annual report preparation, audit, executive management, facilities, finance, general management, human resources, information systems, investor relations, legal services, payroll and SEC filings are provided by Epitope on a centralized basis for the benefit of the Company's subsidiaries ("Shared Services"). Such expenses have been allocated to the subsidiaries in the accompanying financial statements using activity indicators which, in the opinion of management, represent a reasonable measure of the subsidiaries' utilization of such Shared Services. These activity indicators, which are reviewed periodically and adjusted to reflect changes in utilization, include number of employees, number of computers, and level of expenditures. The related subsidiaries' operating results are included in discontinued operations. See Note 3, Discontinued Operations. Selling, general and administrative expenses have been reduced by Shared Services allocated to the subsidiaries included in discontinued operations of: $1,402,895, $1,069,249 and $1,892,371 for the years ended September 30, 1997, 1996 and 1995, respectively. Income Taxes. The Company accounts for certain revenue and expense items differently for income tax purposes than for financial reporting purposes. These differences arise principally from methods used in accounting for stock options and depreciation rates. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," ("SFAS 109") which requires the use of the asset and liability method for accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial statement and the tax bases of assets and liabilities using enacted tax rates in effect for the year in which the temporary differences are expected to reverse. - 30 - Stock-Based Compensation. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a fair-value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under Accounting Principles Board Opinion No. 25, ("APB 25") "Accounting for Stock Issued to Employees," but with additional financial statement disclosure. The Company has elected to continue to account for its stock-based compensation under APB 25. See Note 5, Shareholders' Equity. Income (Loss) Per Share. Income (loss) per share has been computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Common stock equivalents consist of the number of shares issuable upon exercise of outstanding warrants, options and convertible notes less the number of shares assumed to have been purchased for the treasury with the proceeds from such exercise. Common stock equivalents are excluded from the computation if their effect is anti-dilutive. Primary and fully diluted net income (loss) per share are the same. 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. Supplemental Profit and Loss Information. In September 1995, management announced a company-wide reduction in work force whereby 48 employees were terminated. The Company charged $607,000 to 1995 results of operations for severance payments and related expenses of this program. As of September 30, 1996, $55,000 of these charges remained accrued and are included in the accompanying balance sheets of the Company under the caption "Salaries, benefits and other accrued liabilities." There were no such accruals remaining as of September 30, 1997. Management Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates relating to assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could vary from these estimates. The Company has a contingent liability with regard to the guarantee of a loan to a former subsidiary (A&W) through Wells Fargo Bank, NA. Because of the various collateral and corporate and personal guarantees that also back up this line of credit, the Company feels that the likelihood that the Company will sustain any loss under this agreement is remote (see Note 3, Discontinued Operations). Reclassifications. Certain reclassifications have been made to prior years' data to conform with the current year's presentation. These reclassifications had no impact on previously reported results of operations or shareholders' equity. NOTE 3 DISCONTINUED OPERATIONS Agritope. Throughout the period presented, Agritope, Inc. ("Agritope") was a wholly owned subsidiary of Epitope acquired in 1987. Agritope consists of two units: Agritope Research and Development ("Agritope R&D") and Vinifera, Inc. ("Vinifera"). Agritope R&D uses biotechnology in the development of new fruit and vegetable plant varieties for sale to the fresh produce industry. To date, Agritope has not completed commercialization of this technology. A portion of the research and development efforts conducted by Agritope has been performed under various research grants and contracts. Vinifera is engaged in the grapevine propagation and distribution business. During 1995, Vinifera was in the development stage and generated minimal product sales. Vinifera commenced commercial stage operations in 1996. Agritope's results of operations and net assets are presented as discontinued operations in the accompanying consolidated financial statements for all periods presented. All intercompany loans from Epitope to Agritope have been reflected as capital contributions to Agritope consistent with the separation agreement between Epitope and Agritope dated December 1, 1997. The 1997 loss from - 31 - discontinued operations of Agritope includes an accrual of $1.2 million for Agritope's operating losses, from October 1, 1997 to December 1, 1997, and costs of the spin-off of Agritope which is expected to occur in late December 1997. The separation agreement provides that, all net expenses of Agritope beginning December 1, 1997, will be borne by Agritope. Andrew and Williamson Sales, Co. On December 12, 1996, a subsidiary of the Company completed a merger with Andrew and Williamson Sales, Co. (A&W), a 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. On May 27, 1997, in accordance with the terms of a rescission agreement, the former shareholders of A&W returned the 520,000 shares of Epitope common stock they received, and Epitope returned all of the outstanding shares of A&W common stock. Epitope also received A&W preferred stock in satisfaction of intercompany loans made to A&W between December 12, 1996 and March 19, 1997. This A&W preferred stock carries a $5.7 million liquidation preference, dividend preferences, and various redemption features. A&W's results of operations for the period from December 13, 1996 through May 27, 1997 are presented in the accompanying financial statements as discontinued operations. 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 $5.7 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 write-off of $633,000 in A&W acquisition costs, and the accrual of $262,000 in estimated costs associated with the rescission. THE COMPONENTS OF AGRITOPE'S NET ASSETS ARE SUMMARIZED AS FOLLOWS: SEPTEMBER 30 1997 1996 Cash....................................................................... $ 4,384 $ 476,512 Trade accounts receivable, net............................................. 617,359 264,986 Inventories................................................................ 2,081,295 509,745 Other current assets....................................................... 281,778 33,149 ---------- ---------- Total current assets....................................................... 2,984,816 1,284,392 Property and equipment, net................................................ 2,749,788 1,286,197 Patents and proprietary technology, net.................................... 1,276,692 510,244 Investment in affiliates................................................... 246,962 2,448,623 Other assets............................................................... 26,797 140,513 ---------- ---------- 7,285,055 5,669,969 Convertible notes due June 1997............................................ - 3,620,003 Other current liabilities.................................................. 1,326,008 826,952 Long-term liabilities...................................................... 1,196,321 215,407 Accrued losses............................................................. 1,200,000 - ---------- ---------- Net assets of discontinued operations...................................... $ 3,562,726 $ 1,007,607
THE SUMMARIZED STATEMENTS OF OPERATIONS FOR AGRITOPE AND SUBSIDIARIES IS AS FOLLOWS: SEPTEMBER 30 1997 1996 1995 Revenues.............................................................. $ 1,551,190 $ 585,485 $ 2,109,688 Operating costs and expenses.......................................... 6,088,883 2,821,397 9,920,166 Other income (expense), net........................................... (4,427,275) (265,356) (234,740) Minority interest in subsidiary net loss.............................. 274,369 - - - Net loss from operations.............................................. (8,690,599) (2,501,268) (8,045,218)
- 32 - Bank Line of Credit. A&W maintains a $6,500,000 revolving bank line of credit. 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. In addition, the principals of A&W have each personally guaranteed the loan. The Company's guarantee contains various financial covenants including minimum tangible net worth levels. The balance outstanding under the line was $250,000 at September 30, 1997. Long Term Debt. In November 1996, Epitope exchanged $3,380,000 principal amount of Agritope convertible notes for 250,367 shares of common stock of Epitope at a reduced exchange price of $13.50 per share. The exchange price had previously been fixed at $19.53 per share. Accordingly, Agritope recognized a charge to results of operations of $1,216,654 in the first quarter of fiscal 1997 representing the conversion expense. In conjunction with the exchange, unamortized debt issuance costs of $86,134 related to such notes were recognized as equity issuance costs during 1997. Concurrent with the note conversion, Epitope made a $4,529,009 capital contribution to Agritope. On June 30, 1997, Agritope paid in full the remaining $240,000 principal amount outstanding. NOTE 4 PROPERTY AND EQUIPMENT Property and equipment are summarized as follows: SEPTEMBER 30 1997 1996 Research and development laboratory equipment.......................... $ 1,096,425 $ 1,056,883 Manufacturing equipment................................................ 1,389,304 1,291,546 Office furniture and equipment......................................... 1,772,698 1,899,948 Leasehold improvements................................................. 1,102,895 1,084,660 Construction in progress............................................... 109,380 134,557 ----------- ----------- 5,470,702 5,467,594 Less accumulated depreciation and amortization......................... (4,269,714) (3,924,837) ----------- ----------- $ 1,200,988 $ 1,542,757
NOTE 5 SHAREHOLDERS' EQUITY Authorized Capital Stock. The Company's amended articles of incorporation authorize 1,000,000 shares of preferred stock and 30,000,000 shares of common stock. The Company's Board of Directors has authority to determine preferences, limitations and relative rights of the preferred stock. Common Stock Reserved for Future Issuance. As of September 30, 1997, the following shares of the Company's common stock were reserved for future issuance, as more fully described below: PURPOSE SHARES Outstanding warrants............................................................ 2,000,640 Outstanding stock options....................................................... 3,499,865 Employee Stock Purchase Plan subscriptions...................................... 76,460 --------- 5,576,965
- 33 - Common Stock Warrants. As of September 30, 1997, the following warrants to purchase shares of common stock were outstanding: DATE OF ISSUANCE SHARES PRICE * EXPIRATION DATE September 26, 1991........................................ 159,150 $16.00 September 30, 2000 December 23, 1992......................................... 988,390 18.50 September 30, 2000 July 20, 1993............................................. 375,000 20.00 September 30, 2000 August 1, 1993............................................ 200,000 18.50 September 30, 2000 October 17, 1994.......................................... 50,000 18.50 September 30, 2000 November 22, 1994......................................... 228,100 18.50 September 30, 2000 --------- 2,000,640
* Beginning ten days after the Agritope spin-off, Epitope will allow exercise of the warrants at a price equal to 110 percent of the average closing price of Epitope common stock during the five trading days beginning on the date of the spin-off. Stock Award Plans. The Company's 1991 Stock Award Plan (the "1991 Plan") was approved by the shareholders during 1991, replacing the Company's Incentive Stock Option Plan ("ISOP"). The 1991 Plan provides for stock-based awards to employees, outside directors and members of scientific advisory committees or other consultants. Awards which may be granted under the 1991 Plan include qualified incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. Under the terms of the 1991 Plan, qualified incentive stock options on shares of common stock may be granted to eligible employees, including officers, of the Company at an exercise price not less than the fair market value of the stock on the date of grant. The maximum term during which any option may be exercised is ten years from the date of grant. To date, options have been granted with four-year vesting schedules. Options issued to employees under the ISOP were issued at prices not less than the fair market value of a share of common stock on the date of grant. The options are exercisable after one year from the date of grant at the rate of 25% per year cumulatively and expire ten years from the date of grant. The 1991 Plan also provides that nonqualified options may be granted at a price not less than 75% of the fair market value of a share of common stock on the date of grant. The option term and vesting schedule of such awards may either be unlimited or have a specified period in which to vest and be exercised. For the discounted nonqualified options issued, the Company amortizes, on a straight-line basis over the vesting period of the options, the difference between the exercise price and the fair market value of a share of stock on the date of grant. As of September 30, 1997, 1,145,874 shares of Epitope common stock remain available for grant under the Company's stock award plans. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 allows companies which have stock-based compensation arrangements with employees to adopt a fair-value basis of accounting for stock options and other equity instruments or to continue to apply the existing accounting rules under, but with additional financial statement disclosure. The Company has continued to account for stock-based compensation under APB 25, and therefore, SFAS 123 did not have a material impact on its financial position or results of operations. Options granted and outstanding under the Company's stock option plans are summarized as follows: 1997 1996 1995 SHARES PRICE SHARES PRICE SHARES PRICE Outstanding at beginning of period ...... 3,365,726 $3.50 - 24.00 3,636,103 $1.09 - 24.00 3,483,432 $1.09 - 24.94 Granted.................... 2,801,403 3.50 - 14.81 901,379 9.81 - 18.13 802,050 14.94 - 18.88 Exercised.................. (16,124) 7.25 - 14.81 (386,550) 1.09 - 17.13 (183,525) 1.84 - 22.50 Canceled................... (2,651,140) 3.50 - 24.00 (785,206) 14.38 - 24.00 (465,854) 7.38 - 24.94 --------- ------------ --------- ------------- --------- -------------- Outstanding at end of period 3,499,865 $3.50 - 20.38 3,365,726 $3.50 - 24.00 3,636,103 $1.09 - 24.00 Exercisable................ 2,474,623 $3.50 - 20.38 2,302,212 $3.50 - 24.00 2,002,925 $1.09 - 24.00
- 34 - Number of Weighted Average Remaining Exercise Price Range Shares Average Price Contractual Life - -------------------- ------ ------------- ---------------- $3.50 - $5.75 55,950 $4.9172 5.69 $6.38 - $6.38 825,000 $6.375 8.27 $6.69 - $7.06 65,150 $6.968 9.53 $7.25 - $7.25 2,175,503 $7.25 7.57 $8.02 - $20.38 296,832 $13.72 8.46 ---------- ------ ---- 3,418,435 $7.56 7.83
Options exercisable at September 30, 1997 totaled 2,474,623 shares at a weighted average exercise price of $7.65. Options available for grant at September 30, 1997 totaled 1,145,874. Pursuant to the 1991 Plan, 973 and 3,680 shares of common stock were also awarded to consultants and members of the Company's scientific advisory committees during 1996 and 1995, respectively. Employee Stock Purchase Plans. In 1991, the shareholders approved the Company's adoption of the 1991 Employee Stock Purchase Plan ("1991 ESPP") covering a maximum of 100,000 shares of common stock for subscription over two offering periods. The purchase price for stock purchased under the 1991 ESPP for each of the two 24-month subscription periods was the lesser of 85% of the fair market value of a share of common stock at the commencement of the subscription period or the fair market value at the close of each subscription period. An employee may also elect to withdraw at any time during the subscription period and receive the amounts paid plus interest at the rate of 6%. The 1993 Employee Stock Purchase Plan ("1993 ESPP"), as amended and restated effective February 1, 1993, covers a maximum of 500,000 shares of common stock for subscription over established offering periods. The Company's Board of Directors was granted authority to determine the number of offering periods, the number of shares offered, and the length of each period, provided that no more than three offering periods (other than Special Offering Subscriptions as described below) may be set during each fiscal year of the Company. Other provisions of the 1993 ESPP are similar to the 1991 ESPP. As of September 30, 1997, 76,460 shares of common stock were subscribed for during two offerings under the 1993 ESPP. Shares subscribed for under these 1993 ESPP offerings may be purchased over 24 months and have initial subscription prices of $ 8.77 and $ 6.00 per share for the various offerings. During the year ended September 30, 1997, 2,472 shares were issued at prices ranging from $8.77 to $12.33 under the 1993 ESPP. The 1993 ESPP was amended to allow the Company, at its discretion, to provide Special Offering Subscriptions whereby an employee's annual increase in compensation could be deferred for a one-year period. At the end of the one-year period, the employee can elect to receive the deferred compensation amount in the form of cash or shares of the Company's common stock. The purchase price for stock issued under a Special Offering Subscription is the lesser of 85% of the fair market value of a share of common stock on the first day of the calendar month the employee's increase was effective or the fair market value at the close of the one-year subscription period. 5,569 Special Offering Subscription shares were issued to employees during 1995 at an average price of $15.26 per share. The Company has elected to account for its stock-based compensation under the provisions of APB 25, however, as required by SFAS 123, the Company has computed for pro forma disclosure purposes the value of options granted during 1997 and 1996 using the Black-Scholes option pricing model. The weighted average assumptions used for stock option grants for 1997 and 1996 were a risk free interest rate of 5.9 percent and 5.6 percent, respectively, an expected dividend yield of 0 percent and 0 percent, respectively, an expected life of 4.3 and 4.4 years, respectively, and an expected volatility of 53 percent and 48 percent, respectively. The weighted average assumptions used for ESPP rights for 1997 and 1996 were a risk free interest rate of 6.1 percent and 5.4 percent, respectively, an expected dividend yield of 0 percent and 0 percent, respectively, an expected life of 2 years and 2 years, respectively, and an expected volatility of 63 percent and 48 percent, respectively. The weighted-average fair value of ESPP rights granted in 1997 was $248,700 and $57,600 for ESPP rights granted in 1996. - 35 - Options were assumed to be exercised upon vesting for purposes of this valuation. Adjustments are made for options forfeited prior to vesting. For the years ended September 30, 1997 and 1996, the total value of the options granted was computed to be $9,096,600 and $6,638,200, respectively, which would be amortized on a straight-line basis over the vesting period of the options. If the Company had accounted for these plans in accordance with SFAS 123, the Company's net income and pro forma net income per share would have been reported as follows: YEAR ENDED SEPTEMBER 30 1997 1996 NET LOSS NET LOSS NET LOSS NET LOSS PER SHARE PER SHARE As reported................................. $ (22,440,271) $ (1.67) $ (1,399,900) $ (.11) Pro forma................................... (26,958,371) (2.01) (3,579,800) (.28)
The effects of applying SFAS 123 in providing pro forma disclosure for 1997 and 1996 are not likely to be representative of the effects on reported net income and earnings per share for future years since options vest over several years and additional awards are made each year. NOTE 6 INCOME TAXES As of September 30, 1997, the Company had net operating loss carryforwards of approximately $45.0 million and $42.0 million, respectively, to offset federal and state taxable income. Approximately $6.9 million of the Company's net operating loss carryforwards were generated as a result of deductions related to the exercise of stock options. When utilized, such carryforwards, as tax effected, will be reflected in the Company's financial statements as an increase in shareholders' equity rather than a reduction of the provision for income taxes. As of September 30, 1997, the Company had total gross deferred tax assets of approximately $21.3 million, consisting primarily of $17.0 million net operating loss carryforwards, $1.7 million of deferred compensation and a $0.9 million research and development tax credit carryforward. No benefit for these assets has been reflected in the accompanying consolidated financial statements as they do not satisfy the recognition criteria set forth in SFAS 109. Accordingly, a valuation allowance of $21.3 million, representing a $4.6 million increase since the prior fiscal year end, has been recorded. The expected tax benefit of approximately $4.4 million for the year ended September 30, 1997 is increased by approximately $0.5 million for the effect of state and local taxes (net of federal impact) and is reduced by approximately $4.6 million for the effect of the increase in valuation allowance and $0.3 million for other permanent differences consisting primarily of the A&W valuation difference write off. The federal and state net operating loss carryforwards available to offset future taxable income will expire as follows: LOSS CARRYFORWARDS YEAR OF EXPIRATION FEDERAL OREGON 1998................................................................... $ 22,000 $ --- 1999................................................................... 252,000 25,000 2000................................................................... 100,000 200,000 2001................................................................... 300,000 31,000 2002................................................................... 666,000 --- 2003................................................................... 2,278,000 2,106,000 2004................................................................... 2,360,000 2,206,000 2005................................................................... 1,993,000 1,914,000 2006................................................................... 6,100,000 5,643,000 2007................................................................... 6,378,000 5,788,000 - 36 - 2008................................................................... 5,370,000 4,671,000 2009................................................................... 3,459,000 4,430,000 2010................................................................... 7,053,000 6,275,000 2011................................................................... 796,000 796,000 2012................................................................... 7,731,000 7,731,000 ------------ ------------ $44,858,000 $41,816,000 Significant components of Epitope's deferred tax asset were as follows: SEPTEMBER 30 1997 1996 Net operating loss carryforwards....................................... $17,030,000 $13,627,000 Deferred compensation.................................................. 1,707,000 1,504,000 Research and experimentation credit carryforwards...................... 888,000 812,000 Accrued expenses....................................................... 868,000 302,000 Other.................................................................. 850,000 436,000 ------------ ------------ Gross deferred tax assets.............................................. 21,343,000 16,681,000 Valuation allowance.................................................... (21,343,000) (16,681,000) ------------ ------------ Net deferred tax asset................................................. $ ---- $ ----
NOTE 7 RESEARCH AND DEVELOPMENT ARRANGEMENTS In February 1995, the Company entered into a development, license and supply agreement with SmithKline Beecham, plc ("SB") pursuant to which the Company conducted research and development projects funded by SB. In July 1997, SB terminated the agreement. Revenues from research and development arrangements are included in the accompanying consolidated statements of operations under the caption "Grants and Contracts." NOTE 8 DISTRIBUTION AND SUPPLY CONTRACTS The Company has entered into several contractual arrangements, including those discussed in the following paragraphs, for distribution of certain of its products to customers. The Company continues to maintain supply and distribution agreements with Organon Teknika Corporation ("Organon Teknika"), whereby Organon Teknika supplies the Company's antigen requirements and exclusively distributes the Company's EPIblot HIV confirmatory tests ("EPIblot") on a worldwide basis. As of April 1, 1994, the Company renewed the agreements which had an initial termination date of March 31, 1997 (with successive one-year renewal periods thereafter) and include pricing incentives based on volumes purchased by Organon Teknika and penalties for failure to purchase specified minimum quarterly volumes. In 1997, the agreement was extended for another one-year period. For the years ended September 30, 1997, 1996 and 1995, respectively, revenues generated from sales of EPIblot to Organon Teknika were $1,791,290, $1,539,164 and $1,808,431, including export sales of $15,750, $62,539 and $72,369. LabOne, Inc. (previously Home Office Reference Laboratory, Inc.) purchases oral specimen devices from the Company for use in insurance testing in return for non-exclusive distribution rights in the United States and Canada under an agreement which expires on March 13, 2000, with an automatic five-year renewal, unless either party notifies the other of intent not to renew at least 180 days prior to the initial expiration date. For the years ended September 30, 1997, 1996 and 1995, respectively, revenues generated from product sales to LabOne, Inc. were $3,194,698, $1,327,544 and $525,628 including export sales of $597,000, $394,747 and $58,500. SB had an exclusive agreement to market the Company's oral specimen collection device worldwide, except in several foreign countries and to the insurance industry in the U.S., Canada and Japan. In July 1997, SB terminated its development, license and supply agreement with Epitope. As a result, the Company acquired marketing rights for OraSure from SB. During the transition period in August and September of 1997, SB continued to market the OraSure testing system to the medical community. Beginning in October 1997, the product is marketed through Epitope's direct sales force. - 37 - In 1995, SB made an initial license fee payment of $1 million to the Company and committed an additional license fee of $4 million to be paid upon FDA approval of a pending request to amend the labeling of the Company's oral specimen collection device to indicate a two-year shelf life. In April 1996, the FDA granted the Company's request for extended dating and SB disbursed $4 million plus interest from escrow. Accordingly, the Company recognized income of $5 million in 1996 operating results. NOTE 9 COMMITMENTS The Company leases office, manufacturing, warehouse and laboratory facilities under operating lease agreements which require minimum annual payments as follows: YEAR ENDING SEPTEMBER 30 1998.............................................................................................. $ 345,576 1999.............................................................................................. 346,356 2000.............................................................................................. 109,992 --------- $ 801,924
Under the agreements for the lease of its office and laboratory facilities, the Company is obligated to the lessor for its share of certain expenses related to the use, operation, maintenance and insurance of the property. These expenses, payable monthly in addition to the base rent, are not included in the amounts shown above. Rent expense aggregated $409,970, $538,665 and $547,930 for the years ended September 30, 1997, 1996 and 1995, respectively. NOTE 10 PROFIT SHARING AND SAVINGS PLAN The Company established a profit sharing and deferred salary savings plan in 1986 and restated the plan in 1991. All employees are eligible to participate in the plan. In addition, the plan permits certain voluntary employee contributions to be excluded from the employees' current taxable income under the provisions of Internal Revenue Code Section 401(k) and the regulations thereunder. Effective October 1, 1991, the Company replaced a discretionary profit sharing provision with a matching contribution (either in cash, shares of Epitope common stock, or partly in both forms) equal to 50% of an employee's basic contribution, not to exceed 2.5% of an employee's compensation. The Board of Directors has the authority to increase or decrease the 50% match at any time. During 1997, 1996 and 1995, respectively, the Company contributed $101,737 (11,459 shares, totaling $101,721 and the remainder in cash), $73,315 (4,653 shares totaling $73,279 and the remainder in cash) and $97,631 (5,562 shares totaling $97,607 and the remainder in cash). As of September 30, 1997, 27,832 shares of Epitope common stock are held by the plan. - 38 - NOTE 11 GEOGRAPHIC AREA INFORMATION The Company's products are all included in the medical products industry segment. See Note 1 for a description of the Company's business. The Company's products are sold principally in the United States, Canada and Europe. Operating loss represents revenues less operating expenses. In computing operating loss, allocated corporate administration expenses have been included; however, other income and expense items such as interest expense, miscellaneous income, and other charges have not been added or deducted. IN THOUSANDS GEOGRAPHIC REVENUES OPERATING LOSS IDENTIFIABLE ASSETS AREAS 1997 1996 1995 1997 1996 1995 1997 1996 1995 United States........ $ 8,569 $ 4,903 $ 2,630 $ (4,964) $ (5,287) $ (11,608) $ 17,012 $ 29,784 $ 26,142 Canada........ 608 404 78 - - - - Latin America....... 4 100 - - - - - Europe........ 49 65 72 - - - - Other......... 130 122 76 - - - - ------ ------ ------ ------ ------- -------- ------- ------- ------- $ 9,360 $ 5,594 $ 2,856 $ (4,964) $ (5,287) $ (11,608) $ 17,012 $29,784 $ 26,142
No schedules are included with the foregoing financial statements because the required information is inapplicable or is presented in the financial statements or related notes thereto. (a)(3) Exhibits. See Index to Exhibits following the signature pages of this report. (b) Reports on Form 8-K. Current report on Form 8-K dated July 28, 1997, reporting under Item 5 the Company's intention to spin-off Agritope and the termination of the SB Agreement. Current report on Form 8-K dated September 12, 1997, reporting under Item 5 the extension and repricing of outstanding warrants. - 39 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on December 24, 1997. EPITOPE, INC. By /s/ Gilbert N. Miller Gilbert N. Miller Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on December 24, 1997, by the following persons on behalf of the Registrant and in the capacities indicated. SIGNATURE TITLE *JOHN W. MORGAN President and Chief Executive Officer John W. Morgan (Principal Executive Officer) /S/ GILBERT N. MILLER Executive Vice President and Gilbert N. Miller Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) *W. CHARLES ARMSTRONG Director W. Charles Armstrong *RICHARD K. DONAHUE Director Richard K. Donahue *ADOLPH J. FERRO Director Adolph J. Ferro *R. DOUGLAS NORBY Director R. Douglas Norby *MICHAEL J. PAXTON Director Michael J. Paxton *ROGER L. PRINGLE Director Roger L. Pringle *G. PATRICK SHEAFFER Director G. Patrick Sheaffer * /S/ GILBERT N. MILLER Gilbert N. Miller (Attorney-in-Fact) - 40 - INDEX TO EXHIBITS Exhibit Number Exhibit - ------ ------- 2.1 Acquisition and Merger Agreement among Registrant, Thamscoe, Inc., Andrew and Williamson Sales, Co., and the shareholders of Andrew and Williamson Sales, Co., dated November 6, 1996. Incorporated by reference to Exhibit 2 to the Registrant's Current Report on Form 8-K dated November 6, 1996. 2.2 Settlement Agreement and Release among Epitope, Inc., Keith R. Andrew and Kevin S. Andrew as co-trustees 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., dated May 4, 1997. Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 1996 ("March 1996 10-Q"). 2.3 Separation Agreement between Epitope, Inc. and Agritope, Inc, dated December 1, 1997 3.1 Restated Articles of Incorporation, as amended, of Registrant. Incorporated by reference to Exhibit 3 to the Registrant's Registration Statement on Form 8-A filed December 26, 1997 (File No. 000-15337). 3.2 Restated Bylaws of Registrant. 4.1 Stock Purchase Agreement dated November 9, 1990, between certain investors and Registrant. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Instruction 2 of Item 601 of Regulation S-K ("Item 601, Instruction 2"). Incorporated by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1994 (the "1994 10-K"). 4.2 Unit Purchase Agreement dated September 1991 between certain investors and Registrant. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Item 601, Instruction 2. Incorporated by reference to Exhibits 4.1 and 4.2 to the Registrant's Current Report on Form 8-K dated September 17, 1991. 4.3 Note Purchase Agreement dated June 10, 1992, among Agritope, Inc., Registrant, and certain investors. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Item 601, Instruction 2. Incorporated by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 30, 1992. 4.4 Warrant Purchase Agreement dated as of November 25, 1992, between certain investors and Registrant. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Item 601, Instruction 2. Incorporated by reference to Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1992 (the "1992 10-K"). 4.5 1993 Technology Transfer Warrant Issuance Agreement dated as of June 15, 1993, between certain investors and Registrant. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Item 601, Instruction 2. Incorporated by reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-3 (No. 33-68510) ("Registration Statement No. 33-68510"). 4.6 Form of Letter dated August 1, 1993, from Registrant regarding modification of the terms of the 1993 Technology Transfer Warrants. Incorporated by reference to Exhibit 4.5 to Registration Statement No. 33-68510. 4.7 1993 Warrant Purchase Agreement dated as of July 6, 1993, between certain investors and Registrant. Copies of the agreements with individual investors shall be filed with the Commission upon request pursuant to Item 601, Instruction 2. Incorporated by reference to Exhibit 4.6 to Registration Statement No. 33-68510. - 41 - 4.8 Notice to warrantholders and current form of warrant certificate for warrants issued in September 1991 offering, reflecting extension of expiration date. Incorporated by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated September 12, 1997. 4.11 Notice to warrantholders and current form of warrant certificate for warrants issued in December 1992 offering, reflecting extension of expiration date. Incorporated by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated September 12, 1997. 4.12 Notice to warrantholders and current form of warrant certificate for warrants issued in July 1993 offering, reflecting extension of expiration date. Incorporated by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated September 12, 1997. 4.13 Notice to warrantholders and current form of warrant certificate for warrants issued in August 1993 offering, reflecting extension of expiration date. Incorporated by reference to Exhibit 4.4 to the Registrant's Current Report on Form 8-K dated September 12, 1997. 10.1 Incentive Stock Option Plan of Registrant, as amended. Incorporated by reference to Exhibit 10.1 to the 1994 10-K.* 10.2 Amended and Restated Epitope, Inc., 1991 Stock Award Plan.* 10.3 Agritope, Inc., 1992 Stock Award Plan. Incorporated by reference to Exhibit 10.3 to the 1992 10-K.* 10.4 Form of Nonqualified Stock Option Agreement to be issued to certain officers and directors of Registrant pursuant to Agritope, Inc., 1992 Stock Award Plan.* 10.5 Lease dated July 17, 1990, among Registrant, Koll Woodside Associates, a California general partnership, and Petula Associates, Ltd., an Iowa corporation. Incorporated by reference to Exhibit 10.5 to the 1994 10-K. 10.6 Fourth Amendment dated May 20, 1994, to Lease dated July 17, 1990, among Registrant, Koll Woodside Associates, a California general partnership, and Petula Associates, Ltd., an Iowa corporation. Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 30, 1994 ("June 1994 10-Q"). 10.7 Business Park Lease dated May 5, 1994, among Registrant, Koll Woodside Associates, a California general partnership, and Petula Associates, Ltd., an Iowa corporation. Incorporated by reference to Exhibit 10.2 to the June 1994 10-Q. 10.8 Business Park Lease dated as of December 16, 1994, among Registrant, Petula Associates Ltd., an Iowa corporation, and Koll Portland Associates, a California general partnership. Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarterly period ended December 31, 1994. 10.9 Agreement dated December 9, 1987, between Registrant and Adolph Ferro, Ph.D. Incorporated by reference to Exhibit 4.3 to the 1988 S-1.* 10.10 Amendment to Agreement of December 9, 1987, dated November 11, 1996, between Registrant and Adolph J. Ferro, Ph.D. Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1996. 10.11 Distribution Agreement dated as of April 1, 1994, between Registrant and Organon Teknika Corporation. Incorporated by reference to Exhibit 10.3 to the June 1994 10-Q. - 42 - 10.12 Supply Agreement dated as of April 1, 1994, between Registrant and Organon Teknika Corporation. Incorporated by reference to Exhibit 10.4 to the June 1994 10-Q. 10.13 Form of Indemnification Agreement for directors and officers. Incorporated by reference to Exhibit 10.4 to the Registrant's Registration Statement on Form S-4 (No. 333-15705).* 10.14 Amended and Restated Employment Agreement dated January 8, 1991 between Andrew S. Goldstein and Registrant. Incorporated by reference to Exhibit 10.28 to the Registrant's Annual Report on Form 10-K for the year ended September 30, 1991 (the "1991 10-K").* 10.15 Amended and Restated Employment Agreement dated January 9, 1991, between Adolph J. Ferro, Ph.D., and Registrant. Incorporated by reference to Exhibit 10.29 to the 1991 10-K.* 10.16 Amendment to Amended and Restated Employment Agreement of January 9, 1991, dated August 19, 1997, between Registrant and Adolph J. Ferro, Ph.D.* 10.17 Employment Agreement dated January 28, 1990, between Gilbert N. Miller and Registrant. Incorporated by reference to Exhibit 10.19 to the 1994 10-K.* 10.18 Employment Agreement dated July 1, 1990, between John H. Fitchen, M.D. and Registrant. Incorporated by reference to Exhibit 10.20 to the 1994 10-K.* 10.19 Employment Agreement dated October 6, 1997, between John W. Morgan and Registrant.* 10.20 Option Agreement dated October 6, 1997, between John W. Morgan and Registrant.* 10.21 Form of Employment Agreement between Charles E. Bergeron and Registrant.* 10.22 Form of Employment Agreement between J. Richard George, Ph.D. and Registrant.* 10.23 Continuing Guaranty by Epitope, Inc. of credit agreement between Andrew & Williamson Sales Co. ("A&W") and Wells Fargo Bank, N.A. ("Wells Fargo") and Subordination Agreement among Registrant, A&W and Wells Fargo each dated as of December 17, 1996. Incorporated by reference to Exhibit 10.2 to the March 1996 10-Q. 10.24 Amended and Restated Employee Benefits Agreement between Epitope, Inc. and Agritope, Inc., dated December 19, 1997.* 10.25 Transition Services and Facilities Agreement between Epitope, Inc. and Agritope, Inc., dated December 1, 1997. 10.26 Tax Allocation Agreement between Epitope, Inc. and Agritope, Inc., dated December 1, 1997. 21. The Registrant's subsidiaries are Agritope, Inc., an Oregon corporation, Vinifera, Inc., an Oregon corporation, and Agrimax Floral Products, Inc., a Minnesota corporation. The Registrant also owns a 67 percent interest in Superior Tomato Associates, L.L.C., a Delaware limited liability company, and a 60 percent interest in Epitope KK, a Japanese limited liability company. The Registrant will no longer own an interest in Agritope, Inc., Vinifera, Inc., Agrimax Floral Products, Inc. or Superior Tomato Associates, L.L.C., following the spin-off of Agritope, Inc. 23. Consent of Price Waterhouse LLP. 24. Powers of Attorney. 27. Financial Data Schedule. * Management contract or compensatory plan or arrangement - 43 - EX-2.3 2 SEPARATION AGREEMENT SEPARATION AGREEMENT between Epitope, Inc. and Agritope, Inc. Dated December 1, 1997 TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITIONS................................................................ 1 ARTICLE 2 PRE-DISTRIBUTION TRANSACTIONS....................................................... 4 2.1 Private Placement of Agritope Equity. ..................................................... 4 2.2 Agritope Corporate Actions.................................................................. 5 2.3 Epitope Approval............................................................................ 5 2.4 Related Agreements.......................................................................... 5 2.5 Securities Law Actions...................................................................... 5 ARTICLE 3 THE DISTRIBUTION.............................................................. 6 3.1 Discretion of Epitope Board; No Obligation.................................................. 6 3.2 Conditions to the Distribution.............................................................. 6 3.3 The Distribution............................................................................ 6 3.4 Fractional Shares........................................................................... 7 ARTICLE 4 INDEMNIFICATION, CLAIMS AND OTHER MATTERS................................................. 7 4.1 Indemnification by Epitope.................................................................. 7 4.2 Indemnification by Agritope................................................................. 7 4.3 Insurance Proceeds.......................................................................... 8 4.4 Procedure for Indemnification............................................................... 8 4.5 Other Claims................................................................................ 10 4.6 Contribution in Respect of Certain Indemnifiable Losses..................................... 10 4.7 No Beneficiaries............................................................................ 11 ARTICLE 5 CERTAIN ADDITIONAL MATTERS......................................................... 11 5.1 Construction of Agreements.................................................................. 11 5.2 Consents and Assignments.................................................................... 11 5.3 No Representations or Warranties............................................................ 11 5.4 Officers and Directors...................................................................... 11 5.5 Existing Intercompany Arrangements.......................................................... 12 5.6 Termination of Intercompany Accounts........................................................ 12 ARTICLE 6 ACCESS TO INFORMATION AND SERVICES; TECHNOLOGY............................................... 12 6.1 Provision of Corporate Records.............................................................. 12 - i - 6.2 Access to Information....................................................................... 12 6.3 Production of Witnesses and Individuals..................................................... 12 6.4 Retention of Records........................................................................ 13 6.5 Confidentiality............................................................................. 13 6.6 Privileged Matters.......................................................................... 14 6.7 Technology.................................................................................. 15 ARTICLE 7 INSURANCE................................................................. 16 7.1 Transition.................................................................................. 16 7.2 Post-Distribution Date Claims............................................................... 16 7.3 Allocation of Insurance Proceeds............................................................ 16 ARTICLE 8 DISPUTE RESOLUTION............................................................. 17 8.1 Negotiation and Binding Arbitration......................................................... 17 8.2 Initiation.................................................................................. 17 8.3 Submission to Arbitration................................................................... 17 8.4 Equitable Relief............................................................................ 17 ARTICLE 9 MISCELLANEOUS............................................................... 18 9.1 Entire Agreement............................................................................ 18 9.2 Expenses.................................................................................... 18 9.3 Governing Law............................................................................... 18 9.4 Jurisdiction and Venue...................................................................... 18 9.5 Notices..................................................................................... 18 9.6 Modification of Agreement................................................................... 19 9.7 Termination................................................................................. 19 9.8 Successors and Assigns...................................................................... 19 9.9 No Third Party Beneficiaries................................................................ 19 9.10 Titles and Headings; Interpretation......................................................... 19 9.11 Exhibits.................................................................................... 20 9.12 Severability................................................................................ 20 9.13 No Waiver................................................................................... 20 9.14 Survival.................................................................................... 20 9.15 Counterparts................................................................................ 20
- ii - SEPARATION AGREEMENT THIS SEPARATION AGREEMENT (this "Agreement") is entered into by and between Epitope, Inc., an Oregon corporation ("Epitope"), and Agritope, Inc., a Delaware corporation ("Agritope"), as of December 1, 1997. RECITALS A. Agritope is a wholly owned subsidiary of Epitope, principally engaged in research and development of agricultural products using plant genetic engineering. B. The board of directors of Epitope has determined that it is in the best interests of the shareholders of Epitope to separate Agritope from Epitope by distributing as a dividend to holders of Epitope common stock, no par value ("Epitope Stock"), all of the issued and outstanding shares of Agritope common stock, par value $.01 per share, including certain preferred stock purchase rights attached thereto (the "Agritope Stock"), held by Epitope (the "Distribution"), as provided herein; and C. Epitope and Agritope have determined that it is necessary and desirable to establish the principal corporate transactions required to effect the separation of Agritope from Epitope, and to enter into certain other agreements governing matters relating to the Distribution and the relationship between Epitope and Agritope after the Distribution. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, Epitope and Agritope agree as follows: ARTICLE 1 DEFINITIONS Capitalized terms shall have the meanings given below or elsewhere in this Agreement. Action: any action, claim, suit, arbitration, inquiry, subpoena, discovery request, proceeding or investigation by or before any court or grand jury, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. Affiliate: with respect to any specified person, a person that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with such specified person; provided, however, that unless otherwise expressly provided, the Agritope Units and Epitope shall not be deemed to be Affiliates of one another for purposes of this Agreement. - 1 - Agent: ChaseMellon Shareholder Services, L.L.C., the distribution agent appointed by Epitope and Agritope to distribute the Agritope Stock in connection with the Distribution. Agritope Business: (i) the business of research and development, marketing and sales of novel agricultural products using both plant genetic engineering and other modern methods; (ii) the businesses of Vinifera involving grapevine plant propagation and disease screening and elimination programs; and (iii) any other business or operation conducted by an Agritope Unit at any time. The Agritope Business does not include the business conducted by Andrew and Williamson Sales, Co., a California corporation formerly owned by Epitope. Agritope Employee: any employee of a Core Company, and any employee of Epitope who is assigned to a Core Company on or prior to the Distribution Date. Agritope Preferred: Agritope Series A preferred stock, par value $.01 per share. Agritope Unit: each Core Company and Related Company. Books and Records: books and records (or true and complete copies thereof), including computerized records, of Epitope that relate principally to any Agritope Unit or the Agritope Business or decisions made by Epitope that relate to Agritope, including, without limitation, all books and records relating to Agritope Employees, the purchase of materials, supplies and services by any Agritope Unit, and the technologies, customers, and business partners of any Agritope Unit; and all files relating to any Action involving any Agritope Unit or involving any Agritope Employee or director (including any Action that arose when the Agritope Employee was employed by Epitope). Code: the Internal Revenue Code of 1986, as amended. Commission: the Securities and Exchange Commission. Core Company: each of Agritope, Vinifera, and Agrimax Floral Products, Inc., a Minnesota corporation. Distribution Date: the effective date of the Distribution, as determined by the Epitope Board. Distribution Prospectus: the information statement/prospectus to be distributed to holders of Epitope Stock in connection with the Distribution. - 2 - Employee Benefits Agreement: the agreement, substantially in the form of Exhibit A hereto, pursuant to which Epitope and Agritope will provide for certain employee benefit matters. Epitope Board: the board of directors of Epitope. Form S-1: the Registration Statement on Form S-1 filed by Agritope with the Commission to register the Agritope Stock to be distributed to holders of Epitope Stock in the Distribution. Indemnifiable Losses: with respect to any claim by an Indemnitee for indemnification authorized pursuant to Article 4 hereof, any and all losses, liabilities, claims, damages, obligations, payments, costs and expenses (including, without limitation, the costs and expenses of any and all Actions, demands, assessments, judgments, settlements and compromises relating thereto and reasonable attorney fees and expenses in connection therewith, including attorney fees before and at trial and in connection with any appeal or petition for review) suffered by such Indemnitee with respect to such claim, other than those arising out of an individual's service as a director, officer, or employee of the entity that would be the Indemnifying Party but for this exclusion. Indemnifying Party: any party who is required to pay any other person pursuant to Article 4 hereof. Indemnitee: any party who is entitled to receive payment from an Indemnifying Party pursuant to Article 4 hereof. Indemnity Payment: the amount an Indemnifying Party is required to pay an Indemnitee pursuant to Article 4 hereof. Insurance Proceeds: those monies (i) received by an insured from an insurance carrier or (ii) paid by an insurance carrier on behalf of the insured, in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention, cost or reserve paid or held by or for the benefit of such insured. Insured Claims: those Liabilities that, individually or in the aggregate, are covered within the terms and conditions of any of the Policies, whether or not subject to deductibles, co-insurance, uncollectibility or retrospectively-rated premium adjustments, but only to the extent that such Liabilities are within applicable Policy limits, including aggregates. Liabilities: any and all debts, liabilities and obligations, whether accrued, contingent or reflected on a balance sheet, known or unknown, including, without limitation, those arising under any law, rule, regulation, Action, order or consent decree of any - 3 - governmental entity or any judgment of any court of any kind or award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. Policies: insurance policies and insurance contracts of any kind, including, without limitation, primary and excess policies, comprehensive general liability policies, automobile and workers' compensation insurance policies, and self-insurance arrangements, together with the rights and benefits thereunder. Private Placement: the sale of Agritope Stock or Agritope Preferred to certain private investors in transactions intended to be exempt from registration under the Securities Act pursuant to Regulation D or Regulation S under the Securities Act. Record Date: the date determined by the Epitope Board as the record date for the Distribution. Related Agreements: the Employee Benefits Agreement, Transition Services and Facilities Agreement, Tax Allocation Agreement, and all other agreements entered into by Epitope and Agritope pursuant to this Agreement or otherwise in connection with the Distribution. Related Company: each of UAF, Limited Partnership, a Delaware limited partnership, Petals USA, Inc., a Minnesota corporation, and Superior Tomato Associates, L.L.C., a Delaware limited liability company. Securities Act: the Securities Act of 1933, as amended. Shared Policies: all Policies owned or maintained by or on behalf of Epitope prior to the Distribution Date, relating to both Epitope's business and the Agritope Business. Tax Allocation Agreement: the agreement, substantially in the form of Exhibit B hereto, pursuant to which Epitope and Agritope will provide for certain tax matters. Transition Services and Facilities Agreement: the agreement, substantially in the form of Exhibit C hereto, pursuant to which Epitope will provide certain transitional services and facilities to Agritope following the Distribution Date. Vinifera: Vinifera, Inc., an Oregon corporation. ARTICLE 2 PRE-DISTRIBUTION TRANSACTIONS 2.1 Private Placement of Agritope Equity. Agritope shall use its best efforts to obtain commitments in the form of executed share purchase agreements from investors - 4 - interested in investing in Agritope in a Private Placement to occur immediately following the Distribution. Agritope shall use its best efforts to determine the aggregate amount of committed investment capital as soon as practicable. 2.2 Agritope Corporate Actions. Prior to the Distribution Date, Agritope will take all corporate action necessary to effect the Distribution and comply with this Agreement and any Related Agreements, including but not limited to authorizing a recapitalization such that a sufficient number of shares of Agritope Stock are available to effect the Distribution, and approving appropriate stock-based compensation or other plans, agreements and arrangements, as provided for in the Employee Benefits Agreement. 2.3 Epitope Approval. Subject to the business judgment of the Epitope Board, Epitope shall cooperate with Agritope in effecting any actions that are reasonably necessary or desirable to be taken by Agritope in connection with the transactions contemplated by this Agreement or any Related Agreements including, without limitation, approving or ratifying as sole stockholder of Agritope, the election or appointment of directors of Agritope to serve following the Distribution, appropriate stock-based compensation or other plans for Agritope Employees, board members and consultants, and any recapitalization necessary to effect the Distribution. 2.4 Related Agreements. Epitope and Agritope will use their best efforts to cause, on or before the Record Date, the execution and delivery by each party of the Related Agreements and any other agreements deemed necessary or desirable by the parties to establish and govern the post-Distribution relationship of the parties. 2.5 Securities Law Actions. (a) Epitope and Agritope will prepare, and file with the Commission, the Form S-1, including the Distribution Prospectus. Epitope and Agritope shall use reasonable efforts to cause the Form S-1 to become effective under the Securities Act, and, as soon as practicable after the Distribution Date, Epitope shall mail the Distribution Prospectus to holders of Epitope Stock as of the Record Date. The joint obligations of Epitope and Agritope under this Section 2.4(a) shall not affect their respective obligations of indemnity under Article 4 hereof. (b) Epitope and Agritope shall take all such actions as may be necessary or appropriate under the securities or blue sky laws of the various states or other political subdivisions of the United States and other countries in connection with the Distribution and the Private Placement. (c) Agritope will prepare and file, and will use its best efforts to have approved, an application for inclusion of Agritope Stock on The Nasdaq SmallCap Market. - 5 - ARTICLE 3 THE DISTRIBUTION 3.1 Discretion of Epitope Board; No Obligation. The Epitope Board will have the sole discretion to determine, by resolution, the Record Date and all appropriate procedures in connection with the Distribution. Nothing contained in this section shall be interpreted to create any obligation on the part of Epitope or Agritope to effect or to seek to effect the Distribution or in any way limit Epitope's right to terminate this Agreement prior to the Record Date. 3.2 Conditions to the Distribution. The Distribution will not occur prior to such time as each of the following conditions have been satisfied or have been waived by the Epitope Board, in its sole discretion: (a) Agritope shall have received binding commitments for financing in an amount the Epitope Board deems sufficient to support the operations of the Core Companies as businesses separate from Epitope for a period of not less than two years; (b) any waivers, consents, or amendments with respect to agreements or other obligations entered into by or binding upon Epitope or any Core Company shall have been executed and received to the extent necessary to prevent Epitope or the Core Company from being in default with respect to such agreements or obligations following the Distribution; (c) an opinion shall have been received from Miller, Nash, Wiener, Hager & Carlsen LLP in form and substance satisfactory to the Epitope Board, with respect to the federal income tax status of the Distribution under Section 355 of the Code; (d) the Form S-1 shall have been declared effective by the Commission; (e) any material approvals and consents necessary to consummate the Distribution shall have been obtained and shall be in full force and effect, and no Action shall be pending or threatened with respect to the Distribution; and (f) no other event or development shall have occurred that, in the judgment of the Epitope Board, would have a material adverse effect on Epitope or its shareholders. 3.3 The Distribution. On or prior to the Record Date, Epitope will deliver its certificate or certificates for Agritope Stock to the Agent. Epitope will deliver to the Agent a stock certificate or certificates representing, in the aggregate (and rounded down to the nearest whole share), the number of shares necessary so that one share of Agritope Stock may be distributed to Epitope shareholders of record for every five shares of Epitope Stock - 6 - outstanding on the Record Date. Thereafter, Epitope shall instruct the Agent to distribute to holders of record of Epitope Stock on the Record Date, one share of Agritope Stock for every five shares of Epitope Stock. All of the shares of Agritope Stock issued in the Distribution will be fully paid, nonassessable and free of preemptive rights. If the aggregate number of shares held by Epitope or delivered to the Agent as of the Record Date exceeds the number to be distributed to Epitope shareholders, Epitope shall return or instruct the Agent to return the excess shares to Agritope for cancellation, as an additional contribution to capital. 3.4 Fractional Shares. No certificates or scrip representing fractional shares of Agritope Stock will be issued as a part of the Distribution, and in lieu of receiving fractional shares, each holder of Epitope Stock who would otherwise be entitled to receive a fractional share of Agritope Stock pursuant to the Distribution will receive cash from Epitope for such fractional share. ARTICLE 4 INDEMNIFICATION, CLAIMS AND OTHER MATTERS 4.1 Indemnification by Epitope. Epitope will indemnify, defend and hold harmless the Agritope Units and each of their directors, officers, employees, and agents from and against any and all Indemnifiable Losses after the Distribution Date arising out of or due to, directly or indirectly: (i) Liabilities incurred in the course of the business or operations of Epitope exclusive of the Agritope Business; (ii) any claim that the information included in the Distribution Prospectus or the Form S-1 under (A) the captions "Summary - -- Distributing Corporation and Business," "-- Financing of Agritope," "-- Distribution Ratio," "-- Record Date," "-- Distribution Date," "--Shares to be Distributed," "-- Fractional Share Interests," "-- Primary Purposes of the Distribution," "-- Tax Consequences," or "--Relationship with Epitope after the Distribution," and the corresponding information appearing elsewhere in the Distribution Prospectus, (B) the captions "The Distribution -- Reasons for the Distribution," "-- Manner of Effecting the Distribution" and "-- Certain Federal Income Tax Consequences," or (C) the information concerning Vector Securities International, Inc. is false or misleading with respect to any material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (iii) any third party claim of failure by Epitope to perform under, or of any violation by Epitope of, any provision of this Agreement or any Related Agreement, which is to be performed or complied with by Epitope; and (iv) breaches of this Agreement or any Related Agreement by Epitope. 4.2 Indemnification by Agritope. Agritope will indemnify, defend and hold harmless Epitope and each of its directors, officers, employees, and agents from and against any and all Indemnifiable Losses after the Distribution Date arising out of or due to, directly or indirectly: (i) Liabilities incurred in the course of the Agritope Business, including obligations under any existing guaranty by Epitope of obligations of any Agritope Unit; (ii) any claim that any information provided in connection with the Private Placement, other than the information listed in Section 4.1(ii), is false or misleading with respect to any material - 7 - fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, or that the Private Placement otherwise violated the applicable law of any country; (iii) any claim that the information included in the Distribution Prospectus or Form S-1, other than the information listed in Section 4.1(ii) hereof, is false or misleading with respect to any material fact or omits to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (iv) any claim by any person or entity, other than Epitope or Agritope, that is a shareholder or equity owner of an Agritope Unit, relating to such person's or entity's stock or other equity interest in an Agritope Unit; (v) any third party claims of failure by an Agritope Unit to perform under, or any violation by an Agritope Unit of, any provision of this Agreement or any Related Agreement which is to be performed or complied with by an Agritope Unit; and (vi) breaches of this Agreement or any Related Agreement by an Agritope Unit. 4.3 Insurance Proceeds. The amount that any Indemnifying Party is or may be required to pay to any Indemnitee pursuant to Section 4.1 or Section 4.2 hereof will be reduced (including, without limitation, retroactively) by any Insurance Proceeds and other amounts actually recovered by or on behalf of such Indemnitee in reduction of the related Indemnifiable Loss. If an Indemnitee shall have received an Indemnity Payment in respect of an Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds or other amounts in respect of such Indemnifiable Loss as specified above, then such Indemnitee will pay to such Indemnifying Party a sum equal to the amount of such Insurance Proceeds or other amounts actually received. Notwithstanding the foregoing, nothing in this section grants to an Indemnitee any direct or indirect rights or benefits to insurance coverage, nor requires an Indemnifying Party to make any claim for insurance coverage. 4.4 Procedure for Indemnification. (a) If either party shall receive notice of any claim or Action brought, asserted, commenced or pursued by any person or entity not a party to this Agreement (hereinafter a "Third Party Claim"), with respect to which the other party is or may be obligated to make an Indemnity Payment, it shall give such other party prompt notice thereof (including any pleadings relating thereto), specifying in such reasonable detail as is known to it the nature of such Third Party Claim and the amount or estimated amount thereof; provided, however, that the failure of a party to give notice as provided in this Section 4.4 shall not relieve the other party of its indemnification obligations under this Article 4, except to the extent that such other party is actually prejudiced by such failure to give notice. (b) For any Third Party Claim concerning which notice is required to be given, and, in fact, is given under subparagraph (a) of this Section 4.4, the Indemnifying Party shall defend in a timely manner, to the extent permitted by law, such Third Party Claim through counsel appointed by the Indemnifying Party and reasonably acceptable to the Indemnitee. Once an Indemnifying Party has commenced - 8 - its defense of an Indemnitee, it cannot withdraw from such defense until conclusion of the matter, unless the Indemnified Party agrees to the withdrawal or the Indemnitee is also defending the claim. The Indemnitee shall have the right to participate in the defense of the Third Party Claim by employing separate counsel at its own expense. (c) If a party responds to a notice of a Third Party Claim by denying its obligation to indemnify the other party, or if the Indemnifying Party fails to defend in a timely or reasonably satisfactory manner, the Indemnitee shall be entitled to defend such Third Party Claim through counsel appointed by it. In addition, if it is later determined that such party wrongfully denied such claim, or the Indemnifying Party failed to defend timely or in a reasonably satisfactory manner, then the Indemnifying Party shall (i) reimburse the Indemnitee for all reasonable costs and expenses (including attorney fees before and at trial and in connection with any appeal or petition for review, but excluding salaries of officers and employees) incurred by the Indemnitee in connection with its defense of such Third Party Claim; and (ii) be estopped from challenging a judgment, order, settlement, compromise, or consent judgment resolving the Third Party Claim entered into in good faith by the Indemnitee (if such claim has been resolved prior to the conclusion of the proceeding between the Indemnitee and Indemnifying Party). An Indemnifying Party, after initially rejecting a claim for defense or indemnification, may defend and indemnify the Indemnitee, at any time prior to the resolution of said Third Party Claim, for such claim, provided that (x) the Indemnifying Party reimburses the Indemnitee for all reasonable costs and expenses (including attorney fees before and at trial and in connection with any appeal or petition for review, but excluding salaries of officers and employees) incurred by the Indemnitee in connection with its defense of such Third Party Claim up to the time the Indemnifying Party assumes control of the defense of such claim (including costs incurred in the transition of the defense from the Indemnitee to the Indemnifying Party); and (y) the assumption of the defense of the Third Party Claim is not expected to prejudice or cause harm to the Indemnitee. (d) With respect to any Third Party Claim for which indemnification has been claimed hereunder, no party shall enter into any compromise or settlement, or consent to the entry of any judgment which (i) does not include as a term thereof the giving by the third party of a release to the Indemnitee from all further liability concerning such Third Party Claim on terms no less favorable than those obtained by the party entering into such compromise, settlement or consent; or (ii) imposes any obligation on the Indemnitee without such Indemnitee's written consent (such consent not to be withheld unreasonably), except an obligation to pay money which the Indemnifying Party has agreed to pay and has the ability to pay on behalf of the Indemnitee. In the event that an Indemnitee enters into any such compromise, settlement or consent without the written consent of the Indemnifying Party (other than as contemplated by Section 4.4(c) hereof), the entry of such compromise, settlement or consent shall relieve the Indemnifying Party of its indemnification obligation related to the claims underlying such compromise, settlement or consent. - 9 - (e) Upon final judgment, determination, settlement or compromise of any Third Party Claim, and unless otherwise agreed by the parties in writing, the Indemnifying Party shall pay promptly on behalf of the Indemnitee, or to the Indemnitee in reimbursement of any amount theretofore required to be paid by the Indemnitee, the amount so determined by final judgment, determination, settlement or compromise. Upon the payment in full by the Indemnifying Party of such amount, the Indemnifying Party shall succeed to the rights of such Indemnitee to the extent not waived in settlement, against the third party who made such Third Party Claim and any other person who may have been liable to the Indemnitee with respect to the indemnified matter. (f) In connection with defending against Third Party Claims, the parties shall cooperate with and assist each other by making available all employees, books, records, communications, documents, items and matters within their knowledge, possession or control that are necessary, appropriate or reasonably deemed relevant with respect to defense of such claims; provided, however, that nothing in this subparagraph (f) shall be deemed to require the waiver of any privilege, including the attorney-client privilege, or protection afforded by the attorney work product doctrine. In addition, regardless of the party actually defending a Third Party Claim for which there is an indemnity obligation under Section 4.1 or 4.2 hereof, the parties shall give each other regular status reports relating to such action with detail sufficient to permit the other party to assert and protect its rights and obligations under this Agreement. 4.5 Other Claims. Any claim for an Indemnifiable Loss which does not result from a Third Party Claim shall be asserted by written notice from the Indemnitee to the Indemnifying Party within 120 days of first learning thereof. All such claims that are not timely asserted pursuant to this section shall be deemed to be forever waived. The Indemnitee's written notice shall contain such information as the Indemnitee has regarding the alleged breach. Such Indemnifying Party shall have a period of 120 days (or such shorter time period as may be required by law as indicated by the Indemnitee in the written notice) within which to respond thereto. If such Indemnifying Party does not respond within such 120-day period (or lesser period), such Indemnifying Party shall be deemed to have accepted responsibility to make payment for the amount of Indemnifiable Loss and shall have no further right to contest the validity of such claim. If such Indemnifying Party does respond within such 120-day (or lesser) period and rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available under applicable law or under this Agreement. 4.6 Contribution in Respect of Certain Indemnifiable Losses. If the indemnification provided for in this Article 4 is unavailable to an Indemnitee in respect of any Indemnifiable Loss arising out of, or related to, information contained in the Distribution Prospectus or the related Form S-1 or used in connection with the Private Placement, the Indemnifying Party, in lieu of indemnifying such Indemnitee, shall contribute to the amount paid or payable by such Indemnitee as a result of such Indemnifiable Loss, in such proportion as is appropriate to reflect the relative fault of Agritope, its directors, officers, - 10 - employees or agents, on the one hand, and Epitope, its directors, officers, employees or agents, on the other hand, in connection with the statements or omissions which resulted in such Indemnifiable Loss. The relative fault of such respective groups shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by either such group. 4.7 No Beneficiaries. Except to the extent expressly provided otherwise in this Article 4, the indemnification provided for by this Article 4 shall not inure to the benefit of any third party or parties and shall not relieve any insurer who would otherwise be obligated to pay any claim of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, provide any such subrogation rights with respect thereto and each party agrees to waive such rights against the other to the fullest extent permitted. ARTICLE 5 CERTAIN ADDITIONAL MATTERS 5.1 Construction of Agreements. Notwithstanding any other provisions in this Agreement to the contrary, in the event and to the extent that there is a conflict between the provisions of this Agreement and the provisions of any Related Agreement, the provisions of such Related Agreement shall control. 5.2 Consents and Assignments. Epitope and Agritope shall use reasonable efforts to obtain, either before or after the Distribution Date, any consent, approval or amendment required to novate and/or assign to an Agritope Unit or to Epitope, as appropriate, all agreements, leases, licenses and other rights of any nature whatsoever relating solely to that party's business. 5.3 No Representations or Warranties. Agritope understands and agrees that Epitope is not, in this Agreement, or in any Related Agreement or any other agreement or document contemplated by this Agreement, representing or warranting in any way as to the businesses and Liabilities retained, transferred or assumed in connection with the Distribution, or that the obtaining of the consents or approvals, the execution and delivery of any ancillary or amendatory agreements or the making of the filings and applications contemplated by this Agreement will satisfy the provisions of all applicable agreements or the requirements of all applicable laws or judgments, it being understood and agreed that, subject to Section 5.2 hereof, Agritope shall bear the economic and legal risk of the business and Liabilities retained or assumed hereunder by Agritope, and the legal and economic risk that any necessary consents or approvals are not obtained or that any requirements of law or judgments are not complied with or satisfied. 5.4 Officers and Directors. Agritope and Epitope shall take all necessary actions to elect or otherwise appoint, as of the Distribution Date, individuals to be directors or officers (or both) of Agritope, as set forth in the Form S-1, and to cause the resignation of - 11 - individuals as officers and directors of each so that there are only two common directors of Agritope and Epitope as of the Distribution Date and no common officers. 5.5 Existing Intercompany Arrangements. Except as otherwise provided in this Agreement, any and all agreements, arrangements, commitments or understandings, whether or not in writing, between Epitope and Agritope will be terminated and of no further force and effect as of the Distribution Date. Following the Distribution Date, the parties shall discuss in good faith the provision of any services and products to be provided by the other, but which inadvertently were not the subject of this Agreement or any other Related Agreement. 5.6 Termination of Intercompany Accounts. Except as described in Section 9.2, any intercompany receivable, payable or loan between Epitope and Agritope outstanding on the Distribution Date will be deemed terminated as a result of the consummation of the transactions contemplated in this Agreement and will be treated as a capital contribution. ARTICLE 6 ACCESS TO INFORMATION AND SERVICES; TECHNOLOGY 6.1 Provision of Corporate Records. Following the Distribution Date, all Books and Records will remain the property of Epitope but will be made available upon reasonable notice and during normal business hours to Agritope for review and duplication until the earlier of (i) notice from Agritope that such Books and Records are no longer needed by Agritope, or (ii) the seventh anniversary of the Distribution Date. 6.2 Access to Information. From and after the Distribution Date, Epitope and Agritope will afford to each other and to each other's authorized accountants, legal counsel and other designated representatives reasonable access and duplicating rights (with copying costs to be borne by the requesting party) during normal business hours to all Books and Records and documents, communications, items and matters, including computer data (collectively, "Information") within each other's knowledge, possession or control, relating to the Agritope Units or Agritope Employees, insofar as such access is reasonably required by Epitope or Agritope (and shall use reasonable efforts to cause persons or firms possessing Information to give similar access). Information may be requested under this Article 6 for any legitimate business purpose including, without limitation, audit, accounting, claims, Actions, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations, but not for competitive purposes. 6.3 Production of Witnesses and Individuals. From and after the Distribution Date, Epitope and Agritope will use reasonable efforts to make available to each other, upon written request, their respective officers, directors, employees and agents for fact finding, consultation and interviews and as witnesses to the extent that any such person may reasonably be required in connection with any Actions in which the requesting party may - 12 - from time to time be involved. Epitope and Agritope agree to reimburse each other for reasonable out-of-pocket expenses (but not labor charges or salary payments) incurred by the other in connection with providing individuals and witnesses pursuant to this Section 6.3. 6.4 Retention of Records. Except when a longer retention period is otherwise required by law or agreed to in writing, Epitope and Agritope will retain, for seven years following the Distribution Date, all material Information relating to Agritope. Notwithstanding the foregoing, in lieu of retaining any specific Information, Epitope or Agritope may offer in writing to deliver such Information to the other and, if such offer is not accepted within 90 days, the offered Information may be destroyed or otherwise disposed of at any time. If a recipient of such offer requests in writing that any of the Information proposed to be destroyed or disposed of be delivered to such requesting party, the party proposing the destruction or disposal will promptly arrange for the delivery of the requested Information (at the cost of the requesting party). 6.5 Confidentiality. During the period that Agritope has been a wholly owned subsidiary of Epitope, employees of both Epitope and Agritope have become aware of a wide variety of otherwise confidential business and technical information of the other party. Such information of Epitope or the Agritope Units (the "Disclosing Party") shall be protected by the other party (the "Recipient") as follows: (a) "Confidential Information" means nonpublic information concerning the Disclosing Party's business, business plans, products, or technology, whether disclosed before or after the Distribution Date, including but not limited to strategic and long-range plans, financial and operating results, identities of principal customers and suppliers, plans for capital expenditures, plans for expansion into new markets, research projects and results, and trade secrets. (b) "Confidential Information" for purposes of this agreement excludes: (i) information which is or becomes publicly available through no act of the Recipient, from and after the date of public availability; (ii) information disclosed to the Recipient by a third party, provided: (A) under the circumstances of disclosure the Recipient does not have a duty of non-disclosure owed to such third party; (B) the third party's disclosure does not violate a duty of non-disclosure owed to another, including the Disclosing Party; and (C) the disclosure by the third party is not otherwise unlawful; and (iii) information developed by the Recipient independent of any confidential information of the Disclosing Party which is known by the Recipient on the Distribution Date and/or disclosed by the Disclosing Party thereafter. - 13 - (c) The Recipient will hold, and will cause its officers, employees, agents, consultants, advisors and Affiliates to hold, in strict confidence, and not to disclose, unless compelled to disclose by judicial or administrative process or, in the opinion of its independent legal counsel, by other requirements of law, all Confidential Information of the Disclosing Party. (d) The Recipient shall protect Confidential Information of the Disclosing Party by using the same degree of care, but no less than a reasonable degree of care, to prevent unauthorized disclosure as the Recipient uses to protect its own confidential information of a like nature. (e) The Recipient may disclose Confidential Information of the Disclosing Party to its employees, Affiliates, sublicensees, agents and advisors (such as attorneys, accountants and other consultants) who need to know the information and are obligated by policy, agreement or otherwise to avoid unauthorized use and disclosure of Confidential Information. (f) The foregoing restrictions shall expire ten years after the later of the Distribution Date or the date of disclosure, unless and to the extent Epitope and Agritope agree to a longer period for the foregoing restrictions with respect to specific categories of Confidential Information. 6.6 Privileged Matters. (a) Epitope and Agritope will each maintain, preserve and assert all privileges, including, without limitation, any privilege or protection arising under or relating to any attorney-client relationship (including, without limitation, the attorney-client and work product privileges), that existed prior to the Distribution Date in favor of the other party ("Privilege" or "Privileges"). Neither party will waive any Privilege that could be asserted under applicable law by the other party (the "Privileged Party") without the prior written consent of the Privileged Party. The rights and obligations created by this paragraph apply to all information as to which, but for the Distribution, a party would have been entitled to assert or did assert the protection of a Privilege ("Privileged Information"). (b) Upon receipt by either party or any of its Affiliates of any subpoena, discovery or other request that arguably calls for the production or disclosure of Privileged Information of the other party, or if a party obtains knowledge that any of its current or former employees has received any subpoena, discovery or other request which arguably calls for the production or disclosure of Privileged Information of the other party, the party will promptly notify the Privileged Party of the existence of the request and will provide the Privileged Party a reasonable opportunity to review the information and to assert any rights it may have under this Section 6.6 or otherwise to prevent the production or disclosure of Privileged Information. Neither party will produce or disclose any information it should reasonably expect to be covered by a - 14 - Privilege under this Section 6.6 unless (i) the Privileged Party has provided its express written consent to such production or disclosure; or (ii) a court of competent jurisdiction has entered a final, non-appealable order finding that the information is not entitled to protection under any applicable privilege. (c) Either party's provision of information to the other party, and either party's agreement to permit the other party to possess copies of Privileged Information occurring or generated prior to the Distribution Date, are made in reliance on the agreement, as set forth in this Section 6.6, to maintain the confidentiality of Privileged Information and to assert and maintain all applicable Privileges. Any actions taken by either party in connection with the Distribution and this Separation Agreement shall not be deemed a waiver of any Privilege that has been or may be asserted by either party nor shall they operate to reduce, minimize or condition the rights granted to either party in, or the obligations imposed upon either party by, this Section 6.6. (d) Agritope shall cause the Core Companies to comply with the restrictions imposed on it under this Section 6.6. 6.7 Technology. (a) On or before the Distribution Date, Epitope shall assign to Agritope, or as applicable Agritope shall assign to Epitope, those patents, patent applications, trademarks or service marks and related applications, copyrights, trade secrets, licenses, or agreements listed on Schedule 1, which specifies the current owner or named party and the party to which they are to be assigned. Epitope and Agritope shall cooperate fully with each other to effect the assignments and cause them to be made of record. The assignee shall pay any recording costs, counsel fees, or similar charges incurred to cause the assignment to be made of record. (b) After the Distribution Date, Epitope, on the one hand, and the Agritope Units, on the other, may use the patented inventions, trademarks, service marks, copyrighted works, trade secrets, or internally developed or licensed technology of the Agritope Units and of Epitope, respectively, only to the extent permitted by this or another written agreement. (c) For a period not to exceed two years after the Distribution Date, Agritope may continue to use the E design registered trademark, Reg. Nos. 1,770,765 and 1,805,488, in connection with goods and services of a quality comparable to those it provides as of the Distribution Date. Agritope shall use reasonable efforts to adopt a substitute corporate logo within six months after the Distribution Date, and shall phase out use of the E design trademark as soon as practicable. (d) Epitope and Agritope will each make their employees (and employees of the Core Companies) reasonably available to cooperate with the other party in - 15 - connection with any patent application filed after the Distribution Date if such employees have knowledge relevant to the application. If an employee of Epitope, on the one hand, or the Agritope Units, on the other, is an inventor of an invention assigned to an Agritope Unit or to Epitope, respectively, the employer will make the employee reasonably available to sign patent applications or related documents, testify in connection with patent interference or similar proceedings, and take other actions reasonably requested by the assignee to obtain or maintain patent or other rights in the invention. Nothing in this paragraph requires the assignment of any invention to Epitope or the Agritope Units. ARTICLE 7 INSURANCE 7.1 Transition. Agritope shall use reasonable efforts to obtain by and after the Distribution Date such insurance policies for the Agritope Business as the Agritope board of directors deems advisable, and shall keep Epitope informed of all new insurance policies obtained by Agritope that replace Shared Policies. Epitope may have the Agritope Units removed as named insureds from each Shared Policy covering losses of a type for which Agritope obtains its own insurance policy, regardless of differences in the limits under the Shared Policy and the policy obtained by Agritope. Epitope may have the Agritope Units removed as named insureds on each Shared Policy at the time the Shared Policy next comes due for renewal. For any period after the Distribution Date during which an Agritope Unit remains a named insured under a Shared Policy, Agritope shall pay Epitope a pro rata portion of the premiums attributable to the period. 7.2 Post-Distribution Date Claims. If, subsequent to the Distribution Date, any person, corporation, firm or entity shall assert a claim against an Agritope Unit with respect to any injury, loss, liability, damage or expense incurred or claimed to have been incurred in, or in connection with, the conduct of the Agritope Business or, to the extent any claim is made against Agritope, Epitope's business, and which injury, loss, liability, damage or expense may arise out of insured or insurable occurrences or events under one or more of the Shared Policies, Epitope shall at the time such claim is asserted be deemed to assign, without need of further documentation, to Agritope any and all rights of an insured party under the applicable Shared Policy(ies) with respect to such asserted claim, specifically including rights of indemnity and the right(s) to be defended by or at the expense of the insurer(s); provided, however, that nothing in this sentence is intended to effectuate or shall be deemed to constitute or reflect the assignment of the Shared Policies, or any of them, to Agritope. 7.3 Allocation of Insurance Proceeds. Insurance Proceeds received with respect to claims, costs and expenses under the Shared Policies shall be paid to Agritope with respect to Agritope's Liabilities and to Epitope with respect to Epitope's Liabilities. Payment of the allocable portions of indemnity costs of Insurance Proceeds resulting from the liability policies will be made to the appropriate party upon receipt from the insurance carrier. In the event that the aggregate limits on any of the Shared Policies are exceeded, the parties agree - 16 - to provide an equitable allocation of Insurance Proceeds received after the Distribution Date based upon their respective bona fide claims. The parties shall use their best efforts to cooperate with respect to insurance matters. ARTICLE 8 DISPUTE RESOLUTION 8.1 Negotiation and Binding Arbitration. Except with respect to matters involving Section 6.6 hereof (Privileged Matters) and except as may expressly be provided in any other agreement between the parties entered into pursuant hereto, if a dispute, controversy or claim (collectively, a "Dispute") between Epitope and Agritope arises out of or relates to this Agreement, a Related Agreement or any other agreement entered into pursuant hereto or thereto, including, without limitation, the breach, interpretation or validity of any such agreement or any matter involving an Indemnifiable Loss, Epitope and Agritope agree to use the following procedures, in lieu of either party pursuing other available remedies and as the sole remedy (except as provided in Section 8.4 below), to resolve the Dispute. 8.2 Initiation. A party seeking to initiate the procedures will give written notice to the other party, briefly describing the nature of the Dispute. A meeting will be held between the parties within 30 days of the receipt of such notice, attended by individuals with decision-making authority regarding the Dispute, to attempt in good faith to negotiate a resolution of the Dispute. 8.3 Submission to Arbitration. If, not later than 30 days after such meeting, the parties have not succeeded in negotiating a resolution of the Dispute, they will agree to submit the Dispute to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, by a sole arbitrator selected by the parties. The arbitration will be held in Portland, Oregon, and governed by the Federal Arbitration Act, 9 U.S.C. Sections 1-16, and judgment upon the award rendered by the arbitrator may be entered by any court having jurisdiction thereof. The costs of arbitration will be apportioned between Epitope and Agritope as determined by the arbitrator in such manner as the arbitrator deems reasonable, taking into account the circumstances of the Dispute, the conduct of the parties during the proceeding, and the result of the arbitration. 8.4 Equitable Relief. Nothing herein will preclude either party from seeking equitable relief to prevent any immediate, irreparable harm to its interests, including multiple breaches of this Agreement or the relevant Related Agreement by the other party. Otherwise, these procedures are exclusive and will be fully exhausted prior to the initiation of any litigation. Either party may seek specific enforcement of any arbitrator's decision under this Article. The arbitrator may consolidate an arbitration under this Agreement with any arbitration arising under or relating to the Related Agreements or any other agreement between the parties entered into pursuant hereto, as the case may be, if the subjects of the Disputes thereunder arise out of or relate essentially to the same set of facts or transactions. The determination of issues relating to consolidation and the determination of any such - 17 - consolidated arbitration will be determined by the arbitrator appointed for the arbitration proceeding that was commenced first in time. ARTICLE 9 MISCELLANEOUS 9.1 Entire Agreement. This Agreement, including the Exhibits and the agreements and other documents referred to herein, shall constitute the entire agreement between Epitope and Agritope with respect to the subject matter hereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter. 9.2 Expenses. Except as otherwise expressly provided in this Agreement, any Related Agreement or any other agreement being entered into between Epitope and Agritope in connection with this Agreement, Epitope and Agritope shall each pay their own costs and expenses incurred in connection with the Distribution and the consummation of the transactions contemplated by this Agreement. Agritope shall also pay the expenses of the Private Placement and the expenses described on Schedule 2. Beginning December 1, 1997, Agritope shall pay all costs and expenses incurred in the course of the Agritope Business. In addition, commencing December 1, 1997, Epitope shall furnish services to Agritope, and Agritope shall pay Epitope for such services, pursuant to the Transition Services and Facilities Agreement and "Shared Services" shall no longer be allocated by Epitope to Agritope. To the extent expenses that are to be borne by Agritope are advanced by Epitope, Agritope shall reimburse Epitope for such expenses, without interest, within five business days after the Distribution. 9.3 Governing Law. This Agreement, the Related Agreements and any other agreement entered into in connection with the Distribution, shall be governed by, and construed and enforced in accordance with, the laws of the state of Oregon (regardless of the laws that might otherwise govern under applicable principles of conflict of laws). 9.4 Jurisdiction and Venue. Subject to the arbitration provisions of this Agreement, each party consents to the personal jurisdiction of the state and federal courts located in the state of Oregon and hereby waives any argument that venue in any such forum is not convenient or proper. 9.5 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given; (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, provided telephonic confirmation of receipt is obtained promptly after completion of transmission; (iii) on the business day after delivery to an overnight courier service or the express mail service maintained by the United States Postal Service, provided receipt of delivery has been confirmed; or (iv) on the fifth day after mailing, provided receipt of delivery is confirmed, if mailed to the party to whom notice is to be given, by registered or - 18 - certified mail, postage prepaid, properly addressed and return-receipt requested, to the party as follows: If to Epitope: Epitope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Attn: President Facsimile No. (503) 641-8665 If to Agritope: Agritope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Attn: President Facsimile No. (503) 520-6196 Any party may change its address and facsimile number by giving the other party written notice of its new address and facsimile number in the manner set forth above. 9.6 Modification of Agreement. No modification, amendment or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by each of the parties hereto and then such modification, amendment or waiver shall be effective only in the specific instance and for the purpose for which given. 9.7 Termination. This Agreement may be terminated and the Distribution abandoned at any time prior to the Record Date by, and in the sole discretion of, Epitope without the approval of Agritope. In the event of such termination, neither party (or any of its directors of officers) shall have any liability of any kind to the other party. 9.8 Successors and Assigns. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either party without the prior written consent of the other party, and such consent shall not be unreasonably withheld. 9.9 No Third Party Beneficiaries. Except for certain parties entitled to indemnification under Sections 4.1 and 4.2 hereof and listed therein, this Agreement is solely for the benefit of the parties hereto and is not intended to confer upon any other person except the parties hereto any rights or remedies hereunder. 9.10 Titles and Headings; Interpretation. The titles and headings to articles and sections herein are inserted for convenience of reference only and are not intended to constitute a part of or to affect the meaning or interpretation of this Agreement. - 19 - 9.11 Exhibits. The exhibits and schedules to this Agreement shall be construed with and as an integral part of this Agreement to the same extent as if the same had been set forth verbatim herein. 9.12 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable, the enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 9.13 No Waiver. Neither the failure nor any delay on the part of any party hereto to exercise any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or further exercise of the same or any other right, nor shall any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. 9.14 Survival. All covenants and agreements of the parties contained in this Agreement will survive for ten years following the Distribution Date, except for the covenants and agreements contained in Section 6.6, which shall continue indefinitely. 9.15 Counterparts. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when a counterpart has been signed by each party and delivered to the other party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed delivered on their behalf as of the date first written above. EPITOPE, INC. By /s/ John W. Morgan Title President and CEO AGRITOPE, INC. By /s/ Adolph J. Ferro Title Chairman, President and CEO - 20 - The undersigned consent to and agree to be bound by the terms of this Agreement. VINIFERA, INC. By /s/ Gilbert N. Miller Title Exec Vice President AGRIMAX FLORAL PRODUCTS, INC. By /s/ Gilbert N. Miller Title Exec Vice President - 21 - SCHEDULE 1 INTELLECTUAL PROPERTY TO BE ASSIGNED NONE - 22 - SCHEDULE 2 CERTAIN AGRITOPE EXPENSES 1. Miller Nash fees and expenses for Agritope Stock Purchase and R&D Agreements of $12,408. 2. All Tonkon Torp fees and expenses 3. Travel expenses for Dr. Ferro and Mr. Miller for June, September, and November trips to Europe made in connection with private placement of Agritope Stock Purchase and R&D Agreements. 4. Capital Asset Acquisitions - Precision Computers -- Pentium PC $ 2,734 - Computer System, CD Player 699 - HP Gas Chromatograph 21,208 - APCO Technologies Grafting Machine 10,000 5. Prepaid rent on new Agritope facility $ 21,445 == ======== - 23 - EXHIBIT A [EMPLOYEE BENEFITS AGREEMENT] EXHIBIT B [TAX ALLOCATION AGREEMENT] EXHIBIT C [TRANSITION SERVICES AND FACILITIES AGREEMENT] - 24 - EX-3.2 3 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-10.2 4 AMENDED AND RESTATED 1991 STOCK AWARD PLAN EPITOPE, INC. AMENDED AND RESTATED 1991 STOCK AWARD PLAN ARTICLE 1 ESTABLISHMENT AND PURPOSE 1.1 Establishment; Amendment and Restatement. Epitope, Inc. ("Corporation"), hereby establishes the Epitope, Inc., 1991 Stock Award Plan (the "Plan"), effective as of January 8, 1991, subject to shareholder approval as provided in Article 17. The Plan was previously amended and restated effective March 25, 1991, December 8, 1992, December 14, 1993, and December 13, 1994, and is further amended and restated as set forth herein effective December 17, 1996. 1.2 Purpose. The purpose of the Plan is to promote and advance the interests of Corporation and its shareholders by enabling Corporation to attract, retain, and reward key employees, outside advisors, and directors of Corporation and its subsidiaries. It is also intended to strengthen the mutuality of interests between such employees, advisors, and directors and Corporation's shareholders. The Plan is designed to meet this intent by offering stock options and other equity-based incentive awards, thereby providing a proprietary interest in pursuing the long-term growth, profitability, and financial success of Corporation. ARTICLE 2 DEFINITIONS 2.1 Defined Terms. For purposes of the Plan, the following terms shall have the meanings set forth below: "ADVISOR" means a member of an Advisory Committee of Corporation or a Subsidiary, or any other consultant selected by the Committee, who is neither an employee of Corporation or a Subsidiary nor a Non-Employee Director. "ADVISORY COMMITTEE" means a scientific advisory committee to Corporation or a Subsidiary. "AGRITOPE SHARE" means a share of Agritope Stock. "AGRITOPE STOCK PROPOSAL DATE" means the effective date of the amendment of Corporation's Articles of Incorporation to create Agritope Stock and to redesignate Corporation's previously existing common stock as Medical Products Stock. "AGRITOPE STOCK" means the Agritope Common Stock, no par value, of Corporation or any security of Corporation issued in substitution, exchange, or in lieu of such stock. "AWARD" means an award or grant made to a Participant of Options, Stock Appreciation Rights, Restricted Awards, Performance Awards, or Other Stock-Based Awards pursuant to the Plan. "AWARD AGREEMENT" means an agreement as described in Section 6.4. "BOARD" means the Board of Directors of Corporation. - 1 - "CODE" means the Internal Revenue Code of 1986, as amended and in effect from time to time, or any successor thereto, together with rules, regulations, and interpretations promulgated thereunder. Where the context so requires, any reference to a particular Code section shall be construed to refer to the successor provision to such Code section. "COMMITTEE" means the committee appointed by the Board to administer the Plan as provided in Article 3 of the Plan. "COMMON STOCK" means the Common Stock, no par value, of Corporation or any security of Corporation issued in substitution, exchange, or in lieu of such stock. For all periods after the Agritope Stock Proposal Date, references in this Plan to Common Stock include either Agritope Stock, Medical Products Stock, or both, as the context may require. "CONTINUING RESTRICTION" means a Restriction contained in Sections 6.5(h), 16.4, 16.5, and 16.7 of the Plan and any other Restrictions expressly designated by the Committee in an Award Agreement as a Continuing Restriction. "CORPORATION" means Epitope, Inc., an Oregon corporation, or any successor corporation. "DEFERRED COMPENSATION OPTION" means a Nonqualified Option granted with an option price less than Fair Market Value on the date of grant pursuant to Section 7.9 of the Plan. "DISABILITY" means the condition of being "disabled" within the meaning of Section 422(c)(7) of the Code. However, the Committee may change the foregoing definition of "Disability" or may adopt a different definition for purposes of specific Awards. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and in effect from time to time, or any successor statute. Where the context so requires, any reference to a particular section of the Exchange Act, or to any rule promulgated under the Exchange Act, shall be construed to refer to successor provisions to such section or rule. "FAIR MARKET VALUE" means with respect to either Agritope Shares or Medical Products Shares, on a particular day, without regard to any restrictions (other than a restriction which, by its terms, will never lapse), the mean between the reported high and low sale prices, or, if there is no sale on such day, the mean between the reported bid and asked prices, of Shares of the applicable class on that day or, if that day is not a trading day, the last prior trading day, on the securities exchange or automated securities interdealer quotation system on which such Shares shall have been traded. "INCENTIVE STOCK OPTION" or "ISO" means any Option granted pursuant to the Plan that is intended to be and is specifically designated in its Award Agreement as an "incentive stock option" within the meaning of Section 422 of the Code. "MEDICAL PRODUCTS SHARE" means a share of Medical Products Stock. "MEDICAL PRODUCTS STOCK" means the Epitope Medical Products Common Stock, no par value, of Corporation or any security of Corporation issued in substitution, exchange, or in lieu of such stock. "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not an employee of Corporation or any Subsidiary. "NONQUALIFIED OPTION" or "NQO" means any Option, including a Deferred Compensation Option, granted pursuant to the Plan that is not an Incentive Stock Option. "OPTION" means an ISO, an NQO, or a Deferred Compensation Option. - 2 - "OTHER STOCK-BASED AWARD" means an Award as defined in Section 11.1. "PARTICIPANT" means an employee of Corporation or a Subsidiary, an Advisor, or a Non-Employee Director who is granted an Award under the Plan. "PERFORMANCE AWARD" means an Award granted pursuant to the provisions of Article 10 of the Plan, the Vesting of which is contingent on performance attainment. "PERFORMANCE CYCLE" means a designated performance period pursuant to the provisions of Section 10.3 of the Plan. "PERFORMANCE GOAL" means a designated performance objective pursuant to the provisions of Section 10.4 of the Plan. "PLAN" means this Epitope, Inc., 1991 Stock Award Plan, as amended and restated and set forth herein and as it may be hereafter amended from time to time. "REPORTING PERSON" means a Participant who is subject to the reporting requirements of Section 16(a) of the Exchange Act. "RESTRICTED AWARD" means a Restricted Share or a Restricted Unit granted pursuant to Article 9 of the Plan. "RESTRICTED SHARE" means an Award described in Section 9.1(a) of the Plan. "RESTRICTED UNIT" means an Award of units representing Shares described in Section 9.1(b) of the Plan. "RESTRICTION" means a provision in the Plan or in an Award Agreement which limits the exercisability or transferability, or which governs the forfeiture, of an Award or the Shares, cash, or other property payable pursuant to an Award. "RETIREMENT" means: (a) For Participants who are employees, retirement from active employment with Corporation and its Subsidiaries at or after age 50, or such earlier retirement date as approved by the Committee for purposes of the Plan; (b) For Participants who are Non-Employee Directors, termination of membership on the Board after attaining age 50, or such earlier retirement date as approved by the Committee for purposes of the Plan; and (c) For Participants who are Advisors, termination of service as an Advisor after attaining age 50, or such earlier retirement date as approved by the Committee for purposes of the Plan. However, the Committee may change the foregoing definition of "Retirement" or may adopt a different definition for purposes of specific Awards. "SHARE" means a share of Common Stock. For all periods after the Agritope Stock Proposal Date, references in this Plan to Shares include either Agritope Shares, Medical Products Shares, or both, as the context may require. "STOCK APPRECIATION RIGHT" or "SAR" means an Award to benefit from the appreciation of Common Stock granted pursuant to the provisions of Article 8 of the Plan. - 3 - "SUBSIDIARY" means a "subsidiary corporation" of Corporation within the meaning of Section 425 of the Code, namely any corporation in which Corporation directly or indirectly controls 50 percent or more of the total combined voting power of all classes of stock having voting power. "VEST" or "VESTED" means: (a) In the case of an Award that requires exercise, to be or to become immediately and fully exercisable and free of all Restrictions (other than Continuing Restrictions); (b) In the case of an Award that is subject to forfeiture, to be or to become nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); (c) In the case of an Award that is required to be earned by attaining specified Performance Goals, to be or to become earned and nonforfeitable, freely transferable, and free of all Restrictions (other than Continuing Restrictions); or (d) In the case of any other Award as to which payment is not dependent solely upon the exercise of a right, election, exercise, or option, to be or to become immediately payable and free of all Restrictions (except Continuing Restrictions). 2.2 Gender and Number. Except where otherwise indicated by the context, any masculine or feminine terminology used in the Plan shall also include the opposite gender; and the definition of any term in Section 2.1 in the singular shall also include the plural, and vice versa. ARTICLE 3 ADMINISTRATION 3.1 General. Except as provided in Section 3.7, the Plan shall be administered by a Committee composed as described in Section 3.2. 3.2 Composition of the Committee. The Committee shall be appointed by the Board from among its members in a number and with such qualifications as will meet the requirements for approval by a committee pursuant to Rule 16b-3 under the Exchange Act. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The initial members of the Committee shall be the members of Corporation's existing Executive Compensation Committee. The Board may at any time replace the Executive Compensation Committee with another Committee. In the event that the Executive Compensation Committee shall cease to satisfy the requirements of Rule 16b-3, the Board shall appoint another Committee satisfying such requirements. 3.3 Authority of the Committee. The Committee shall have full power and authority (subject to such orders or resolutions as may be issued or adopted from time to time by the Board) to administer the Plan in its sole discretion, including the authority to: (a) Construe and interpret the Plan and any Award Agreement; (b) Promulgate, amend, and rescind rules and procedures relating to the implementation of the Plan; (c) With respect to employees and Advisors: (i) Select the employees and Advisors who shall be granted Awards; (ii) Determine the number and types of Awards to be granted to each such Participant; - 4 - (iii) Determine the number of Shares, or Share equivalents, to be subject to each Award and whether the Shares subject to an Award are to be Agritope Shares, Medical Products Shares, or a combination of both; (iv) Determine the option price, purchase price, base price, or similar feature for any Award; and (v) Determine all the terms and conditions of all Award Agreements, consistent with the requirements of the Plan. Decisions of the Committee, or any delegate as permitted by the Plan, shall be final, conclusive, and binding on all Participants. 3.4 Action by the Committee. A majority of the members of the Committee shall constitute a quorum for the transaction of business. Action approved by a majority of the members present at any meeting at which a quorum is present, or action in writing by all the members of the Committee, shall be the valid acts of the Committee. 3.5 Delegation. Notwithstanding the foregoing, the Committee may delegate to one or more officers of Corporation the authority to determine the recipients, types, amounts, and terms of Awards granted to Participants who are not Reporting Persons. 3.6 Liability of Committee Members. No member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan, any Award, or any Participant. 3.7 Awards to Non-Employee Directors. The Board may grant Awards from time to time to Non-Employee Directors. Awards to Non-Employee Directors shall be governed by and shall be subject to the terms and conditions set forth in an Award Agreement in a form approved by the Board. 3.8 Costs of Plan. The costs and expenses of administering the Plan shall be borne by Corporation. ARTICLE 4 DURATION OF THE PLAN AND SHARES SUBJECT TO THE PLAN 4.1 Duration of the Plan. The Plan is effective January 8, 1991, subject to approval by Corporation's shareholders as provided in Article 17. The Plan shall remain in effect until Awards have been granted covering all the available Shares or the Plan is otherwise terminated by the Board. Termination of the Plan shall not affect outstanding Awards. 4.2 Shares Subject to the Plan. 4.2.1 General. The shares which may be made subject to Awards under the Plan shall be Shares of Common Stock, which may be either authorized and unissued Shares or reacquired Shares. No fractional Shares shall be issued under the Plan. If an Award under the Plan is canceled or expires for any reason prior to having been fully Vested or exercised by a Participant or is settled in cash in lieu of Shares or is exchanged for other Awards, all Shares covered by such Awards shall be made available for future Awards under the Plan. Furthermore, any Shares used as full or partial payment to Corporation by a Participant of the option, purchase, or other exercise price of an Award and any Shares covered by a Stock Appreciation Right which are not issued upon exercise shall become available for future Awards. 4.2.2 Medical Products Shares. The maximum number of Medical Products Shares for which Awards may be granted under the Plan shall be 3,400,000 Medical Products Shares, plus the number of Shares - 5 - which were available for grant under Corporation's Incentive Stock Option Plan for Key Employees of Epitope, Inc. (the "ISOP"), on January 8, 1991, subject to adjustment pursuant to Article 14. 4.2.3 Agritope Shares. The maximum number of Agritope Shares for which Awards may be granted under the Plan shall be (i) 1,000,000 Agritope Shares plus (ii) that number of Agritope Shares which is one-half of the number of shares of Epitope Common Stock (rounded down to the nearest whole number) subject to outstanding Options under the Plan on the Agritope Stock Proposal Date, in each case subject to adjustment pursuant to Article 14. 4.2.4 Availability of Shares for Future Awards. If an Award under the Plan or under the ISOP is canceled or expires for any reason prior to having been fully Vested or exercised by a Participant or is settled in cash in lieu of Shares or is exchanged for other Awards, all Shares covered by such Awards shall be made available for future Awards under the Plan. Furthermore, any Shares used as full or partial payment to Corporation by a Participant of the option, purchase, or other exercise price of an Award and any Shares covered by a Stock Appreciation Right which are not issued upon exercise shall become available for future Awards. ARTICLE 5 ELIGIBILITY 5.1 Employees and Advisors. Officers and other key employees of Corporation and its Subsidiaries (who may also be directors of Corporation or a Subsidiary) and Advisors who, in the Committee's judgment, are or will be contributors to the long-term success of Corporation shall be eligible to receive Awards under the Plan. 5.2 Non-Employee Directors. All Non-Employee Directors shall be eligible to receive Awards as provided in Section 3.7 of the Plan. ARTICLE 6 AWARDS 6.1 Types of Awards. The types of Awards that may be granted under the Plan are: (a) Options governed by Article 7 of the Plan; (b) Stock Appreciation Rights governed by Article 8 of the Plan; (c) Restricted Awards governed by Article 9 of the Plan; (d) Performance Awards governed by Article 10 of the Plan; and (e) Other Stock-Based Awards or combination awards governed by Article 11 of the Plan. In the discretion of the Committee, any Award may be granted alone, in addition to, or in tandem with other Awards under the Plan. 6.2 General. Subject to the limitations of the Plan, the Committee may cause Corporation to grant Awards to such Participants, at such times, of such types, in such amounts, for such periods, with such option prices, purchase prices, or base prices, and subject to such terms, conditions, limitations, and restrictions as the Committee, in its discretion, shall deem appropriate. Awards may be granted as additional compensation to a Participant or in lieu of other compensation to such Participant. A Participant may receive more than one Award and more than one type of Award under the Plan. - 6 - 6.3 Nonuniform Determinations. The Committee's determinations under the Plan or under one or more Award Agreements, including without limitation, (a) the selection of Participants to receive Awards, (b) the type, form, amount, and timing of Awards, (c) the terms of specific Award Agreements, and (d) elections and determinations made by the Committee with respect to exercise or payments of Awards, need not be uniform and may be made by the Committee selectively among Participants and Awards, whether or not Participants are similarly situated. 6.4 Award Agreements. Each Award shall be evidenced by a written Award Agreement between Corporation and the Participant. Award Agreements may, subject to the provisions of the Plan, contain any provision approved by the Committee. 6.5 Provisions Governing All Awards. All Awards shall be subject to the following provisions: (a) Type of Shares. Each Award Agreement shall specify whether the Award covers Agritope Shares, Medical Products Shares, or a specified combination of both. (b) Alternative Awards. If any Awards are designated in their Award Agreements as alternative to each other, the exercise of all or part of one Award automatically shall cause an immediate equal (or pro rata) corresponding termination of the other alternative Award or Awards. (c) Rights as Shareholders. No Participant shall have any rights of a shareholder with respect to Shares subject to an Award until such Shares are issued in the name of the Participant. (d) Employment Rights. Neither the adoption of the Plan nor the granting of any Award shall confer on any person the right to continued employment with Corporation or any Subsidiary or the right to remain as a director of Corporation or a member of any Advisory Committee, as the case may be, nor shall it interfere in any way with the right of Corporation or a Subsidiary to terminate such person's employment or to remove such person as an Advisor or as a director at any time for any reason, with or without cause. (e) Termination Of Employment. The terms and conditions under which an Award may be exercised, if at all, after a Participant's termination of employment or service as an Advisor or as a Non-Employee Director shall be determined by the Committee and specified in the applicable Award Agreement. (f) Change in Control. The Committee, in its discretion, may provide in any Award Agreement that in the event of a change in control of Corporation (as the Committee may define such term in the Award Agreement), as of the date of such change in control: (i) All, or a specified portion of, Awards requiring exercise shall become fully and immediately exercisable, notwithstanding any other limitations on exercise; (ii) All, or a specified portion of, Awards subject to Restrictions shall become fully Vested; and (iii) All, or a specified portion of, Awards subject to Performance Goals shall be deemed to have been fully earned. The Committee, in its discretion, may include change in control provisions in some Award Agreements and not in others, may include different change in control provisions in different Award Agreements, and may include change in control provisions for some Awards or some Participants and not for others. (g) Reporting Persons. With respect to all Awards granted to Reporting Persons, the Award Agreement shall provide that: - 7 - (i) Awards requiring exercise shall not be exercisable until at least six months after the date the Award was granted, except in the case of the death or Disability of the Participant; and (ii) Shares issued pursuant to any other Award may not be sold by the Participant for at least six months after acquisition, except in the case of the death or Disability of the Participant; provided, however, that (unless an Award Agreement provides otherwise) the limitation of this Section 6.5(g) shall apply only if or to the extent required by Rule 16b-3 under the Exchange Act or any applicable successor provision. Award Agreements for Awards to Reporting Persons shall also comply with any future restrictions imposed by such Rule 16b-3. (h) Service Periods. At the time of granting Awards, the Committee may specify, by resolution or in the Award Agreement, the period or periods of service performed or to be performed by the Participant in connection with the grant of the Award. ARTICLE 7 OPTIONS 7.1 Types of Options. Options granted under the Plan may be in the form of Incentive Stock Options or Nonqualified Options (including Deferred Compensation Options). The grant of each Option and the Award Agreement governing each Option shall identify the Option as an ISO or an NQO. In the event the Code is amended to provide for tax-favored forms of stock options other than or in addition to Incentive Stock Options, the Committee may grant Options under the Plan meeting the requirements of such forms of options. 7.2 General. Options shall be subject to the terms and conditions set forth in Article 6 and this Article 7 and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee (or the Board with respect to Awards to Non-Employee Directors) shall deem desirable. 7.3 Option Price. Each Award Agreement for Options shall state the option exercise price per Share of Common Stock purchasable under the Option, which shall not be less than: (a) $1 per share in the case of a Deferred Compensation Option; (b) 75 percent of the Fair Market Value of a Share on the date of grant for all other Nonqualified Options; or (c) 100 percent of the Fair Market Value of a Share on the date of grant for all Incentive Stock Options. 7.4 Option Term. The Award Agreement for each Option shall specify the term of each Option, which may be unlimited or may have a specified period during which the Option may be exercised, as determined by the Committee. 7.5 Time of Exercise. The Award Agreement for each Option shall specify, as determined by the Committee: (a) The time or times when the Option shall become exercisable and whether the Option shall become exercisable in full or in graduated amounts over a period specified in the Award Agreement; (b) Such other terms, conditions, and restrictions as to when the Option may be exercised as shall be determined by the Committee; and - 8 - (c) The extent, if any, to which the Option shall remain exercisable after the Participant ceases to be an employee, Advisor, or director of Corporation or a Subsidiary. An Award Agreement for an Option may, in the discretion of the Committee, provide whether, and to what extent, the Option will become immediately and fully exercisable (i) in the event of the death, Disability, or Retirement of the Participant, or (ii) upon the occurrence of a change in control of Corporation. 7.6 Method of Exercise. The Award Agreement for each Option shall specify the method or methods of payment acceptable upon exercise of an Option. An Award Agreement may provide that the option price is payable in full in cash or, at the discretion of the Committee: (a) In installments on such terms and over such period as the Committee shall determine; (b) In previously acquired Shares (including Restricted Shares); (c) By surrendering outstanding Awards under the Plan denominated in Shares or in Share-equivalent units; (d) By delivery (in a form approved by the Committee) of an irrevocable direction to a securities broker acceptable to the Committee: (i) To sell Shares subject to the Option and to deliver all or a part of the sales proceeds to Corporation in payment of all or a part of the option price and withholding taxes due; or (ii) To pledge Shares subject to the Option to the broker as security for a loan and to deliver all or a part of the loan proceeds to Corporation in payment of all or a part of the option price and withholding taxes due; or (e) In any combination of the foregoing or in any other form approved by the Committee. If Restricted Shares are surrendered in full or partial payment of an Option price, a corresponding number of the Shares issued upon exercise of the Option shall be Restricted Shares subject to the same Restrictions as the surrendered Restricted Shares. 7.7 Special Rules for Incentive Stock Options. In the case of an Option designated as an Incentive Stock Option, the terms of the Option and the Award Agreement shall be in conformance with the statutory and regulatory requirements specified in Section 422 of the Code, as in effect on the date such ISO is granted. ISOs may be granted only to employees of Corporation or a Subsidiary. ISOs may not be granted under the Plan after January 8, 2001, unless the ten-year limitation of Section 422(b)(2) of the Code is removed or extended. 7.8 Restricted Shares. In the discretion of the Committee, the Shares issuable upon exercise of an Option may be Restricted Shares if so provided in the Award Agreement. 7.9 Deferred Compensation Options. The Committee may, in its discretion, grant Deferred Compensation Options with an option price less than Fair Market Value to provide a means for deferral of compensation to future dates. The option price shall be determined by the Committee subject to Section 7.3(a) of the Plan. The number of Shares subject to a Deferred Compensation Option shall be determined by the Committee, in its discretion, by dividing the amount of compensation to be deferred by the difference between the Fair Market Value of a Share on the date of grant and the option price of the Deferred Compensation Option. Amounts of compensation deferred with Deferred Compensation Options may include amounts earned under Awards granted under the Plan or under any other compensation program or arrangement of Corporation as permitted by the Committee. The Committee shall grant Deferred Compensation Options only if it - 9 - reasonably determines that the recipient of such an Option is not likely to be deemed to be in constructive receipt for income tax purposes of the income being deferred. 7.10 Reload Options. The Committee, in its discretion, may provide in an Award Agreement for an Option that in the event all or a portion of the Option is exercised by the Participant using previously acquired Shares, the Participant shall automatically be granted a replacement Option (with an option price equal to the Fair Market Value of a Share on the date of such exercise) for a number of Shares equal to (or equal to a portion of) the number of shares surrendered upon exercise of the Option. Such reload Option features may be subject to such terms and conditions as the Committee shall determine, including without limitation, a condition that the Participant retain the Shares issued upon exercise of the Option for a specified period of time. 7.11 Limitation on Number of Shares Subject to Options. In no event may options for more than 500,000 Shares be granted to any individual under the Plan during any fiscal year period. ARTICLE 8 STOCK APPRECIATION RIGHTS 8.1 General. Stock Appreciation Rights shall be subject to the terms and conditions set forth in Article 6 and this Article 8 and shall contain such additional terms and conditions, not inconsistent with the express terms of the Plan, as the Committee (or the Board with respect to Awards to Non-Employee Directors) shall deem desirable. 8.2 Nature of Stock Appreciation Right. A Stock Appreciation Right is an Award entitling a Participant to receive an amount equal to the excess (or if the Committee shall determine at the time of grant, a portion of the excess) of the Fair Market Value of a Share of Common Stock on the date of exercise of the SAR over the base price, as described below, on the date of grant of the SAR, multiplied by the number of Shares with respect to which the SAR shall have been exercised. The base price shall be designated by the Committee in the Award Agreement for the SAR and may be the Fair Market Value of a Share on the grant date of the SAR or such other higher or lower price as the Committee shall determine. 8.3 Exercise. A Stock Appreciation Right may be exercised by a Participant in accordance with procedures established by the Committee. The Committee may also provide that a SAR shall be automatically exercised on one or more specified dates or upon the satisfaction of one or more specified conditions. In the case of SARs granted to Reporting Persons, exercise of the SAR shall be limited by the Committee to the extent required to comply with the applicable requirements of Rule 16b-3 under the Exchange Act. 8.4 Form of Payment. Payment upon exercise of a Stock Appreciation Right may be made in cash, in installments, in Shares, by issuance of a Deferred Compensation Option, or in any combination of the foregoing, or in any other form as the Committee shall determine. ARTICLE 9 RESTRICTED AWARDS 9.1 Types of Restricted Awards. Restricted Awards granted under the Plan may be in the form of either Restricted Shares or Restricted Units. (a) Restricted Shares. A Restricted Share is an Award of Shares transferred to a Participant subject to such terms and conditions as the Committee deems appropriate, including, without limitation, restrictions on the sale, assignment, transfer, or other disposition of such Restricted Shares and may include a requirement that the Participant forfeit such Restricted Shares back to Corporation upon termination of Participant's employment (or service as an Advisor) for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Shares. Each Participant receiving a Restricted Share shall be issued a stock certificate in - 10 - respect of such Shares, registered in the name of such Participant, and shall execute a stock power in blank with respect to the Shares evidenced by such certificate. The certificate evidencing such Restricted Shares and the stock power shall be held in custody by Corporation until the Restrictions thereon shall have lapsed. (b) Restricted Units. A Restricted Unit is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate, and may include a requirement that the Participant forfeit such Restricted Units upon termination of Participant's employment (or service as an Advisor) for specified reasons within a specified period of time or upon other conditions, as set forth in the Award Agreement for such Restricted Units. 9.2 General. Restricted Awards shall be subject to the terms and conditions of Article 6 and this Article 9 and shall contain such additional terms and conditions, not inconsistent with the express provisions of the Plan, as the Committee (or the Board with respect to Awards to Non-Employee Directors) shall deem desirable. 9.3 Restriction Period. Restricted Awards shall provide that such Awards, and the Shares subject to such Awards, may not be transferred, and may provide that, in order for a Participant to Vest in such Awards, the Participant must remain in the employment (or remain as an Advisor) of Corporation or its Subsidiaries, subject to relief for reasons specified in the Award Agreement, for a period commencing on the date of the Award and ending on such later date or dates as the Committee may designate at the time of the Award (the "Restriction Period"). During the Restriction Period, a Participant may not sell, assign, transfer, pledge, encumber, or otherwise dispose of Shares received under or governed by a Restricted Award grant. The Committee, in its sole discretion, may provide for the lapse of restrictions in installments during the Restriction Period. Upon expiration of the applicable Restriction Period (or lapse of Restrictions during the Restriction Period where the Restrictions lapse in installments) the Participant shall be entitled to settlement of the Restricted Award or portion thereof, as the case may be. Although Restricted Awards shall usually Vest based on continued employment (or service as an Advisor) and Performance Awards under Article 10 shall usually Vest based on attainment of Performance Goals, the Committee, in its discretion, may condition Vesting of Restricted Awards on attainment of Performance Goals as well as continued employment (or service as an Advisor). In such case, the Restriction Period for such a Restricted Award shall include the period prior to satisfaction of the Performance Goals. 9.4 Forfeiture. If a Participant ceases to be an employee or Advisor of Corporation or a Subsidiary during the Restriction Period for any reason other than reasons which may be specified in an Award Agreement (such as death, Disability, or Retirement) the Award Agreement may require that all non-Vested Restricted Awards previously granted to the Participant be forfeited and returned to Corporation. 9.5 Settlement of Restricted Awards. (a) Restricted Shares. Upon Vesting of a Restricted Share Award, the legend on such Shares will be removed and the Participant's stock power will be returned and the Shares will no longer be Restricted Shares. The Committee may also, in its discretion, permit a Participant to receive, in lieu of unrestricted Shares at the conclusion of the Restriction Period, payment in cash, installments, or by issuance of a Deferred Compensation Option equal to the Fair Market Value of the Restricted Shares as of the date the Restrictions lapse. (b) Restricted Units. Upon Vesting of a Restricted Unit Award, a Participant shall be entitled to receive payment for Restricted Units in an amount equal to the aggregate Fair Market Value of the Shares covered by such Restricted Units at the expiration of the Applicable Restriction Period. Payment in settlement of a Restricted Unit shall be made as soon as practicable following the conclusion of the applicable Restriction Period in cash, in installments, in Shares equal to the number of Restricted Units, by issuance of a Deferred Compensation Option, or in any other manner or combination of such methods as the Committee, in its sole discretion, shall determine. - 11 - 9.6 Rights as a Shareholder. A Participant shall have, with respect to unforfeited Shares received under a grant of Restricted Shares, all the rights of a shareholder of Corporation, including the right to vote the shares, and the right to receive any cash dividends. Stock dividends issued with respect to Restricted Shares shall be treated as additional Shares covered by the grant of Restricted Shares and shall be subject to the same Restrictions. ARTICLE 10 PERFORMANCE AWARDS 10.1 General. Performance Awards shall be subject to the terms and conditions set forth in Article 6 and this Article 10 and shall contain such other terms and conditions not inconsistent with the express provisions of the Plan, as the Committee (or the Board with respect to Awards to Non-Employee Directors) shall deem desirable. 10.2 Nature of Performance Awards. A Performance Award is an Award of units (with each unit having a value equivalent to one Share) granted to a Participant subject to such terms and conditions as the Committee deems appropriate, including, without limitation, the requirement that the Participant forfeit such Performance Award or a portion thereof in the event specified performance criteria are not met within a designated period of time. 10.3 Performance Cycles. For each Performance Award, the Committee shall designate a performance period (the "Performance Cycle") with a duration to be determined by the Committee in its discretion within which specified Performance Goals are to be attained. There may be several Performance Cycles in existence at any one time and the duration of Performance Cycles may differ from each other. 10.4 Performance Goals. The Committee shall establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Performance Goals may be based on performance criteria for Corporation, a Subsidiary, or an operating group, or based on a Participant's individual performance. Performance Goals may include objective and subjective criteria. During any Performance Cycle, the Committee may adjust the Performance Goals for such Performance Cycle as it deems equitable in recognition of unusual or nonrecurring events affecting Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. 10.5 Determination of Awards. As soon as practicable after the end of a Performance Cycle, the Committee shall determine the extent to which Performance Awards have been earned on the basis of performance in relation to the established Performance Goals. 10.6 Timing and Form of Payment. Settlement of earned Performance Awards shall be made to the Participant as soon as practicable after the expiration of the Performance Cycle and the Committee's determination under Section 10.5, in the form of cash, installments, Shares, Deferred Compensation Options, or any combination of the foregoing or in any other form as the Committee shall determine. ARTICLE 11 OTHER STOCK-BASED AND COMBINATION AWARDS 11.1 Other Stock-Based Awards. The Committee (or the Board with respect to Awards to Non-Employee Directors) may grant other Awards under the Plan pursuant to which Shares are or may in the future be acquired, or Awards denominated in or measured by Share equivalent units, including Awards valued using measures other than the market value of Shares. Such Other Stock-Based Awards may be granted either alone, in addition to, or in tandem with, any other type of Award granted under the Plan. 11.2 Combination Awards. The Committee may also grant Awards under the Plan in tandem or combination with other Awards or in exchange of Awards, or in tandem or combination with, or as - 12 - alternatives to, grants or rights under any other employee plan of Corporation, including the plan of any acquired entity. No action authorized by this section shall reduce the amount of any existing benefits or change the terms and conditions thereof without the Participant's consent. ARTICLE 12 DEFERRAL ELECTIONS The Committee may permit a Participant to elect to defer receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise, earn-out, or Vesting of an Award made under the Plan. If any such election is permitted, the Committee shall establish rules and procedures for such payment deferrals, including, but not limited to: (a) payment or crediting of reasonable interest on such deferred amounts credited in cash, (b) the payment or crediting of dividend equivalents in respect of deferrals credited in Share equivalent units, or (c) granting of Deferred Compensation Options. ARTICLE 13 DIVIDEND EQUIVALENTS Any Awards may, at the discretion of the Committee, earn dividend equivalents. In respect of any such Award which is outstanding on a dividend record date for Common Stock, the Participant may be credited with an amount equal to the amount of cash or stock dividends that would have been paid on the Shares covered by such Award, had such covered Shares been issued and outstanding on such dividend record date. The Committee shall establish such rules and procedures governing the crediting of dividend equivalents, including the timing, form of payment, and payment contingencies of such dividend equivalents, as it deems are appropriate or necessary. ARTICLE 14 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, ETC. 14.1 Plan Does Not Restrict Corporation. The existence of the Plan and the Awards granted hereunder shall not affect or restrict in any way the right or power of the Board or the shareholders of Corporation to make or authorize any adjustment, recapitalization, reorganization, or other change in Corporation's capital structure or its business, any merger or consolidation of the Corporation, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting Corporation's capital stock or the rights thereof, the dissolution or liquidation of Corporation or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding. 14.2 Adjustments by the Committee. In the event of any change in capitalization affecting the Common Stock of Corporation, such as a stock dividend, stock split, recapitalization, merger, consolidation, split-up, combination or exchange of shares or other form of reorganization, or any other change affecting the Common Stock, such proportionate adjustments, if any, as the Committee, in its sole discretion, may deem appropriate to reflect such change, shall be made with respect to the aggregate number of Shares for which Awards in respect thereof may be granted under the Plan, the maximum number of Shares which may be sold or awarded to any Participant, the number of Shares covered by each outstanding Award, and the price per Share in respect of outstanding Awards. The Committee may also make such adjustments in the number of Shares covered by, and price or other value of any outstanding Awards in the event of a spin-off or other distribution (other than normal cash dividends), of Corporation assets to shareholders. ARTICLE 15 AMENDMENT AND TERMINATION Without further approval of Corporation's shareholders, the Board may at any time terminate the Plan, or may amend it from time to time in such respects as the Board may deem advisable, except that the Board may not, without approval of the shareholders, make any amendment that would materially increase the - 13 - aggregate number of shares of Common Stock that may be issued under the Plan (except for adjustments pursuant to Article 14 of the Plan). Without further shareholder approval, the Board may amend the Plan to take into account changes in applicable securities, federal income tax laws, and other applicable laws. Further, should the provisions of Rule 16b-3, or any successor rule, under the Exchange Act be amended, the Board, without further shareholder approval, may amend the Plan as necessary to comply with any modifications to such rule. ARTICLE 16 MISCELLANEOUS 16.1 Tax Withholding. 16.1.1 General. Corporation shall have the right to deduct from any settlement, including the delivery or vesting of Shares, made under the Plan any federal, state, or local taxes of any kind required by law to be withheld with respect to such payments or to take such other action as may be necessary in the opinion of Corporation to satisfy all obligations for the payment of such taxes. The recipient of any payment or distribution under the Plan shall make arrangements satisfactory to Corporation for the satisfaction of any such withholding tax obligations. Corporation shall not be required to make any such payment or distribution under the Plan until such obligations are satisfied. 16.1.2 Stock Withholding. The Committee, in its sole discretion, may permit a Participant to satisfy all or a part of the withholding tax obligations incident to the settlement of an Award involving payment or delivery of Shares to the Participant by having Corporation withhold a portion of the Shares that would otherwise be issuable to the Participant. Such Shares shall be valued based on their Fair Market Value on the date the tax withholding is required to be made. Any stock withholding with respect to a Reporting Person shall be subject to such limitations as the Committee may impose to comply with the requirements of the Exchange Act. 16.2 Unfunded Plan. The Plan shall be unfunded and Corporation shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. Any liability of Corporation to any person with respect to any Award under the Plan shall be based solely upon any contractual obligations that may be effected pursuant to the Plan. No such obligation of Corporation shall be deemed to be secured by any pledge of, or other encumbrance on, any property of Corporation. 16.3 Payments to Trust. The Committee is authorized to cause to be established a trust agreement or several trust agreements whereunder the Committee may make payments of amounts due or to become due to Participants in the Plan. 16.4 Annulment of Awards. Any Award Agreement may provide that the grant of an Award payable in cash is provisional until cash is paid in settlement thereof or that grant of an Award payable in Shares is provisional until the Participant becomes entitled to the certificate in settlement thereof. In the event the employment (or service as an Advisor or membership on the Board) of a Participant is terminated for cause (as defined below), any Award which is provisional shall be annulled as of the date of such termination for cause. For the purpose of this Section 16.4, the term "for cause" shall have the meaning set forth in the Participant's employment agreement, if any, or otherwise means any discharge (or removal) for material or flagrant violation of the policies and procedures of Corporation or for other job performance or conduct which is materially detrimental to the best interests of Corporation, as determined by the Committee. 16.5 Engaging in Competition With Corporation. Any Award Agreement may provide that, if a Participant terminates employment with Corporation or a Subsidiary for any reason whatsoever, and within 18 months after the date thereof accepts employment with any competitor of (or otherwise engages in competition with) Corporation, the Committee, in its sole discretion, may require such Participant to return to Corporation the economic value of any Award that is realized or obtained (measured at the date of exercise, Vesting, or - 14 - payment) by such Participant at any time during the period beginning on the date that is six months prior to the date of such Participant's termination of employment with Corporation. 16.6 Other Corporation Benefit and Compensation Programs. Payments and other benefits received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's regular, recurring compensation for purposes of the termination indemnity or severance pay law of any state or country and shall not be included in, or have any effect on, the determination of benefits under any other employee benefit plan or similar arrangement provided by Corporation or a Subsidiary unless expressly so provided by such other plan or arrangements, or except where the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of cash compensation. Awards under the Plan may be made in combination with or in tandem with, or as alternatives to, grants, awards, or payments under any other Corporation or Subsidiary plans, arrangements, or programs. The Plan notwithstanding, Corporation or any Subsidiary may adopt such other compensation programs and additional compensation arrangements as it deems necessary to attract, retain, and reward employees and directors for their service with Corporation and its Subsidiaries. 16.7 Securities Law Restrictions. No Shares shall be issued under the Plan unless counsel for Corporation shall be satisfied that such issuance will be in compliance with applicable federal and state securities laws. Certificates for Shares delivered under the Plan may be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law. The Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. 16.8 Governing Law. Except with respect to references to the Code or federal securities laws, the Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the state of Oregon. ARTICLE 17 SHAREHOLDER APPROVAL The amendment and restatement of the Plan is expressly subject to the approval of the Plan by the shareholders at the 1997 annual meeting of Corporation's shareholders. - 15 - EX-10.4 5 NONQUALIFIED STOCK OPTION AGREEMENT AWARD AGREEMENT UNDER THE AGRITOPE, INC., 1992 STOCK AWARD PLAN NONQUALIFIED STOCK OPTION AGREEMENT Dated July 26, 1997 Agritope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 ("Corporation") - ----------------- ("Participant") - ----------------- - ----------------- RECITALS A. Participant is an employee of Corporation. Corporation desires to have Participant remain in his or her capacity with Corporation or Epitope, and to afford Participant the opportunity to obtain stock ownership in Corporation so that Participant may have a significant proprietary interest in Corporation's success. B. The board of directors of Corporation (the "Board") has granted to Participant a nonqualified stock option pursuant to Corporation's 1992 Stock Award Plan (the "Plan"), subject to the terms and conditions of this Agreement. C. Capitalized terms not otherwise defined have the meanings given in Section 11. AGREEMENT In consideration of services rendered and to be rendered by Participant to Corporation and of the agreements set forth below, the parties agree as follows: 1. Grant of Option. Subject to the terms and conditions of this Agreement, Corporation grants to Participant, as of the date of this Agreement (the "Effective Date"), an option (the "Option") to purchase ------ shares ("Shares") of Corporation's common stock, no par value (the "Stock"). 2. Terms of Option. 2.1 Price. The Option price per share shall be $2.98 (the "Option Price"). If any reduction (the "Epitope Option Reduction") is made to the exercise prices of options outstanding under the Epitope, Inc. 1991 Stock Award Plan in - 1 - connection with the Spin-Off, as defined below, the Option price hereunder shall be reduced by an amount equal to the product of the Epitope Option Reduction and a factor of .411, without further action of the Corporation. 2.2 Term. The term of the Option shall be unlimited; provided, however, that to the extent not previously exercised, the Option shall terminate upon the earlier of the following dates: (a) One year after Participant ceases to be a director, officer, or employee of Corporation, Epitope, or their respective Subsidiaries (including with respect to periods after the effective date of the Spin-Off described in Section 2.4) for any reason other than Participant's Retirement; or (b) Five years after Participant ceases to be a director, officer, or employee of Corporation, Epitope, or their respective Subsidiaries as a result of Participant's Retirement. 2.3 Time of Exercise. Unless the Option is terminated as provided in Section 2.2, the Option shall vest and accordingly may be exercised from time to time to purchase a cumulative total of up to the following percentage of the Shares: [For each Replacement Option, the exercisability schedule will be the same as the replaced Out-of-the-Money Option.] 2.4 Effect of Spin-Off. In the event the stock of Corporation is distributed by Epitope to its shareholders in a spin-off transaction or sale or other disposition as a result of which the Corporation is no longer a wholly owned subsidiary of Epitope (a "Spin-Off"), unless Participant is, after the effective date of the Spin-Off, an employee of Epitope, the Option will be exercisable only to the extent the Option had become exercisable pursuant to Section 2.3 as of the 90th day after the effective date of the Spin-Off. (If Participant is an Epitope employee after the effective date of the Spin-Off, the Option will continue to vest pursuant to Section 2.3 so long as Participant remains an employee of Epitope or its Subsidiaries and for 90 days thereafter.) 2.5 Acceleration of Exercisability. Notwithstanding the provisions of Sections 2.2 and 2.3, the exercisability of the Option shall be accelerated upon a Change in Control Date occurring after the Registration Date. Upon such a Change in Control Date, the Option shall become immediately and fully exercisable as to all Shares covered by the Option. 2.6 Method of Exercise; Payment. The Option shall be exercised by delivery of a written notice to Corporation, signed by Participant, specifying the - 2 - number of Shares that Participant then desires to purchase, together with cash, certified check, or bank draft payable to the order of Corporation, or other form of payment acceptable to Corporation, for an amount of United States dollars equal to the aggregate Option Price of such Shares. If Corporation, in its sole discretion, elects to allow payment of all or a portion of the Option Price in installments, Participant shall also deliver a promissory note, in form satisfactory to Corporation, for the deferred portion of the Option Price secured by a pledge, also in form satisfactory to Corporation, of the Shares of Stock purchased by such exercise of the Option. Following any Spin-off the notice of exercise and the exercise price shall be delivered to, and any check or bank draft shall be made payable to, Epitope unless otherwise requested by Corporation by notice to Participant. 2.7 Stock Certificates. Promptly after any exercise in whole or in part of the Option by Participant, Corporation shall deliver to Participant a certificate or certificates, registered in Participant's name, for the number of shares of Stock for which the Option was so exercised. 3. Nontransferability. 3.1 Restriction. (a) The Option is not transferable by Participant other than by testamentary will or the laws of descent and distribution and, during Participant's lifetime, may be exercised only by Participant or Participant's guardian or legal representative; (b) No assignment or transfer of the Option, whether voluntary, involuntary, or by operation of law or otherwise, except by testamentary will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right; and (c) Immediately upon any attempt to assign or transfer the Option, the Option shall terminate and be of no force or effect. 3.2 Exercise in the Event of Death or Disability. Whenever the word "Participant" is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Participant's guardian, legal representative, executor, administrator, or the person or persons to whom the Option may be transferred by testamentary will or by the laws of descent and distribution, the word "Participant" shall be deemed to include such person or persons. 4. No Rights as Shareholder Prior to Exercise. Participant shall not be deemed for any purpose to be a shareholder of Corporation with respect to any - 3 - shares subject to the Option under this Agreement as to which the Option shall not have been exercised. 5. Adjustments. 5.1 No Effect on Changes in Corporation's Capital Structure. The existence of the Option shall not affect in any way the right or power of Corporation or its shareholders to make or authorize (a) any adjustments, recapitalizations, reorganization, or other changes in Corporation's capital structure or its business, (b) any merger or consolidation of Corporation, (c) any issue of bonds, debentures, preferred, or preference stocks ahead of or affecting the Shares, (d) the dissolution or liquidation of Corporation, (e) any sale or transfer of all or any part of its assets or business, or (f) any other corporate act or proceeding, whether of a similar character or otherwise. 5.2 Adjustment to Option Shares. The Shares subject to the Option are Stock as constituted on the date of this Agreement, but in the event of any stock split or payment of a dividend on Stock payable in shares of Stock, the Shares of Stock then subject to the Option shall be increased proportionately without any change in the aggregate Option Price. If all the outstanding shares of Stock shall be changed into or exchanged for a different number or class of shares of Corporation, or of another corporation, through reorganization, recapitalization, stock split-up, combination of shares, merger, consolidation, or otherwise, then there shall be substituted for each share of Stock then subject to the Option the number and class of shares into which each outstanding share of Stock shall be so exchanged, all without any change in the aggregate Option Price for the shares then subject to the Option. In connection with any adjustment under this Section 5.2 resulting in a fractional share interest, such interest shall, if less than 0.5 share, be rounded down to the nearest whole share, and otherwise be rounded up to the nearest whole share. No adjustment shall be made under this Section in connection with any stock split, stock dividend, or other event described in this Section that occurs in connection with a Spin-Off. In case of any adjustment under this Section, a corresponding adjustment shall be made to the Exchange Ratio, as defined in Section 9.1. 6. Compliance with Securities Laws. 6.1 No Exercise Until Compliance. If Corporation at any time determines that registration or qualification of the Shares, the Stock, or the Option under state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable, then the Option may not be exercised, in whole or in part, until such registration, qualification, consent, or approval shall have been effected or obtained free of any conditions not acceptable to Corporation. - 4 - 6.2 Investment Interest. If required by Corporation at the time of any exercise of the Option, as a condition to such exercise, Participant shall enter into an agreement with Corporation in form satisfactory to counsel for Corporation by which Participant (a) shall represent that the Shares are being acquired for Participant's own account for investment and not with a view to, or for sale in connection with, any resale or distribution of such Shares, and (b) shall agree that, if Participant should decide to sell, transfer, or otherwise dispose of any of such Shares, Participant may do so only if the Shares are registered under the Securities Act of 1933 and applicable state securities laws, unless, in the opinion of counsel for Corporation, such registration is not required. 7. Termination for Cause: Competition. 7.1 The grant of the Option governed by this Agreement is provisional until Participant becomes entitled to a certificate for Shares in settlement thereof. In the event Participant's employment or service as a director is terminated for cause (as defined below), any portion of the Option that is provisional shall be annulled as of the date of such termination for cause. For the purpose of this Section 7.1, the term "for cause" shall have the meaning set forth in Participant's employment agreement, if any, or otherwise means any discharge (or removal) for material or flagrant violation of corporate policies and procedures or for other job performance or conduct that is materially detrimental to the best interests of the employer, as determined by its board of directors. 7.2 If Participant ceases to be a director or employee of Corporation, Epitope, or their respective Subsidiaries, for any reason whatsoever, and within 18 months after the date thereof accepts employment with any competitor of (or otherwise engages in competition with) the employer or corporation of which Participant was a director, its board of directors, in its sole discretion, may require Participant to return to Corporation the economic value of this Option that is realized or obtained (measured at the date of exercise, vesting, or payment) by Participant at any time during the period beginning on the date that is six months prior to the date of Participant's termination of employment with or service as a director. 8. Service Periods. The periods of service as an employee or director in connection with the grant of the Option are as follows: [Conform to the replaced Out-of-the-Money Option.] 9. Epitope Shares. 9.1 Mandatory Issuance. Upon any exercise of all or any portion of the Option, Participant shall receive, in lieu of shares of Stock otherwise issuable pursuant to this Option, fully paid and nonassessable shares (the "Exchange - 5 - Shares") of Common Stock, no par value, of Epitope (the "Epitope Common Stock"), based upon a ratio of 2.433 shares of Stock for each share of Epitope Common Stock (the "Exchange Ratio"). In connection with any issuance under this Section 9.1 resulting in a fractional share interest of Epitope Common Stock, such interest shall, if less than 0.5 share, be rounded down to the nearest whole share, and otherwise be rounded up to the nearest whole share. Corporation shall purchase the Exchange Shares from Epitope pursuant to a separate agreement. Epitope's obligation to issue the Exchange Shares pursuant to such agreement shall be a condition precedent to Participant's obligation to accept the Exchange Shares pursuant to this Section 9.1. 9.2 Procedure. Upon exercise of the Option, Corporation shall cause Epitope, pursuant to the separate agreement between Corporation and Epitope described above, to issue a certificate or certificates for the Exchange Shares in Participant's name. As promptly as practicable after exercise of the Option, Corporation at its expense shall cause to be delivered to Participant: (a) A certificate or certificates for the Exchange Shares; (b) A copy of the prospectus deliverable in connection with the registration of the Exchange Shares pursuant to Section 10.2 below, if applicable; and (c) A statement setting forth (A) the aggregate amount of the Stock for which the Option is exercised and (B) the calculation of the number of shares of Epitope Common Stock to be issued. 9.3 Reservation of Stock Issuable Upon Exchange. Epitope shall at all times reserve and keep available out of its authorized but unissued shares of Epitope Common Stock, such number of its shares of Epitope Common Stock as shall from time to time be sufficient to effect the provisions of this Section 9; and if at any time the number of authorized but unissued shares of Epitope Common Stock shall not be sufficient to do so, in addition to such other remedies as shall be available to Participant, Epitope shall use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Epitope Common Stock to such number of shares as shall be sufficient for such purposes. 9.4 Ratio Adjustment. (a) Adjustments for Stock Splits and Subdivisions. If Epitope should at any time or from time to time fix a record date for a split or subdivision of the outstanding shares of Epitope Common Stock or the determination of holders of Epitope Common Stock entitled to receive a dividend or other distribution payable in additional shares of Epitope Common Stock or other securities or rights - 6 - convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Epitope Common Stock ("Epitope Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Epitope Common Stock or the Epitope Common Stock Equivalents (including the additional shares of Epitope Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend, distribution, split or subdivision if no record date is fixed), the Exchange Ratio shall be appropriately adjusted so that the number of shares of Epitope Common Stock issuable upon exercise of the Option shall be increased in proportion to such increase of outstanding shares. (b) Adjustments for Reverse Stock Splits. If the number of shares of Epitope Common Stock outstanding at any time is decreased by a combination of the outstanding shares of Epitope Common Stock, then, as of the record date for such combination (or the date of such combination if no record date is fixed), the Exchange Ratio shall be appropriately adjusted so that the number of shares of Epitope Common Stock issuable on exercise of the Option shall be decreased in proportion to such decrease in outstanding shares. 9.5 Holdback Agreements. Participant hereby agrees, if requested by Epitope and an underwriter of an offering of Epitope securities, that it shall not sell any Epitope Common Stock for a period of time specified by the underwriter (not to exceed 90 days) following the effective date of a registration statement pursuant to which Epitope proposes to sell its securities to the public generally; provided, however, that all executive officers and directors of Epitope enter into similar agreements. Participant agrees that Epitope shall have sole discretion to determine whether and on what terms to undertake any public offering of its securities. 9.6 Restriction on Transfer of Shares Issued. In the event that the registration statement provided for in Section 10.2 below covering the Exchange Shares has not been declared effective at the time any Exchange Shares are issued under this Section 9, any such Exchange Shares shall bear a legend stating that the Exchange Shares have not been registered under the 1933 Act and may not be offered, sold, transferred, pledged, or otherwise disposed of, in whole or in part, unless the transaction is registered under the 1933 Act and applicable state securities laws, unless, in the opinion of counsel for Epitope, such registration is not required. Prior to the effectiveness of the registration statement covering the Exchange Shares, Epitope shall refuse to register on its books any purported transfer of Exchange Shares not made in accordance with the 1933 Act and this Agreement, and any such purported transfer shall be void. 9.7 No Shareholder Rights. Nothing contained in this Agreement shall be construed as conferring upon Participant or any other person the right to vote on or consent to matters submitted to shareholders, to receive notice as a shareholder in respect of meetings of shareholders, to receive dividends, or to exercise any - 7 - other rights whatsoever as a shareholder of Epitope, until, and only to the extent that, Participant shall have received shares of Epitope Common Stock. 9.8 Condition Precedent. The Company will use its best efforts to obtain approval by Epitope of its obligations under this Agreement and the agreement described in Section 9.1 pursuant to which the Exchange Shares will be obtained from Epitope. If the Company determines that such approval cannot be obtained or that such agreement cannot be entered into with Epitope, the Option shall terminate on notice to Participant to that effect. 10. Registration Rights. 10.1 Definitions. (a) The terms "register," "registered, and "registration" refer to a registration effected by preparing and filing a registration statement or similar document in compliance with the 1933 Act and the declaration or ordering of effectiveness of such registration statement or document. (b) The term Registrable Securities means the Exchange Shares. As to any particular Registrable Securities, such securities will cease to be Registrable Securities when (i) they have been effectively registered under the 1933 Act and disposed of in accordance with the registration statement covering them, or (ii) they are transferred pursuant to Rule 144 (or any similar provision that is in force) under the 1933 Act. 10.2 Epitope Registration. As soon as practicable after the delivery of this Agreement to Participant, Epitope shall file a registration statement on Form S-3 or S-8 or other applicable form (the "Epitope Registration Statement") covering the Epitope Common Stock for which the Stock may be exchanged unless such stock is already registered, and prepare and file such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the 1933 Act with respect to disposition of all securities covered by such registration statement. Epitope shall use its best efforts to cause the Epitope Registration Statement to become effective under the 1933 Act and to maintain the effectiveness of the Epitope Registration Statement for a period ending on the earlier of (i) one year after the date by which all Stock issuable pursuant to the Plan has been exchanged for Epitope Common Stock, and (ii) such other date by which the holders of Registrable Securities have sold all the Epitope Common Stock into which the Stock is exchangeable or by and after which the holders of Registrable Securities may sell the Epitope Common Stock without registration under the 1933 Act. If required by applicable law, Epitope shall furnish to the holders of Registrable Securities such reasonable number of copies of a prospectus, in conformity with the requirements of the 1933 Act, and any amendments or supplements thereto and such other - 8 - documents as the holders of Registrable Securities may reasonably request in order to facilitate the disposition of the Registrable Securities after the Epitope Registration Statement has been declared effective. Epitope shall use reasonable efforts to notify the holders of Registrable Securities when a prospectus relating to Registrable Securities is required to be delivered under the 1933 Act, to notify the holders of Registrable Securities of the happening of any event as a result of which the prospectus included in the Epitope Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, to promptly file such amendments and supplements as may be required on account of such event, and to use its best efforts to cause each such amendment to become effective. The holders of Registrable Securities shall not effect sales of Registrable Securities after receipt of notice from Epitope that any such amendment or supplement is required on account of any such event, until the amendment becomes effective or the supplement has been filed. Epitope's obligations under this Section 10.2 shall expire at such time as it is no longer required to maintain the effectiveness of the Epitope Registration Statement as provided for above. 10.3 Preparation; Information; Reasonable Investigation. (a) Furnish Information. It shall be a condition precedent to Epitope's obligations under Section 10.2 that the holders of Registrable Securities shall furnish to Epitope such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities, and shall agree to be bound by the terms of this Section 10 if such holders are not already parties to this Agreement. (b) Preparation; Reasonable Investigation. In connection with the preparation and filing of any registration statement under the 1933 Act pursuant to Section 10.2 above, Epitope shall give the holders of Registrable Securities registered under such registration statement, their underwriters, and their respective counsel and accountants the opportunity to participate in the preparation of such registration statement, each prospectus included therein or filed with the SEC, and each amendment thereof or supplement thereto, and shall give each of them such access to its books and records and such opportunities to discuss Epitope's business with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the 1933 Act. 10.4 Expenses of Registration. All expenses relating to Registrable Securities (other than underwriting discounts and commissions, transfer taxes, if any, and fees and disbursements of counsel to the holders of Registrable - 9 - Securities) incurred in connection with the registrations, filings or qualifications pursuant to Section 10.2 above, including without limitation all registration, filing and qualification fees, printing and accounting fees, and fees and disbursements of counsel for Epitope, shall be borne by Epitope. 10.5 Indemnification. In the event any Registrable Securities are included in a registration statement under this Section 10: (a) Registering Corporation Indemnification. To the extent permitted by law, Epitope shall indemnify and hold harmless each holder of Registrable Securities, the officers, directors, partners, agents, and employees of each holder or any underwriter (as defined in the 1933 Act) for such holder, and each person, if any, who controls such holder or underwriter within the meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the 1933 Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by Epitope of the 1933 Act, the 1934 Act, any state securities law, or any rule or regulation promulgated under the 1933 Act, the 1934 Act, or any state securities law. Epitope shall reimburse each such holder, officer, director, partner, agent, employee, underwriter or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action. The indemnity agreement contained in this section 10.5(a) shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is effected without Epitope's consent (which consent shall not be unreasonably withheld), - 10 - nor shall Epitope be liable to a holder in any such case for any such loss, claim, damage, liability, or action (A) to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of such holder, underwriter or controlling person or (B) in the case of a sale directly by a holder of Registrable Securities (including a sale of such Registrable Securities through any underwriter retained by such holder to engage in a distribution solely on behalf of such holder), if such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and such holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Registrable Securities to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the 1933 Act. (b) Holder Indemnification. To the extent permitted by law, each holder of Registrable Securities shall indemnify and hold harmless Epitope, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls Epitope within the meaning of the 1933 Act, each agent and any underwriter for Epitope, and any other holder of Registrable Securities selling securities in such registration statement or any of its directors, officers, partners, agents, or employees or any person who controls such holder or underwriter, against any losses, claims, damages, or liabilities (joint or several) to which Epitope or any such director, officer, controlling person, agent, or underwriter or other such holder, director, officer or controlling person may become subject, under the 1933 Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such holder expressly for use in connection with such registration; and each such holder shall reimburse any legal or other expenses reasonably incurred by Epitope or any such director, officer, controlling person, agent or underwriter or other holder, officer, director, partner, agent, employee or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 10.5(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the holder, which consent shall not be unreasonably withheld nor, in the case of a sale directly by Epitope of - 11 - its securities (including a sale of such securities through any underwriter retained by Epitope to engage in a distribution solely on behalf of Epitope), shall the holder be liable to Epitope in any case in which such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and Epitope failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the securities to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the 1933 Act; and provided, further, that the indemnification obligation of each holder shall be limited to the aggregate public offering price of the Registrable Securities sold by such holder pursuant to such registration. (c) Notice, Defense, and Counsel. Promptly after receipt by an indemnified party under this Section 10.5 of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 10.5, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume and control the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 10.5 to the extent of such prejudice, but the omission so to deliver written notice to the indemnifying party shall not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 10.5. (d) Survival of Rights and Obligations. The obligations of Epitope and the holders of Registrable Securities under this Section 10.5 shall survive the completion of any offering of Registrable Securities in a registration statement whether under this Section 10.5 or otherwise. - 12 - 11. Defined Terms. When used in this Agreement, the following terms shall have the meanings specified below: 11.1 "Acquiring Person" shall mean, from and after the Registration Date, any person or related person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the 1934 Act, as such Section and Rule are in effect as of the date of this Agreement; provided, however, that the term Acquiring Person shall not include (a) Epitope or any of its Subsidiaries, (b) any employee benefit plan of Epitope or any of its Subsidiaries, (c) any entity holding voting capital stock of Epitope or of any its Subsidiaries for or pursuant to the terms of any such employee benefit plan, or (d) any person or group solely because such person or group has voting power with respect to capital stock of Corporation or Epitope arising from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to the 1934 Act. 11.2 "Change in Control" shall mean: (a) A change in control of Epitope of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A as in effect on the date of this Agreement pursuant to the 1934 Act; provided that, without limitation, such a change in control shall be deemed to have occurred at such time as any Acquiring Person hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 30 percent or more of the combined voting power of Voting Securities; or (b) During any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the Epitope board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by Corporation's shareholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; or (c) There shall be consummated (i) any consolidation or merger of Epitope in which Epitope is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of Epitope in which the holders of Voting Securities immediately prior to the merger have the same, or substantially the same, proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in - 13 - one transaction or a series of related transactions) of all, or substantially all, of the assets of Epitope; or (d) Approval by the shareholders of Epitope of any plan or proposal for the liquidation or dissolution of Epitope. 11.3 "Change in Control Date" shall mean the first date following the date of this Agreement on which a Change in Control has occurred. 11.4 "Effective Date" has the meaning assigned in Section 1. 11.5 "Epitope" means Epitope, Inc., an Oregon corporation. 11.6 "Option" has the meaning assigned in Section 1. 11.7 "Voting Securities" shall mean Epitope's issued and outstanding securities ordinarily having the right to vote at elections for Epitope's board of directors. 11.8 Capitalized terms not otherwise defined in this Agreement have the meanings given them in the Plan. 12. Miscellaneous. 12.1 Violation. Notwithstanding any provision of this Agreement to the contrary, the Option shall not be exercisable at any time, in whole or in part, if issuance and delivery of the Stock or Exchange Shares would violate any law or regulation. 12.2 Tax Reimbursement. In the event any withholding or similar tax liability is imposed on Corporation or Epitope in connection with or with respect to the exercise of the Option, Participant agrees to pay to Corporation or Epitope an amount sufficient to provide for such tax liability. 12.3 Disputes. Any dispute or disagreement that may arise under or as a result of this Agreement, or any question as to the interpretation of this Agreement, may be determined by Corporation in its absolute and uncontrolled discretion, and any such determination shall be final, binding, and conclusive on all affected persons. - 14 - 12.4 Notices. Any notice that a party may be required or permitted to give to the other shall be in writing, and may be delivered personally or by certified or registered mail, postage prepaid, at the address set forth above, or at such other address as either party may designate by AGRITOPE, INC. By ---------------------------------- Title: ------------------------------ ------------------------------------- Participant Agreed to for purposes of Sections 9.3 and 10 EPITOPE, INC. By ----------------------------------- Title: - 15 - EX-10.16 6 AMENDMENT TO EMPLOYMENT AGREEMENT - ADOLPH FERRO August 19, 1997 Mr. Roger L. Pringle Chairman of the Board Epitope, Inc. 8505 SW Creekside Place Beaverton, OR 97008 Dear Roger: This will confirm my agreement with Epitope, Inc. (the "Company") made in connection with recent management and strategic changes at the Company: 1. Effective May 30, 1997, I was removed as President and Chief Executive Officer of the Company by action of the Board of Directors. This action substantially diminished my duties and title and constituted a "termination without cause" by the Company within the meaning of Section 5.2.1 of the Amended and Restated Employment Agreement dated as of January 8, 1991 between the Company and me (the "Employment Agreement"). 2. As a result of such termination, the Company is obligated to pay me 24 months of my regular salary as President and Chief Executive Officer of the Company, as extraordinary compensation under Section 2.3 and Schedule 2.3 of the Employment Agreement. Because I have agreed to serve as President and Chief Executive Officer of the Company's Agritope, Inc. subsidiary ("Agritope"), we have agreed that payment of the extraordinary compensation will commence in the first month following the earlier of (i) termination of my employment with Agritope for any reason, (ii) the closing of a transaction by which the Company no longer controls Agritope (an "Agritope Disposition"), or (iii) the 90th day (the "Cut-Off Date") after the Company's first public announcement of its intent to proceed with a specific Agritope Disposition which is subsequently closed. If payment of extraordinary compensation is to commence under clause (iii), any salary paid me by the Company or any subsidiary for the period between the Cut-Off Date and the closing of the Agritope Disposition shall be credited against the obligation to pay me extraordinary compensation. Mr. Roger L. Pringle August 19, 1997 Page 2 3. My services as President and Chief Executive Officer of Agritope shall include the primary responsibility for arranging a transaction by which Agritope can become a corporation separate from the Company through a sale, spin-off, initial public offering or other corporate transaction. 4. Section 3.1 of the Employment Agreement shall not apply to Confidential Information (as defined in Section 3.1) of Agritope to which I have had access during my employment with the Company and Agritope. 5. Section 4.1 of the Employment Agreement shall not apply to services that I perform for or on behalf of Agritope either during the time in which Agritope is owned by the Company or after it is no longer controlled by the Company. 6. Termination of my employment as President and Chief Executive Officer of the Company shall not constitute a termination of employment for purposes of any of the stock option or stock award plans of the Company or Agritope under which I now hold options. Any stock options held by me under such plans, which by their terms are slated to expire in 1997, shall be extended or exchanged for new stock options with terms consistent with the Company's policies for executive compensation. 7. The Indemnification Agreement dated June 14, 1989 between the Company and me shall be amended or replaced by a new agreement to provide that it applies to services performed by me as a director, officer and key employee of Agritope through the date of an Agritope Disposition. 8. The Company will pay my reasonable attorneys' fees related to these changes in my employment arrangements not to exceed $2,500. 9. This Agreement constitutes an amendment to the Employment Agreement. Except as so amended, the terms of the Employment Agreement remain in full force and effect. Mr. Roger L. Pringle August 19, 1997 Page 2 Please sign below to indicate the agreement of the Company to these terms. Very truly yours, /s/ Adolph J. Ferro Adolph J. Ferro The above terms are agreed to as of the above date: EPITOPE, INC. By: /s/ Roger L. Pringle Roger L. Pringle Chairman of the Board By: /s/ W. Charles Armstrong W. Charles Armstrong President and Chief Executive Officer EX-10.19 7 EMPLOYMENT AGREEMENT - JOHN W. MORGAN EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of October 6, 1997, between John W. Morgan ("Employee") and Epitope, Inc., an Oregon corporation (the "Company"). 1. SERVICES. 1.1 EMPLOYMENT. The Company agrees to employ Employee as President and Chief Executive Officer of the Company, and Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. Employment shall continue until terminated pursuant to the terms of this Agreement. 1.2 DUTIES. Employee shall have the position named in Section 1.1 with such powers and duties appropriate to that office (a) as may be provided by the bylaws of the Company, (b) as otherwise set forth in Exhibit A attached to this Agreement, and (c) as determined by the board of directors from time to time. Subject to the provisions of Section 7.4 hereof, Employee's position and duties may be changed from time to time during the term of this Agreement, and Employee's place of work may be relocated at the sole discretion of the board of directors. 1.3 OUTSIDE ACTIVITIES. Employee shall obtain the consent of the board of directors before he engages, either directly or indirectly, in any other professional or business activities that may require an appreciable portion of Employee's time or effort to the detriment of the Company's business. 1.4 DIRECTION OF SERVICES. Employee shall at all times discharge his duties in consultation with and under the supervision and direction of the board of directors. 2. COMPENSATION AND EXPENSES. 2.1 SALARY. As compensation for services under this Agreement, the Company shall pay to Employee a regular salary of $20,416.67 per month. Subject to the provisions of Section 7.4 hereof, such salary may be adjusted from time to time in the discretion of the board of directors. Payment shall be made on a bi-weekly basis, less all amounts required by law or authorized by Employee to be withheld or deducted, at such times as shall be determined by the board of directors. The board of directors may also authorize payment to Employee of bonuses at such times and in such amounts as may be determined by the board of directors. 2.2 ADDITIONAL EMPLOYEE BENEFITS. The Company shall provide for Employee life insurance in the amount of $1 million payable to Employee's designated beneficiary, provided the cost to the Company does not exceed $10,000 per year. To the extent otherwise eligible, Employee shall also be entitled to receive or participate in any additional - 1 - benefits, including without limitation medical and dental insurance programs, profit sharing or pension plans, and medical reimbursement plans, which may from time to time be made available by the Company to corporate officers. The Company may change or discontinue such benefits at any time in its sole discretion. 2.3 EXPENSES. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. The Company shall further reimburse Employee for reasonable and necessary expenses incurred as follows: (a) Employee's reasonable expenses incurred in moving himself, his family, and his household goods from Alpharetta, Georgia to the Portland, Oregon metropolitan area; (b) up to two months (which time period may be extended by the Company in its discretion at Employee's request) of temporary housing at a cost of up to $1,000 per month; (c) one round-trip, coach airline ticket per month for Employee for travel between Atlanta, Georgia and Portland, Oregon until Employee has relocated his residence to the Portland, Oregon metropolitan area; and (d) one round-trip, coach airline ticket for Employee's spouse for travel between Atlanta, Georgia and Portland, Oregon for purposes of locating and obtaining a new residence in the Portland, Oregon metropolitan area. Employee shall present to the Company from time to time an itemized account of such expenses in such form as may be required by the Company. In addition, regarding the expenses listed as (a) above, Employee shall obtain bids from at least two national moving companies and select the company with the lowest bid. To the extent the reimbursement payments under this section are includable in Employee's net taxable income, the Company shall pay Employee an additional amount so that the amount paid to him under this section, less taxes at Employee's effective marginal tax rate, equals the expenses to be reimbursed. 2.4 FEES. All compensation earned by Employee, other than pursuant to this Agreement, as a result of services performed on behalf of the Company or as a result of or arising out of any work done by Employee in any way related to the scientific or business activities of the Company shall belong to the Company. Employee shall pay or deliver such compensation to the Company promptly upon receipt. For the purposes of this provision, "compensation" shall include, but is not limited to, all professional and nonprofessional fees, lecture fees, expert testimony fees, publishing fees, royalties, and any related income, earnings, or other things of value; and "scientific or business activities of the Company" shall include, but not be limited to, any project or projects in which the Company is involved and any subject matter that is directly or indirectly researched, tested, developed, promoted, or marketed by the Company. 3. STOCK OPTIONS. Employee has been granted a non-qualified option to purchase 350,000 shares of common stock of the Company at an exercise price equal to 75 percent of the fair market value of the stock on the date of grant. - 2 - 4. CONFIDENTIAL INFORMATION. 4.1 DEFINED. "Confidential Information" is all nonpublic information relating to the Company or its business that is disclosed to Employee, that Employee produces, or that Employee otherwise obtains during employment. "Confidential Information" also includes information received from third parties that the Company has agreed to treat as confidential. Examples of Confidential Information are: 4.1.1 Marketing plans. 4.1.2 Customer lists. 4.1.3 Product design and manufacturing information. 4.1.4 Financial information. "Confidential Information" does not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by Employee; (b) becomes available to Employee on a nonconfidential basis from a source other than the Company or its representatives, provided that such source is not known by Employee to be bound by a confidentiality agreement with the Company or its representatives or otherwise prohibited from transmitting the information to Employee by a contractual, legal, or fiduciary obligation; (c) can be demonstrated by written evidence or other convincing evidence to have been known by Employee on a nonconfidential basis prior to its disclosure to Employee by the Company or one of its representatives; or (d) can be demonstrated by written or other convincing evidence to have been developed by Employee in good faith and independent of Confidential Information. 4.2 ACCESS TO INFORMATION. Employee acknowledges that in the course of his employment he will have access to Confidential Information, that such information is a valuable asset of the Company, and that its disclosure or unauthorized use will cause the Company substantial harm. 4.3 OWNERSHIP. Employee acknowledges that all Confidential Information shall continue to be the exclusive property of the Company (or the third party that disclosed it to the Company), whether or not prepared in whole or in part by Employee and whether or not disclosed to Employee or entrusted to his custody in connection with his employment by the Company. 4.4 NONDISCLOSURE AND NONUSE. Unless authorized or instructed in writing by the Company, or required by legally constituted authority, Employee will not, except as required in the course of the Company's business, during or after his employment, disclose to others or use any Confidential Information, unless and until, and then only to the extent that, such items become available to the public through no fault of Employee. - 3 - 4.5 RETURN OF CONFIDENTIAL INFORMATION. Upon request by the Company during or after his employment, and without request upon termination of employment pursuant to this Agreement, Employee will deliver immediately to the Company all written or tangible materials containing Confidential Information without retaining any excerpts or copies. 4.6 DURATION. The obligations set forth in this Section 4 will continue beyond the term of employment of Employee by the Company and for so long as Employee possesses Confidential Information. 5. MATERIALS PREPARED AND INVENTIONS MADE DURING EMPLOYMENT. The Company shall be the exclusive owner of all materials, concepts, and inventions Employee prepares, develops, or makes (whether alone or jointly with others) within the scope of his employment, and of all related rights (including copyrights, trademarks, and patents) and proceeds. Without limitation, materials, concepts, and inventions that (a) relate to the Company's business or actual or demonstrably anticipated research or development, or (b) result from any work performed by Employee for the Company, shall be considered within the scope of Employee's employment. Employee shall promptly disclose all such materials, concepts, and inventions to the Company. Employee shall take all action reasonably requested by the Company to vest ownership of such materials, consents, and inventions in the Company and to permit the Company to obtain copyright, trademark, patent, or similar protection in its name. 6. NONCOMPETITION. Employee covenants that Employee will not, throughout the United States, either individually or as a director, officer, partner, employee, agent, representative, or consultant with any business, directly or indirectly during the term of employment and for one year thereafter: 6.1 Engage or prepare to engage in any business that sells products or services competing with those sold by the Company as of the date of Employee's termination of employment with the Company; 6.2 Induce or attempt to induce any person who is an employee of the Company during the term of this covenant to leave the employ of the Company; or 6.3 Solicit, divert, or accept orders for products or services that are substantially competitive with the products or services sold by the Company from any customer of the Company. 7. TERMINATION. 7.1 TERMINATION UPON DEATH. This Agreement shall terminate immediately upon Employee's death. - 4 - 7.2 TERMINATION BY EMPLOYEE. Employee may terminate his employment under this Agreement by 60 days' written notice to the Company. 7.3 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate Employee's employment under this Agreement for cause at any time, with or without advance notice. For purposes of this Agreement, "cause" means: (a) a material breach of this Agreement by Employee; (b) any willful or grossly negligent act by Employee which causes material harm to the Company; (c) Employee's refusal, failure, or inability to perform any material job duties of Employee; (d) any act of fraud on the Company, any criminal act, or any act involving moral turpitude by Employee; (e) the commission of any act in direct competition with or materially detrimental to the best interests of the Company; or (f) excessive absenteeism by Employee. The Company reserves the right to determine the facts giving rise to cause for termination and whether those facts constitute cause for termination. Notwithstanding the foregoing, Employee shall not be deemed to have been terminated for cause unless and until there shall have been delivered to Employee a copy of a resolution duly adopted by the board of directors at a meeting of the board of directors (after reasonable notice to Employee and an opportunity for Employee to be heard before the board of directors) called and held for the purpose of finding whether in the good faith opinion of the board of directors Employee has engaged in conduct constituting cause as defined in this section. 7.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate Employee's employment under this Agreement without cause by written notice to Employee. Employee may (but shall not be required to) elect to treat any of the following events as a termination without cause, provided Employee acts within 60 days of the event: 7.4.1 A material breach of this Agreement by the Company and a failure by the Company to cure the breach within 30 days after Employee has given written notice of the breach to the board of directors. 7.4.2 A reduction in Employee's salary below the amount stated in Section 2.1 (except as part of and in proportion to a reduction in all executive officers' salaries) or a substantial diminution in Employee's duties or title below those or that stated in this Agreement. 7.4.3 A requirement by the Company that Employee regularly report other than to the board of directors or the chairman of the board. 7.4.4 A relocation by the Company of the principal place where Employee's duties are to be performed to a place outside of the Portland metropolitan area. 7.4.5 A "Change of Control" of the Company. For purposes of this Agreement, a "Change of Control" shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A as in effect on the date hereof pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a change of control shall be deemed to have occurred at - 5 - such time as (i) any Acquiring Person hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30 percent or more of the combined voting power of Voting Securities; (ii) during any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; (iii) there shall be consummated (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of Voting Securities immediately prior to the merger have the same, or substantially the same, proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (iv) approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. For purposes of this Agreement, "Acquiring Person" means any person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the Exchange Act, as such Section and Rule are in effect as of the date of this Agreement; provided, however, that the term Acquiring Person shall not include: (i) the Company or any of its subsidiaries; (ii) any employee benefit plan of the Company or any of its subsidiaries; (iii) any entity holding voting capital stock of the Company for or pursuant to the terms of any such employee benefit plan; or (iv) any person or group solely because such person or group has voting power with respect to capital stock of the Company arising from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to the Exchange Act. For purposes of this Agreement, "Voting Securities" means the Company's issued and outstanding securities ordinarily having the right to vote at elections for the Company's board of directors. 7.5 COMPENSATION UPON TERMINATION. 7.5.1 TERMINATION UNDER SECTION 7.1, 7.2, OR 7.3. In the event of a termination of Employee's employment under Sections 7.1, 7.2, or 7.3, Employee's regular compensation pursuant to Section 2.1 shall be prorated and payable until the date of termination. 7.5.2 TERMINATION UNDER SECTION 7.4. In the event of a termination of Employee's employment by the Company without cause as provided in Section 7.4, Employee shall continue to be paid the salary provided in Section 2.1 for 12 months from the date of notice of such termination of employment, in the manner and at the times at which regular compensation was paid to Employee during the term of his employment under this Agreement, except that if Employee elects to treat an event described in Sections 7.4.1, 7.4.2, 7.4.3, 7.4.4, or 7.4.5 as a termination without cause but continues to work for the Company or any of its subsidiaries, then any amounts Employee receives as compensation during the 12- month period shall be credited against the amounts payable to Employee under this section. Unless Employee elects to continue working for the Company or any of its subsidiaries, as a condition to receipt of the compensation described in the preceding sentence Employee shall sign - 6 - and deliver a release agreement, in form and substance satisfactory to the Company, releasing all claims related to Employee's employment. The Company's obligation to pay the amounts stated in this section shall terminate if Employee engages, either individually or as a director, officer, partner, employee, agent, representative, or consultant with any business, directly or indirectly in any of the activities listed in Section 6.1, 6.2, or 6.3 anywhere in the United States within one year after termination of employment. 8. REMEDIES. The respective rights and duties of the Company and Employee under this Agreement are in addition to, and not in lieu of, those rights and duties afforded to and imposed upon them by law or at equity. Employee acknowledges that breach of Sections 4 or 6 of this Agreement will cause irreparable harm to the Company and agrees to the entry of a temporary restraining order and permanent injunction by any court of competent jurisdiction to prevent breach or further breach of Sections 4 or 6 of this Agreement. Such remedy shall be in addition to any other remedy available to the Company at law or in equity. 9. SEVERABILITY OF PROVISIONS. The provisions of this Agreement are severable, and if any provision hereof is held invalid or unenforceable, it shall be enforced to the maximum extent permissible, and the remaining provisions of the Agreement shall continue in full force and effect. 10. ATTORNEY FEES. In the event a suit or action is filed to enforce Sections 4 or 6 of this Agreement, the prevailing party shall be reimbursed by the other party for all costs and expenses incurred in connection with the suit or action, including without limitation reasonable attorney fees at trial or on appeal. 11. NONWAIVER. Failure of the Company at any time to require performance of any provision of this Agreement shall not limit the right of the Company to enforce the provision. No provision of this Agreement or breach thereof may be waived by either party except by a writing signed by that party. A waiver of any breach of a provision of this Agreement shall be construed narrowly and shall not be deemed to be a waiver of any succeeding breach of that provision or a waiver of that provision itself or of any other provision. 12. ARBITRATION. 12.1 CLAIMS COVERED. All claims or controversies, except for those excluded by Section 12.2 ("claims"), whether or not arising out of Employee's employment (or its termination), that the Company may have against the Employee or that Employee may have against the Company or against its officers, directors, employees or agents, in their capacity as such or otherwise, shall be resolved as provided in this Section 12. Claims covered by this Section 12 include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure - 7 - different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except as provided in Section 12.2. 12.2 NON-COVERED CLAIMS. Claims arising out of Sections 4 or 6 of this Agreement and workers' compensation or unemployment compensation benefits are not covered by this Section 12. Non-covered claims include but are not limited to claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as to which Employee understands and agrees that the Company may seek and obtain relief from a court of competent jurisdiction. 12.3 REQUIRED NOTICE OF ALL CLAIMS AND STATUTE OF LIMITATIONS. Company and Employee agree that the aggrieved party must give written notice of any claim to the other party within one year of the date the aggrieved party first has knowledge of the event giving rise to the claim; otherwise the claim shall be void and deemed waived even if there is a federal or state statute of limitations which would have given more time to pursue the claim. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. 12.4 HEARING OR MEDIATION. Prior to any arbitration proceeding taking place pursuant to this section, Company or Employee may, at its respective option, elect to submit the claim to non-binding mediation before a mutually agreeable mediation tribunal or mediator, in which event both parties shall execute a suitable confidentiality agreement and abide by the procedures specified by the mediation tribunal or mediator. 12.5 ARBITRATION PROCEDURES. Any arbitration shall be conducted in accordance with the then-current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA"), modified to substitute for AAA actions, the United States Arbitration and Mediation Service ("USA&MS"), before an arbitrator who is licensed to practice law in the state of Oregon (the "Arbitrator"). The arbitration shall take place in or near Portland, Oregon. 12.5.1 SELECTION OF ARBITRATOR. The USA&MS shall give each party a list of 11 arbitrators drawn from its panel of labor-management dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains. The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, the USA&MS shall furnish an additional list or lists until an Arbitrator is selected. 12.5.2 APPLICABLE LAW. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) specified in this Agreement or federal law, or both, as applicable to the claim(s) asserted. The Oregon Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive - 8 - authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. 12.5.3 AUTHORITY. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The Arbitrator shall render an award and opinion in the form typically rendered in labor arbitrations. 12.5.4 REPRESENTATION. Any party may be represented by an attorney or other representative selected by the party. 12.5.5 DISCOVERY. Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any experts, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. 12.5.6 REPORTER. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. 12.5.7 POST-HEARING BRIEFS. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. 12.6 ENFORCEMENT. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and Employee agree that neither shall initiate or prosecute any lawsuit or administrative action (other than for a non-covered claim) in any way related to any claim covered by this Agreement. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. 12.7 ARBITRATION FEES AND COSTS. Company and Employee shall equally share the fees and costs of the Arbitrator. Each party will deposit funds or post other - 9 - appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any, provided that the Arbitrator, in its sole discretion, may award reasonable fees to the prevailing party in a proceeding. 13. GENERAL TERMS AND CONDITIONS. This Agreement constitutes the entire understanding of the parties relating to the employment of Employee by the Company, and supersedes and replaces all written and oral agreements heretofore made or existing by and between the parties relating thereto. This Agreement shall be construed in accordance with the laws of the state of Oregon, without regard to any conflicts of laws rules thereof. This Agreement shall inure to the benefit of any successors or assigns of the Company. All captions used herein are intended solely for convenience of reference and shall in no way limit any of the provisions of this Agreement. Employee acknowledges that he signed this Agreement upon his initial employment with the Company. The parties have executed this Employment Agreement as of the date stated above. EPITOPE, INC. /s/ John W. Morgan By: /s/ Roger L. Pringle JOHN W. MORGAN Title: Chairman, Board of Directors - 10 - EXHIBIT A TO EMPLOYMENT AGREEMENT SPECIFIC DUTIES OF EMPLOYEE AS PRESIDENT AND CHIEF EXECUTIVE OFFICER Employee as the President and Chief Executive Officer of the Company shall be responsible for directing all phases of the operations and the overall management of the Company, subject to direction by the board of directors, as such positions are more particularly described in Article IV of the bylaws of the Company. As President and Chief Executive Officer, Employee shall report directly to the Chairman of the Board. In such capacities, Employee shall be the key executive responsible for formulating and directing execution of Company strategy in all phases of operations, development, and planning. As Chief Executive Officer, Employee shall be the Company's principal spokesperson and will serve as a director on the board of directors and as operating management's principal liaison to the board of directors. Pending the spin-off of the Company's subsidiary Agritope, Inc. ("Agritope"), the President and Chief Executive Officer of Agritope shall report to the Chairman of the Board of the Company, rather than to Employee. EX-10.20 8 OPTION AGREEMENT - JOHN W. MORGAN NONQUALIFIED STOCK OPTION AWARD GENERAL TERMS AND CONDITIONS - EXECUTIVE OFFICER - The Epitope, Inc. 1991 Stock Award Plan ("Plan") is administered by the executive compensation committee (the "Committee") of the board of directors of Epitope. Capitalized terms not otherwise defined shall have the definitions assigned thereto in Section 13 of these Nonqualified Stock Option Award General Terms and Conditions ("Agreement Terms"). 1 OPTION TYPE AND TERM. 1.1 TYPE OF OPTION. The Option is not intended to be an incentive stock option as described in Internal Revenue Code Section 422. 1.2 TERM. The term of the Option shall be ten years from the Grant Date unless otherwise terminated pursuant to the terms of these Agreement Terms. 1.3 VESTING. Except as otherwise provided in these Agreement Terms, the Option shall be vested as to, and accordingly may be exercised from time to time during the term to purchase, Shares up to the following limits during the periods indicated following the Grant Date: (a) During the period from the Grant Date to the first anniversary of the Grant Date (the "First Anniversary") no portion of the Option will be vested; (b) Effective as of the First Anniversary, the Option will become vested as to one-third (1/3) of the total number of Shares covered by the Option (the "Option Shares"); and (c) Effective as of the day corresponding to the First Anniversary in the calendar month following the month in which the First Anniversary occurs, and on the corresponding day of each succeeding calendar month, the Option will become vested as to one-twenty-fourth (1/24) of the Option Shares that did not become vested pursuant to the foregoing paragraph (b). - 1 - 2 EMPLOYMENT REQUIREMENT. 2.1 GENERAL. Except as provided in Sections 3 and 4 of these Agreement Terms, the Option shall not be vested unless the recipient of the Option (the "Participant") is employed by Epitope and/or one or more of its Subsidiaries (an "Employer") continuously for at least one year after the Grant Date, unless employment is terminated by death, Disability, Retirement, or without "cause" (as defined in Participant's employment agreement with Epitope). "Employment" for purposes of the Option shall include periods of illness or other leaves of absence authorized by Employer. 2.2 NO EMPLOYMENT CONTRACT. Neither the Plan nor the Option shall constitute a contract of employment of Participant by any Employer. 2.3 EXPIRATION AFTER TERMINATION OF EMPLOYMENT. If Participant ceases to be an active employee, the right to exercise the Option shall expire at the end of the following periods: After Termination On Account Of Period ----------------- ------ Death 1 year Retirement 5 years Disability 1 year Any other reason 1 year 2.4 EFFECT OF TERMINATION ON VESTING. The Shares as to which the Option is exercisable under Section 2.3 shall be those as to which the Option is vested as of termination of employment; provided, however, that upon Participant's termination of employment by the Company without "cause" (as defined in Participant's employment agreement with Epitope), Participant shall be credited with vesting during the period of salary continuation paid by the Company. 3 ACCELERATION OF EXERCISABILITY. Upon a Change in Control Date, the Option shall become immediately and fully vested and exercisable as to all Shares covered by the Option. - 2 - 4 EXERCISE PRIOR TO VESTING PERMITTED 4.1 CONDITIONS OF EARLY EXERCISE. Subject to the provisions of this Section 4, Participant may elect, at any time prior to termination of Employment with an Employer, including without limitation a time prior to the date(s) the Option becomes vested pursuant to Section 1.3 of these Agreement Terms, to exercise the Option (an "Early Exercise") as to all or any portion of the Shares covered by the Option, provided, however, that: (a) A partial exercise of the Option shall be deemed to cover first any vested Shares and then the earliest vesting installment of unvested Shares; (b) Participant must enter into an Early Exercise Stock Purchase Agreement (a "Purchase Agreement") in the form attached to these Agreement Terms with a vesting schedule that will result in the same vesting as to the Shares purchased pursuant to the Early Exercise as if no Early Exercise had occurred; and (c) Any Shares purchased pursuant to Early Exercise from installments that have not vested as of the time of exercise shall be subject to a purchase option in favor of Epitope as described in the Purchase Agreement. 4.2 EXPIRATION OF EARLY EXERCISE ELECTION. The election provided by this Section 4 to purchase Shares upon an Early Exercise shall cease upon Participant's termination of Employment with an Employer and may not be exercised after such termination. 5 SERVICE PERIODS. The periods of service as an employee in connection with the grant of the Option are as follows: 5.1 FIRST YEAR. The portion of the Option vesting pursuant to Section 1.3(b) is in connection with services to be performed in the one-year period commencing on the Grant Date. 5.2 ADDITIONAL YEARS. The portions of the Option vesting in monthly installments pursuant to Sections 1.3(c) are respectively in connection with services to be performed in the consecutive monthly - 3 - periods ending immediately before each monthly vesting date. 6 METHOD OF EXERCISE. 6.1 EXERCISE OF OPTION. The Option, or a portion thereof, may be exercised, to the extent it has become exercisable pursuant to the terms of these Agreement Terms, by delivery of written notice to Epitope in the form attached hereto stating the number of Shares, form of payment, and proposed date of closing. 6.2 OTHER DOCUMENTS. Participant shall furnish Epitope, before closing of any exercise of the Option, such other documents or representations as Epitope may require to assure compliance with applicable laws and regulations. 6.3 PAYMENT. The exercise price for the Shares purchased upon exercise of the Option shall be paid in full at or before closing by one or a combination of the following: (a) Payment in cash; (b) By delivery (in a form approved by the Committee) of an irrevocable direction to a securities broker acceptable to the Committee: (i) To sell Shares subject to the Option and to deliver all or a part of the sales proceeds to Epitope in payment of all or a part of the exercise price and withholding taxes due; or (ii) To pledge Shares subject to the Option to the broker as security for a loan and to deliver all or a part of the loan proceeds to Epitope in payment of all or a part of the exercise price and withholding taxes due; or (c) Delivery of previously acquired Shares having a Fair Market Value at least equal to the exercise price. - 4 - 6.4 PREVIOUSLY ACQUIRED SHARES. Delivery of previously acquired Shares surrendered in full or partial payment of the exercise price of the Option, or any portion thereof, shall be subject to the following conditions: (a) The Shares tendered shall be in good delivery form; (b) The Fair Market Value of the Shares, together with the amount of cash, if any, tendered shall equal or exceed the exercise price of the Option; (c) Any Shares remaining after satisfying payment of the exercise price shall be reissued in the same manner as the Shares tendered; and (d) No fractional Shares will be issued and cash will not be paid to Participant for any fractional Share value not used to satisfy payment of the exercise price. 7 TRANSFERABILITY. 7.1 RESTRICTION. Except for Permitted Transfers, as defined in Section 7.2: (a) The Option is not transferable by Participant other than by testamentary will or the laws of descent and distribution and, during Participant's lifetime, may be exercised only by Participant or Participant's guardian or legal representative; (b) No assignment or transfer of the Option, whether voluntary, involuntary, or by operation of law or otherwise, except by testamentary will or the laws of descent and distribution, shall vest in the assignee or transferee any interest or right; and (c) Immediately upon any attempt to assign or transfer the Option, the Option shall terminate and be of no force or effect. 7.2 PERMITTED TRANSFERS. Participant may transfer all or any portion of the Option, without payment of consideration, to Participant's family members, trusts for such family members, or a partnership or limited liability - 5 - company of which Participant and members of participant's family are the only partners or members. 7.3 EXERCISE IN THE EVENT OF DEATH OR DISABILITY. Whenever the word "Participant" is used in any provision of this Agreement under circumstances when the provision should logically be construed to apply to Participant's guardian, legal representative, executor, administrator, or the person or persons to whom the Option may be transferred by testamentary will or by the laws of descent and distribution, the word "Participant" shall be deemed to include such person or persons. 8 SECURITIES LAWS. Epitope shall not be required to distribute any Shares upon exercise of the Option, or any portion thereof, until Epitope shall have taken any action required to comply with the provisions of the Securities Act of 1933 or any other then applicable federal or state securities laws. 9 TAX REIMBURSEMENT. In the event any withholding or similar tax liability is imposed on Epitope in connection with or with respect to the exercise of the Option governed by these Agreement Terms or the disposition by Participant of the Shares acquired upon exercise of the Option, Participant agrees to pay to Epitope an amount sufficient to satisfy such tax liability. 10 CONDITIONS PRECEDENT. Epitope will use its best efforts to obtain any required approvals of the Plan and the Option by any state or federal agency or authority that Epitope determines has jurisdiction. If Epitope determines that any required approval cannot be obtained, all Awards to Participant shall terminate on notice to Participant to that effect (provided that nothing contained in this Section 10 shall impair any rights Participant may have with respect to the Option pursuant to Participant's employment agreement with Epitope). 11 TERMINATION FOR CAUSE; COMPETITION. 11.1 ANNULMENT OF AWARDS. The grant of the Option governed by these Agreement Terms is provisional until Participant becomes entitled to a certificate for Shares in settlement thereof. In the event the employment of Participant is terminated for cause (as defined below), any portion of the Option which is provisional shall be annulled as of the date of such termination for cause. For the purpose of this Section 11.1, the term "for - 6 - cause" shall have the meaning set forth in Participant's employment agreement with Epitope. 11.2 ENGAGING IN COMPETITION WITH EPITOPE. If Participant terminates employment with Epitope or a Subsidiary for any reason whatsoever, and within 12 months after the date thereof accepts employment with any competitor of (or otherwise engages in competition with) Epitope, the Committee, in its sole discretion, may require Participant to return to Epitope the economic value of any Award that is realized or obtained (measured at the date of exercise) by Participant at any time during the period beginning on the date that is six months prior to the date of Participant's termination of employment with Epitope. 12 SUCCESSORSHIP. Subject to the restrictions on transferability of the Option set forth in these Agreement Terms and in the Plan, these Agreement Terms shall be binding upon and benefit the parties, their successors, and assigns. 13 DEFINED TERMS. When used in these Agreement Terms, the following terms shall have the meanings specified below: 13.1 "ACQUIRING PERSON" shall mean any person or related person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the Securities Exchange Act of 1934 (the "Exchange Act"), as such Section and Rule are in effect as of the date of the Agreement; provided, however, that the term Acquiring Person shall not include: (a) Epitope or any of its Subsidiaries; (b) Any employee benefit plan of Epitope or any of its Subsidiaries; (c) Any entity holding voting capital stock of Epitope for or pursuant to the terms of any such employee benefit plan, or (d) Any person or group solely because such person or group has voting power with respect to capital stock of Epitope arising from a revocable proxy or consent given - 7 - in response to a public proxy or consent solicitation made pursuant to the Exchange Act. 13.2 "AGREEMENT" shall mean the agreement evidencing an Option governed by these Agreement Terms. 13.3 "CHANGE IN CONTROL" shall mean: (a) A change in control of Epitope of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A as in effect on the date of the Agreement pursuant to the Exchange Act; provided that, without limitation, such a change in control shall be deemed to have occurred at such time as any Acquiring Person hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30 percent or more of the combined voting power of Voting Securities; or (b) During any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by Epitope's shareholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; or (c) There shall be consummated (i) any consolidation or merger of Epitope in which Epitope is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of Epitope in which the holders of Voting Securities immediately prior to the merger have the same, or substantially the same, proportionate ownership of common stock of the surviving corporation immediately after the merger, or (ii) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of Epitope; or (d) Approval by the shareholders of Epitope of any plan or proposal for the liquidation or dissolution of Epitope. - 8 - 13.4 "CHANGE IN CONTROL DATE" shall mean the first date following the date of the Agreement on which a Change in Control has occurred. 13.5 "GRANT DATE" means the date of the Agreement, which is the date the Option is granted to Participant. 13.6 "OPTION" means the Nonqualified Stock Option granted to Participant evidenced by the Agreement. 13.7 "VOTING SECURITIES" shall mean Epitope's issued and outstanding securities ordinarily having the right to vote at elections for Epitope's board of directors. 13.8 Capitalized terms not otherwise defined in these Agreement Terms have the meanings given them in the Plan. 14 NOTICES. Any notices regarding the Option shall be in writing and shall be effective when actually delivered personally or, if mailed, when deposited as registered or certified mail directed to the address maintained in Epitope's records or to such other address as a party may certify by notice to the other party. - 9 - EARLY EXERCISE STOCK PURCHASE AGREEMENT THIS AGREEMENT is made by and between EPITOPE, INC., an Oregon corporation ("Epitope"), and ---------------------------- ("Purchaser"). RECITALS A. Purchaser holds a stock option (the "Option") to purchase shares of Epitope's common stock ("Shares") pursuant to Epitope's 1991 Stock Award Plan (the "Plan") which Purchaser desires to exercise; and B. Purchaser wishes to take advantage of the early exercise provision of the Option and therefore to enter into this Agreement. AGREEMENT 1. (a) Pursuant to an early exercise of the Option, Purchaser agrees to purchase from Epitope, and Epitope agrees to sell to Purchaser, - -------------- Shares for an exercise price of $------ per Share (total exercise price: $---------) payable as follows: Cash at Closing $------ Value of Previously Owned Shares1 $------ Total Exercise Price $------ (b) The closing shall occur at the offices of Epitope on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. (c) At the closing, Purchaser shall deliver to Epitope a stock assignment in the form of Exhibit B, duly endorsed (with date and number of shares left blank) and the total exercise price (including endorsed certificates representing the appropriate number of previously owned Shares tendered for all or a portion of the total exercise price). (d) At the closing or as soon thereafter as practical, Epitope shall cause share certificates for all the Shares that are to be subject to the Purchase Option (as defined in Section 2 below) to be issued in Purchaser's name, and Epitope shall retain those certificates, together with the blank stock assignments until the Purchase Option is exercised or expires - ---------------- 1 Shares tendered as part of the exercise price must meet the requirements of the Option and the Plan. - 1 - pursuant to this Agreement, and shall deliver share certificates to Purchaser for all the Shares, if any, that are not to be subject to the Purchase Option. 2. The Shares to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser ceases to be an employee of Epitope and/or any of its subsidiaries (an "Employer") for any reason (including Purchaser's death), or no reason, with or without cause, the Purchase Option may be exercised. Epitope shall have the right at any time within the 90-day period after Purchaser's termination of Employment (as defined in the Agreement Terms for the Option) with an Employer or such longer period as may be agreed to by Epitope and Purchaser (for example, for purposes of satisfying the requirements of Section 1202(c)(3) of the Internal Revenue Code) to purchase from Purchaser or his personal representative, as the case may be, at the price per Share paid by Purchaser pursuant to this Agreement ("Option Price"), up to but not exceeding the number of Shares set forth on Exhibit A to this Agreement which is incorporated herein by this reference. (b) The Purchase Option shall lapse at the same rate as Purchaser's Option would have vested had Purchaser not entered into this Agreement (e.g., vesting shall accelerate upon a Change in Control Date). (c) This Agreement is not an employment contract and nothing in this Agreement shall be deemed to create in any way whatsoever any obligation on the part of Purchaser to continue in the employ of Epitope, or of Epitope to continue Purchaser in the employ of an Employer. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 9. Upon providing of such notice and payment or tender of the purchase price, Epitope shall become the legal and beneficial owner of the Shares being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of Epitope, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Shares will be immediately subject to the Purchase Option and be included in the word "Shares" for all purposes of the Purchase Option with the same force and effect as the Shares then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per Share upon exercise of the Purchase Option shall be appropriately adjusted. - 2 - 5. Purchaser may not sell or transfer any of the Shares subject to the Purchase Option or any interest therein so long as such Shares are subject to the Purchase Option. 6. Epitope shall not be required (i) to transfer on its books any Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares shall have been so transferred. 7. Subject to the provisions of paragraphs 5 and 6 above, Purchaser (but not any unapproved transferee) may, during the term of this Agreement, exercise all rights and privileges of a shareholder of Epitope with respect to the Shares. 8. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 9. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 10. This Agreement shall bind and inure to the benefit of the successors and assigns of Epitope and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of Epitope hereunder shall be assignable by Epitope at any time or from time to time, in whole or in part. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the --- day of --------------, 19----. EPITOPE, INC. By ------------------------------------------- Address: 8505 S.W. Creekside Place Beaverton, Oregon 97008 ---------------------------------------------- Purchaser Address: ------------------------------------- - 3 - ---------------------------------------------- ATTACHMENTS: Exhibit A Vesting Schedule Exhibit B Assignment Separate from Certificate - 4 - EXHIBIT A VESTING SCHEDULE Number of Shares Subject to If Cessation of Employment Occurs: Purchase Option - ---------------------------------- ---------------- EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Early Exercise Stock Purchase Agreement between the undersigned and Epitope, Inc., an Oregon corporation ("Epitope") dated as of ---------------, 1997 (the "Agreement"), the undersigned hereby sells, assigns and transfers unto Epitope - ---------------------------- (------) shares of common stock of Epitope, standing in the undersigned's name on the books of Epitope represented by Certificate No. ------ herewith, and does hereby irrevocably constitute and appoint ---------------- attorney to transfer the said stock on the books of Epitope with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement and only to the extent that such shares remain subject to Epitope's Purchase Option under the Agreement. Dated: ---------------------------- --------------------------------------------- [Signature] --------------------------------------------- [Print Name] [INSTRUCTION: Please do not fill in any blanks other than the signature line. The purpose of this Assignment is to enable Epitope to exercise its repurchase option set forth in the Agreement without requiring additional signatures on the part of Purchaser.] EX-10.21 9 FORM OF EMPLOYMENT AGREEMENT - CHARLES E. BERGERON EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of December --, 1997, between Charles E. Bergeron ("Employee") and Epitope, Inc., an Oregon corporation (the "Company"). 1. SERVICES. 1.1 EMPLOYMENT. Effective upon Gilbert N. Miller's resignation as Chief Financial Officer of the Company, the Company agrees to employ Employee as Chief Financial Officer of the Company. Until such time, Company agrees to employ employee as Vice President of Operations of the Company. Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. Employment shall continue until terminated pursuant to the terms of this Agreement. 1.2 DUTIES. Employee shall have the position named in Section 1.1 with such powers and duties appropriate to that office as may be provided by the bylaws of the Company and as determined from time to time by the President and Chief Executive Officer or the board of directors of the Company. Subject to the provisions of Section 7.4, Employee's position and duties may be changed from time to time during the term of this Agreement, and Employee's place of work may be relocated at the sole discretion of the President and Chief Executive Officer or the board of directors. 1.3 OUTSIDE ACTIVITIES. Employee shall obtain the consent of the President and Chief Executive Officer or the board of directors before he engages, either directly or indirectly, in any other professional or business activities that may require an appreciable portion of Employee's time or effort to the detriment of the Company's business. 1.4 DIRECTION OF SERVICES. Employee shall at all times discharge his duties in consultation with and under the supervision and direction of the President and Chief Executive Officer of the Company. 2. COMPENSATION AND EXPENSES. 2.1 SALARY. As compensation for services under this Agreement, the Company shall pay to Employee a regular salary established by the President and Chief Executive Officer or the board of directors. Such salary may be adjusted from time to time in the discretion of the President and Chief Executive Officer or the board of directors. Payment shall be made on a bi-weekly basis, less all amounts required by law or authorized by Employee to be withheld or deducted, at such times as shall be determined by the Company. 2.2 ADDITIONAL EMPLOYEE BENEFITS. To the extent otherwise eligible, Employee shall also be entitled to receive or participate in any additional benefits, including without limitation insurance programs, profit sharing or pension plans, and medical reimbursement plans, which may from time to time be made available by the Company to - 1 - corporate officers. The Company may change or discontinue such benefits at any time in its sole discretion. 2.3 EXPENSES. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Company from time to time an itemized account of such expenses in such form as may be required by the Company. 2.4 FEES. All compensation earned by Employee, other than pursuant to this Agreement, as a result of services performed on behalf of the Company or as a result of or arising out of any work done by Employee in any way related to the scientific or business activities of the Company shall belong to the Company. Employee shall pay or deliver such compensation to the Company promptly upon receipt. For the purposes of this provision, "compensation" shall include, but is not limited to, all professional and nonprofessional fees, lecture fees, expert testimony fees, publishing fees, royalties, and any related income, earnings, or other things of value; and "scientific or business activities of the Company" shall include, but not be limited to, any project or projects in which the Company is involved and any subject matter that is directly or indirectly researched, tested, developed, promoted, or marketed by the Company. 3. STOCK OPTIONS. The Company shall grant Employee an option to purchase 30,000 shares of common stock of the Company at an exercise price equal to the fair market value of the stock on the date of grant. 4. CONFIDENTIAL INFORMATION. 4.1 DEFINED. "Confidential Information" is all nonpublic information relating to the Company or its business that is disclosed to Employee, that Employee produces, or that Employee otherwise obtains during employment. "Confidential Information" also includes information received from third parties that the Company has agreed to treat as confidential. Examples of Confidential Information are: 4.1.1 Marketing plans. 4.1.2 Customer lists. 4.1.3 Product design and manufacturing information. 4.1.4 Financial information. 4.2 ACCESS TO INFORMATION. Employee acknowledges that in the course of his employment he will have access to Confidential Information, that such information is a valuable asset of the Company, and that its disclosure or unauthorized use will cause the Company substantial harm. - 2 - 4.3 OWNERSHIP. Employee acknowledges that all Confidential Information shall continue to be the exclusive property of the Company (or the third party that disclosed it to the Company), whether or not prepared in whole or in part by Employee and whether or not disclosed to Employee or entrusted to his custody in connection with his employment by the Company. 4.4 NONDISCLOSURE AND NONUSE. Unless authorized or instructed in writing by the Company, or required by legally constituted authority, Employee will not, except as required in the course of the Company's business, during or after his employment, disclose to others or use any Confidential Information, unless and until, and then only to the extent that, such items become available to the public through no fault of Employee. 4.5 RETURN OF CONFIDENTIAL INFORMATION. Upon request by the Company during or after his employment, and without request upon termination of employment pursuant to this Agreement, Employee will deliver immediately to the Company all written or tangible materials containing Confidential Information without retaining any excerpts or copies. 4.6 DURATION. The obligations set forth in this Section 4 will continue beyond the term of employment of Employee by the Company and for so long as Employee possesses Confidential Information. 5. MATERIALS PREPARED AND INVENTIONS MADE DURING EMPLOYMENT. The Company shall be the exclusive owner of all materials, concepts, and inventions Employee prepares, develops, or makes (whether alone or jointly with others) within the scope of his employment, and of all related rights (including copyrights, trademarks, and patents) and proceeds. Without limitation, materials, concepts, and inventions that (a) relate to the Company's business or actual or demonstrably anticipated research or development, or (b) result from any work performed by Employee for the Company, shall be considered within the scope of Employee's employment. Employee shall promptly disclose all such materials, concepts, and inventions to the Company. Employee shall take all action reasonably requested by the Company to vest ownership of such materials, consents, and inventions in the Company and to permit the Company to obtain copyright, trademark, patent, or similar protection in its name. 6. NONCOMPETITION. Employee confirms the noncompetition covenant set forth in his Employment Agreement dated as of August 31, 1993 (the "1993 Agreement"). The covenant is restated below to refer to the appropriate sections of this Agreement. 6.1 COVENANT. Subject to the provisions of Section 6.3, Employee covenants that Employee will not, throughout the United States, either individually or as a director, officer, partner, employee, agent, representative, or consultant with any business, directly or indirectly during the term of employment and for one year thereafter: 6.1.1 Engage or prepare to engage in any business that competes with the Company; - 3 - 6.1.2 Induce or attempt to induce any person who is an employee of the Company during the term of this covenant to leave the employ of the Company; or 6.1.3 Solicit, divert, or accept orders for products or services that are substantially competitive with the products or services sold by the Company from any customer of the Company. 6.2 ENFORCEMENT. Employee acknowledges and agrees that the time, scope, and other provisions of this Section 6 have been specifically negotiated by sophisticated parties with the advice and consultation of counsel and specifically hereby agrees that such time, scope, and other provisions are reasonable under the circumstances. Employee further agrees that if, at any time, despite the express agreement of the parties hereto, a court of competent jurisdiction holds that any portion of this Section 6 is unenforceable for any reason, the maximum restrictions reasonable under the circumstances, as determined by such court, will be substituted for any such restrictions held unenforceable. 6.3 RELEASE FROM OBLIGATION. In the event that Employee shall be entitled to extraordinary compensation pursuant to the provisions of Section 7.5.2, Employee may elect to waive all rights to receive such compensation from and after the date of such waiver in exchange for the release of Employee from the obligations of Sections 6.1.1 and 6.1.3. Such waiver shall be in writing, shall state that it is in consideration for the release of Employee from the obligations of Sections 6.1.1 and 6.1.3 of this Agreement, and shall be effective when delivered to Epitope. In the event of such a waiver, the amounts payable pursuant to the provisions of Section 7.5.2 shall be prorated through the period commencing on the date of termination of employment and ending on the date of delivery of the written notice of waiver to Epitope. For example, if such waiver is delivered to Epitope six months after the commencement for the 12-month-period set forth in Section 7.5.2, Employee shall be paid one-half of the amounts otherwise payable pursuant to the provisions of Section 7.5.2; in the event that Employee shall have received more than such pro rata share of such compensation, it shall be a condition of Employee's rights under this section that he shall have returned to Epitope any amounts in excess of such pro rata share with the delivery of the waiver notice to Epitope. 7. TERMINATION. 7.1 TERMINATION UPON DEATH. This Agreement shall terminate immediately upon Employee's death. 7.2 TERMINATION BY EMPLOYEE. Employee may terminate his employment under this Agreement by 90 days' written notice to the Company. 7.3 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate Employee's employment under this Agreement for cause at any time, with or without advance notice. "Cause" includes, but is not limited to: (a) a material breach of this Agreement by Employee and Employee's failure to promptly cure such breach after receipt of written notice thereof from the President and Chief Executive Officer or the board of directors of the - 4 - Company; (b) Employee's willful refusal or failure, or Employee's inability, to comply with any policies or standards of the Company or to perform any job duties of Employee; (c) any act of fraud, dishonesty, or misconduct by Employee in connection with Employee's employment with the Company; (d) the commission of any act in direct competition with or materially detrimental to the best interests of the Company; or (e) Employee's failure to otherwise comply with the standards of behavior that an employer has the right to expect of an employee. The Company reserves the right to determine the facts giving rise to cause for termination and whether those facts constitute cause for termination. 7.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate Employee's employment under this Agreement without cause by written notice to Employee. Employee may (but shall not be required to) elect to treat either of the following events as a termination without cause, provided Employee acts within 60 days of the event: 7.4.1 A relocation by the Company of the principal place where Employee's duties are to be performed to a place outside of the Portland metropolitan area. 7.4.2 A "Change of Control" of the Company. For purposes of this Agreement, a "Change of Control" shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A as in effect on the date hereof pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a change of control shall be deemed to have occurred at such time as (i) any Acquiring Person hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30 percent or more of the combined voting power of Voting Securities; (ii) during any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; (iii) there shall be consummated (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of Voting Securities immediately prior to the merger have the same, or substantially the same, proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (iv) approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. For purposes of this Agreement, "Acquiring Person" means any person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the Exchange Act, as such Section and Rule are in effect as of the date of this Agreement; provided, however, that the term Acquiring Person shall not include: (i) the Company or any of its subsidiaries; (ii) any employee benefit plan of the Company or any of its subsidiaries; (iii) any entity holding voting capital stock of the Company for or pursuant to the terms of any such employee benefit plan; or (iv) any person or group solely because such person or group has voting power with respect to capital stock of the Company arising from a - 5 - revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to the Exchange Act. For purposes of this Agreement, "Voting Securities" means the Company's issued and outstanding securities ordinarily having the right to vote at elections for the Company's board of directors. 7.5 COMPENSATION UPON TERMINATION. 7.5.1 TERMINATION UNDER SECTION 7.1, 7.2, OR 7.3. In the event of a termination of Employee's employment under Section 7.1, 7.2, or 7.3, Employee's regular compensation pursuant to Section 2.1 shall be prorated and payable until the date of termination. 7.5.2 TERMINATION UNDER SECTION 7.4. In the event of a termination of Employee's employment by the Company without cause as provided in Section 7.4, Employee shall continue to be paid the salary provided in Section 2.1 for 12 months from the date of notice of such termination of employment, in the manner and at the times at which regular compensation was paid to Employee during the term of his employment under this Agreement, except that if Employee elects to treat an event described in Sections 7.4.1 or 7.4.2 as a termination without cause but continues to work for the Company or any of its subsidiaries, then any amounts Employee receives as compensation during the 12-month period shall be credited against the amounts payable to Employee under this section. Unless Employee elects to continue working for the Company or any of its subsidiaries, as a condition to receipt of the compensation described in the preceding sentence Employee shall sign, deliver, and abide by a Separation Agreement and Release, substantially in the form attached as Exhibit A to this Agreement. The Company's obligation to pay the amounts stated in this section shall terminate if Employee engages, either individually or as a director, officer, partner, employee, agent, representative, or consultant with any business, directly or indirectly in any of the activities listed in Section 6.1.1, 6.1.2, or 6.1.3 anywhere in the United States within one year after termination of employment. 8. REMEDIES. The respective rights and duties of the Company and Employee under this Agreement are in addition to, and not in lieu of, those rights and duties afforded to and imposed upon them by law or at equity. Employee acknowledges that breach of Sections 4 and 6 of this Agreement will cause irreparable harm to the Company and agrees to the entry of a temporary restraining order and permanent injunction by any court of competent jurisdiction to prevent breach or further breach of this Agreement. Such remedy shall be in addition to any other remedy available to the Company at law or in equity. 9. SEVERABILITY OF PROVISIONS. The provisions of this Agreement are severable, and if any provision hereof is held invalid or unenforceable, it shall be enforced to the maximum extent permissible, and the remaining provisions of the Agreement shall continue in full force and effect. 10. ATTORNEY FEES. In the event a suit or action is filed to enforce Sections 4 or 6 of this Agreement, the prevailing party shall be reimbursed by the other party for all costs - 6 - and expenses incurred in connection with the suit or action, including without limitation reasonable attorney fees at trial or on appeal. 11. NONWAIVER. Failure of the Company at any time to require performance of any provision of this Agreement shall not limit the right of the Company to enforce the provision. No provision of this Agreement or breach thereof may be waived by either party except by a writing signed by that party. A waiver of any breach of a provision of this Agreement shall be construed narrowly and shall not be deemed to be a waiver of any succeeding breach of that provision or a waiver of that provision itself or of any other provision. 12. ARBITRATION. 12.1 CLAIMS COVERED. All claims or controversies, except for those excluded by Section 12.2 ("claims"), whether or not arising out of Employee's employment (or its termination), that the Company may have against Employee or that Employee may have against the Company or against its officers, directors, employees or agents, in their capacity as such or otherwise, shall be resolved as provided in this Section 12. Claims covered by this Section 12 include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except as provided in Section 12.2. 12.2 NON-COVERED CLAIMS. Claims arising out of Sections 4 and 6 of this Agreement and workers' compensation or unemployment compensation benefits are not covered by this Section 12. Non-covered claims include but are not limited to claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as to which Employee understands and agrees that the Company may seek and obtain relief from a court of competent jurisdiction. 12.3 REQUIRED NOTICE OF ALL CLAIMS AND STATUTE OF LIMITATIONS. Company and Employee agree that the aggrieved party must give written notice of any claim to the other party within one year of the date the aggrieved party first has knowledge of the event giving rise to the claim; otherwise the claim shall be void and deemed waived even if there is a federal or state statute of limitations which would have given more time to pursue the claim. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. 12.4 HEARING OR MEDIATION. Prior to any arbitration proceeding taking place pursuant to this section, Company or Employee may, at its respective option, elect to submit the claim to non-binding mediation before a mutually agreeable mediation tribunal or - 7 - mediator, in which event both parties shall execute a suitable confidentiality agreement and abide by the procedures specified by the mediation tribunal or mediator. 12.5 ARBITRATION PROCEDURES. Any arbitration shall be conducted in accordance with the then-current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA"), modified to substitute for AAA actions, the United States Arbitration and Mediation Service ("USA&MS"), before an arbitrator who is licensed to practice law in the state of Oregon (the "Arbitrator"). The arbitration shall take place in or near Portland, Oregon. 12.5.1 SELECTION OF ARBITRATOR. The USA&MS shall give each party a list of 11 arbitrators drawn from its panel of labor-management dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains. The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, the USA&MS shall furnish an additional list or lists until an Arbitrator is selected. 12.5.2 APPLICABLE LAW. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) specified in this Agreement or federal law, or both, as applicable to the claim(s) asserted. The Oregon Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. 12.5.3 AUTHORITY. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The Arbitrator shall render an award and opinion in the form typically rendered in labor arbitrations. 12.5.4 REPRESENTATION. Any party may be represented by an attorney or other representative selected by the party. 12.5.5 DISCOVERY. Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. At least 30 days before the arbitration, the - 8 - parties must exchange lists of witnesses, including any experts, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. 12.5.6 REPORTER. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. 12.5.7 POST-HEARING BRIEFS. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. 12.6 ENFORCEMENT. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and Employee agree that neither shall initiate or prosecute any lawsuit (other than for a non-covered claim) in any way related to any claim covered by this Agreement. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. 12.7 ARBITRATION FEES AND COSTS. Company and Employee shall equally share the fees and costs of the Arbitrator. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any, provided that the Arbitrator, in its sole discretion, may award reasonable fees to the prevailing party in a proceeding. 13. GENERAL TERMS AND CONDITIONS. This Agreement constitutes the entire understanding of the parties relating to the employment of Employee by the Company, and, except as set forth in Section 6 with respect to the noncompetition covenant in the 1993 Agreement, supersedes and replaces all written and oral agreements heretofore made or existing by and between the parties relating thereto. This Agreement shall be construed in accordance with the laws of the state of Oregon, without regard to any conflicts of laws rules thereof. This Agreement shall inure to the benefit of any successors or assigns of the Company. All captions used herein are intended solely for convenience of reference and shall in no way limit any of the provisions of this Agreement. - 9 - The parties have executed this Employment Agreement as of the date stated above. EPITOPE, INC. By: CHARLES E. BERGERON Title: - 10 - EXHIBIT A TO EMPLOYMENT AGREEMENT SEPARATION AGREEMENT AND RELEASE A. This Separation Agreement and Release ("Agreement") is made and entered into as of this ----- day of --------------, -----, by and between Company, Inc., an Oregon corporation ("Company"), and ---------------------- ("--------------") in order to provide the terms and conditions of - --------------'s termination of employment, to fully and completely resolve any and all issues that -------------- may have in connection with his employment with Company or the termination of that employment, and to promote an amicable long-term relationship between Company and --------------. B. In consideration of the mutual promises and conditions contained herein, the parties agree as follows: 1. SEPARATION. -------------- has been [is currently] employed at Company as --------------. -------------- shall have no further job responsibilities at Company after --------------, and his employment shall be terminated effective as of such date. 2. PAYMENT TO --------------. Pursuant to the Employment Agreement entered into between the parties, Company agrees to provide additional compensation to -------------- in the amount of --------------- provided - -------------- executes and does not revoke this Agreement. 3. RELEASE OF CLAIMS. In return for the benefits conferred by this Agreement (and described in the Employment Agreement), which -------------- acknowledges Company has no legal obligation to provide if -------------- does not enter into this Agreement, --------------, on behalf of himself and his heirs, executors, administrators, successors and assigns, hereby releases and forever discharges Company and its past, present and future affiliates, subsidiaries, predecessors, successors and assigns, and each of their past, present and future shareholders, officers, directors, employees, agents and insurers, from any and all claims, actions, causes of action, disputes, liabilities or damages, of any kind, which may now exist or hereafter may be discovered, specifically including, but not limited to, any and all claims, disputes, actions, causes of action, liabilities or damages, arising from or relating to --------------'s employment with Company, or the termination of such employment, except for any claim for payment or performance pursuant to the terms of this Agreement. This release includes, but is not limited to, any claims that -------------- might have for reemployment or reinstatement or for additional compensation or benefits and applies to claims that he might have under either federal, state or local law dealing with employment, contract, tort, wage and hour, or civil rights matters, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, similar state laws, and any regulations under such laws. This release shall not affect any accrued rights -------------- may have under any medical insurance, workers' compensation or retirement plan because of his prior employment with Company. -------------- ACKNOWLEDGES AND AGREES THAT THROUGH THIS RELEASE HE IS GIVING UP ALL RIGHTS AND CLAIMS OF EVERY KIND AND NATURE WHATSOEVER, KNOWN OR UNKNOWN, CONTINGENT OR LIQUIDATED, THAT HE MAY HAVE AGAINST Company AND THE OTHER PERSONS NAMED ABOVE, EXCEPT FOR THE RIGHTS SPECIFICALLY EXCLUDED ABOVE. 4. CONFIDENTIALITY. -------------- agrees to keep this Agreement and each of its terms, specifically including without limitation the amount of the payment described in this Agreement, and the fact that he has received payment, strictly confidential. -------------- may disclose the terms of this Agreement only to his attorney or accountant, or as required by law. - --------------- understands that Company may be required to publicly disclose the terms of this Agreement. 5. NON-DISPARAGEMENT. -------------- shall not make any disparaging or derogatory remarks of any nature whatsoever about Company, its officers, directors or employees, or its products, either publicly or privately, unless required by law. 6. NON-ADMISSION OF LIABILITY. This Agreement shall not be construed as an admission of liability or wrongdoing by Company. Neither this Agreement nor any of its terms, provisions, or conditions constitute an admission of liability or wrongdoing or may be offered or received in evidence in any action or proceeding as evidence of an admission of liability or wrongdoing. 7. EMPLOYMENT AGREEMENT. -------------- acknowledges and reaffirms his obligations under Sections 4 and 6 of the Employment Agreement executed by him in conjunction with his employment at Company. The terms of such Employment Agreement are hereby incorporated herein and made a part of this Agreement. -------------- agrees to strictly comply with such terms of the Employment Agreement. 8. RETURN OF PROPERTY. -------------- agrees to and hereby represents that he has returned to Company all of Company's property and all materials containing confidential information of Company, that were in his possession or under his control. 9. MISCELLANEOUS. 9.1 ENTIRE AGREEMENT. This document constitutes the entire, final, and complete agreement and understanding of the parties with respect to the subject matter hereof and supersedes and replaces all written and oral agreements and understandings heretofore made or existing by and between the parties or their representatives with respect thereto, other than the Employment Agreement executed between the parties. There have been no representations or commitments by Company to make any payment or perform any act other than those expressly stated herein. - 2 - 9.2 WAIVER. No waiver of any provision of this Agreement shall be deemed, or shall constitute a wavier of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the parties making the waiver. 9.3 BINDING EFFECT. All rights, remedies, and liabilities herein given to or imposed upon the parties shall extend to, inure to the benefit of and bind, as the circumstances may require, the parties and their representative heirs, personal representatives, administrators, successors and assigns. 9.4 AMENDMENT. No supplement, modification or amendment of this Agreement shall be valid, unless the same is in writing and signed by both parties. 9.5 RECOVERY OF ATTORNEY FEES BY PREVAILING PARTY. If it becomes necessary to enforce this Agreement, or any part hereof, the prevailing party shall be entitled to recover its reasonable attorney fees and costs incurred therein, including all attorney fees and costs on appeal. 9.6 GOVERNING LAW. This Agreement and the rights of the parties hereunder shall be governed, construed and enforced in accordance with the laws of the state of Oregon, without regard to its conflict of law principles. Any suit or action arising out of or in connection with this Agreement, or any breach hereof, shall be brought and maintained in the Circuit Court of the State of Oregon for the County of Multnomah. The parties hereby irrevocably submit to the jurisdiction of such court for the purpose of such suit or action and hereby expressly and irrevocably waive, to the fullest extent permitted by law, any claim that any such suit or action has been brought in an inconvenient forum. 9.7 -------------- GIVEN 21 DAYS TO CONSIDER AGREEMENT. -------------- acknowledges that Company advised him in writing to consult with an attorney before signing this Agreement and that he has had at least 21 days to consider whether to execute this Agreement. 9.8 REVOCATION. -------------- may revoke this Agreement by written notice delivered to the President and Chief Executive Officer of the Company within seven days following the date he signed the Agreement. If not revoked under the preceding sentence, this Agreement becomes effective and enforceable after the seven-day period has expired. - 3 - 9.9 MISCELLANEOUS. -------------- acknowledges that he has freely and voluntarily executed this Agreement, with a complete understanding of its terms and present and future effects. [NAME OF EMPLOYEE] EPITOPE, INC. By: Date: Title: Date: - 4 - EX-10.22 10 FORM OF EMPLOYMENT AGREEMENT - J. RICHARD GEORGE EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of December --, 1997, between J. Richard George, Ph.D. ("Employee") and Epitope, Inc., an Oregon corporation (the "Company"). 1. SERVICES. 1.1 EMPLOYMENT. The Company agrees to employ Employee as Vice President of Scientific Affairs - Epitope Medical Products, and Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. Employment shall continue until terminated pursuant to the terms of this Agreement. 1.2 DUTIES. Employee shall have the position named in Section 1.1 with such powers and duties appropriate to that office (a) as may be provided by the bylaws of the Company, (b) as otherwise set forth in Exhibit A attached to this Agreement, and (c) as determined from time to time by the President and Chief Executive Officer or the board of directors of the Company. Employee's position and duties may be changed from time to time during the term of this Agreement, and Employee's place of work may be relocated at the sole discretion of the President and Chief Executive Officer or the board of directors. 1.3 OUTSIDE ACTIVITIES. Employee shall obtain the consent of the President and Chief Executive Officer or the board of directors before he engages, either directly or indirectly, in any other professional or business activities that may require an appreciable portion of Employee's time or effort to the detriment of the Company's business. 1.4 DIRECTION OF SERVICES. Employee shall at all times discharge his duties in consultation with and under the supervision and direction of the President and Chief Executive Officer of the Company. 2. COMPENSATION AND EXPENSES. 2.1 SALARY. As compensation for services under this Agreement, the Company shall pay to Employee a regular salary established by the President and Chief Executive Officer or the board of directors. Such salary may be adjusted from time to time in the discretion of the President and Chief Executive Officer or the board of directors. Payment shall be made on a bi-weekly basis, less all amounts required by law or authorized by Employee to be withheld or deducted, at such times as shall be determined by the Company. 2.2 ADDITIONAL EMPLOYEE BENEFITS. To the extent otherwise eligible, Employee shall also be entitled to receive or participate in any additional benefits, including without limitation insurance programs, profit sharing or pension plans, and medical reimbursement plans, which may from time to time be made available by the Company to - 1 - corporate officers. The Company may change or discontinue such benefits at any time in its sole discretion. 2.3 EXPENSES. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement. Employee shall present to the Company from time to time an itemized account of such expenses in such form as may be required by the Company. 2.4 FEES. All compensation earned by Employee, other than pursuant to this Agreement, as a result of services performed on behalf of the Company or as a result of or arising out of any work done by Employee in any way related to the scientific or business activities of the Company shall belong to the Company. Employee shall pay or deliver such compensation to the Company promptly upon receipt. For the purposes of this provision, "compensation" shall include, but is not limited to, all professional and nonprofessional fees, lecture fees, expert testimony fees, publishing fees, royalties, and any related income, earnings, or other things of value; and "scientific or business activities of the Company" shall include, but not be limited to, any project or projects in which the Company is involved and any subject matter that is directly or indirectly researched, tested, developed, promoted, or marketed by the Company. 3. STOCK OPTIONS. The Company shall grant Employee an option to purchase 30,000 shares of common stock of the Company at an exercise price equal to the fair market value of the stock on the date of grant. 4. CONFIDENTIAL INFORMATION. 4.1 DEFINED. "Confidential Information" is all nonpublic information relating to the Company or its business that is disclosed to Employee, that Employee produces, or that Employee otherwise obtains during employment. "Confidential Information" also includes information received from third parties that the Company has agreed to treat as confidential. Examples of Confidential Information are: 4.1.1 Marketing plans. 4.1.2 Customer lists. 4.1.3 Product design and manufacturing information. 4.1.4 Financial information. 4.2 ACCESS TO INFORMATION. Employee acknowledges that in the course of his employment he will have access to Confidential Information, that such information is a valuable asset of the Company, and that its disclosure or unauthorized use will cause the Company substantial harm. - 2 - 4.3 OWNERSHIP. Employee acknowledges that all Confidential Information shall continue to be the exclusive property of the Company (or the third party that disclosed it to the Company), whether or not prepared in whole or in part by Employee and whether or not disclosed to Employee or entrusted to his custody in connection with his employment by the Company. 4.4 NONDISCLOSURE AND NONUSE. Unless authorized or instructed in writing by the Company, or required by legally constituted authority, Employee will not, except as required in the course of the Company's business, during or after his employment, disclose to others or use any Confidential Information, unless and until, and then only to the extent that, such items become available to the public through no fault of Employee. 4.5 RETURN OF CONFIDENTIAL INFORMATION. Upon request by the Company during or after his employment, and without request upon termination of employment pursuant to this Agreement, Employee will deliver immediately to the Company all written or tangible materials containing Confidential Information without retaining any excerpts or copies. 4.6 DURATION. The obligations set forth in this Section 4 will continue beyond the term of employment of Employee by the Company and for so long as Employee possesses Confidential Information. 5. MATERIALS PREPARED AND INVENTIONS MADE DURING EMPLOYMENT. The Company shall be the exclusive owner of all materials, concepts, and inventions Employee prepares, develops, or makes (whether alone or jointly with others) within the scope of his employment, and of all related rights (including copyrights, trademarks, and patents) and proceeds. Without limitation, materials, concepts, and inventions that (a) relate to the Company's business or actual or demonstrably anticipated research or development, or (b) result from any work performed by Employee for the Company, shall be considered within the scope of Employee's employment. Employee shall promptly disclose all such materials, concepts, and inventions to the Company. Employee shall take all action reasonably requested by the Company to vest ownership of such materials, consents, and inventions in the Company and to permit the Company to obtain copyright, trademark, patent, or similar protection in its name. 6. TERMINATION. 6.1 TERMINATION UPON DEATH. This Agreement shall terminate immediately upon Employee's death. 6.2 TERMINATION BY EMPLOYEE. Employee may terminate his employment under this Agreement by 90 days' written notice to the Company. 6.3 TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate Employee's employment under this Agreement for cause at any time, with or without advance notice. "Cause" includes, but is not limited to: (a) a material breach of this Agreement by Employee; (b) Employee's refusal, failure, or inability to comply with any policies or - 3 - standards of the Company or to perform any job duties of Employee; (c) any act of fraud, dishonesty, or misconduct by Employee; (d) the commission of any act in direct competition with or materially detrimental to the best interests of the Company; or (e) Employee's failure to otherwise comply with the standards of behavior that an employer has the right to expect of an employee. The Company reserves the right to determine the facts giving rise to cause for termination and whether those facts constitute cause for termination. 6.4 TERMINATION BY THE COMPANY WITHOUT CAUSE. The Company may terminate Employee's employment under this Agreement without cause by written notice to Employee. 6.5 COMPENSATION UPON TERMINATION. 6.5.1 TERMINATION UNDER SECTION 6.1, 6.2, OR 6.3. In the event of a termination of Employee's employment under Section 6.1, 6.2, or 6.3, Employee's regular compensation pursuant to Section 2.1 shall be prorated and payable until the date of termination. 6.5.2 TERMINATION UNDER SECTION 6.4. In the event of a termination of Employee's employment by the Company without cause as provided in Section 6.4, Employee shall continue to be paid the salary provided in Section 2.1 for 12 months from the date of notice of such termination of employment, in the manner and at the times at which regular compensation was paid to Employee during the term of his employment under this Agreement. As a condition to receipt of the compensation described in the preceding sentence, Employee shall sign, deliver, and abide by a Separation Agreement and Release, substantially in the form attached as Exhibit B to this Agreement. The Company's obligation to pay the amounts stated in this section shall terminate if Employee either individually or as a director, officer, partner, employee, agent, representative, or consultant with any business, directly or indirectly anywhere in the United States within one year after termination of employment (a) engages or prepares to engage in any business that competes with the Company; (b) induces or attempts to induce any person who is an employee of the Company to leave the employ of the Company; or (c) solicits, diverts, or accepts orders for products or services that are substantially competitive with the products or services sold by the Company from any customer of the Company. 7. REMEDIES. The respective rights and duties of the Company and Employee under this Agreement are in addition to, and not in lieu of, those rights and duties afforded to and imposed upon them by law or at equity. Employee acknowledges that breach of Section 4 of this Agreement will cause irreparable harm to the Company and agrees to the entry of a temporary restraining order and permanent injunction by any court of competent jurisdiction to prevent breach or further breach of this Agreement. Such remedy shall be in addition to any other remedy available to the Company at law or in equity. 8. SEVERABILITY OF PROVISIONS. The provisions of this Agreement are severable, and if any provision hereof is held invalid or unenforceable, it shall be enforced to - 4 - the maximum extent permissible, and the remaining provisions of the Agreement shall continue in full force and effect. 9. ATTORNEY FEES. In the event a suit or action is filed to enforce Section 4 of this Agreement, the prevailing party shall be reimbursed by the other party for all costs and expenses incurred in connection with the suit or action, including without limitation reasonable attorney fees at trial or on appeal. 10. NONWAIVER. Failure of the Company at any time to require performance of any provision of this Agreement shall not limit the right of the Company to enforce the provision. No provision of this Agreement or breach thereof may be waived by either party except by a writing signed by that party. A waiver of any breach of a provision of this Agreement shall be construed narrowly and shall not be deemed to be a waiver of any succeeding breach of that provision or a waiver of that provision itself or of any other provision. 11. ARBITRATION. 11.1 CLAIMS COVERED. All claims or controversies, except for those excluded by Section 11.2 ("claims"), whether or not arising out of Employee's employment (or its termination), that the Company may have against Employee or that Employee may have against the Company or against its officers, directors, employees or agents, in their capacity as such or otherwise, shall be resolved as provided in this Section 11. Claims covered by this Section 11 include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, sexual orientation, religion, national origin, age, marital status, or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other governmental law, statute, regulation, or ordinance, except as provided in Section 11.2. 11.2 NON-COVERED CLAIMS. Claims arising out of Section 4 of this Agreement and workers' compensation or unemployment compensation benefits are not covered by this Section 11. Non-covered claims include but are not limited to claims by the Company for injunctive and/or other equitable relief for unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information, as to which Employee understands and agrees that the Company may seek and obtain relief from a court of competent jurisdiction. 11.3 REQUIRED NOTICE OF ALL CLAIMS AND STATUTE OF LIMITATIONS. Company and Employee agree that the aggrieved party must give written notice of any claim to the other party within one year of the date the aggrieved party first has knowledge of the event giving rise to the claim; otherwise the claim shall be void and deemed waived even if there is a federal or state statute of limitations which would have given more time to pursue the claim. The written notice shall identify and describe the nature of all claims asserted and the facts upon which such claims are based. - 5 - 11.4 HEARING OR MEDIATION. Prior to any arbitration proceeding taking place pursuant to this section, Company or Employee may, at its respective option, elect to submit the claim to non-binding mediation before a mutually agreeable mediation tribunal or mediator, in which event both parties shall execute a suitable confidentiality agreement and abide by the procedures specified by the mediation tribunal or mediator. 11.5 ARBITRATION PROCEDURES. Any arbitration shall be conducted in accordance with the then-current Model Employment Arbitration Procedures of the American Arbitration Association ("AAA"), modified to substitute for AAA actions, the United States Arbitration and Mediation Service ("USA&MS"), before an arbitrator who is licensed to practice law in the state of Oregon (the "Arbitrator"). The arbitration shall take place in or near Portland, Oregon. 11.5.1 SELECTION OF ARBITRATOR. The USA&MS shall give each party a list of 11 arbitrators drawn from its panel of labor-management dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the lists of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternately until only one remains. The party who did not initiate the claim shall strike first. If no common name remains on the lists of all parties, the USA&MS shall furnish an additional list or lists until an Arbitrator is selected. 11.5.2 APPLICABLE LAW. The Arbitrator shall apply the substantive law (and the law of remedies, if applicable) specified in this Agreement or federal law, or both, as applicable to the claim(s) asserted. The Oregon Rules of Evidence shall apply. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. 11.5.3 AUTHORITY. The Arbitrator shall have jurisdiction to hear and rule on pre-hearing disputes and is authorized to hold pre-hearing conferences by telephone or in person as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. The Arbitrator shall render an award and opinion in the form typically rendered in labor arbitrations. 11.5.4 REPRESENTATION. Any party may be represented by an attorney or other representative selected by the party. 11.5.5 DISCOVERY. Each party shall have the right to take the deposition of one individual and any expert witness designated by another party. Each party also shall have the right to make requests for production of documents to any party. The - 6 - subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the Arbitrator selected pursuant to this Agreement so orders, upon a showing of substantial need. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any experts, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. 11.5.6 REPORTER. Either party, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. 11.5.7 POST-HEARING BRIEFS. Either party, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. 11.6 ENFORCEMENT. Either party may bring an action in any court of competent jurisdiction to compel arbitration under this Agreement and to enforce an arbitration award. Except as otherwise provided in this Agreement, both the Company and Employee agree that neither shall initiate or prosecute any lawsuit (other than for a non-covered claim) in any way related to any claim covered by this Agreement. A party opposing enforcement of an award may not do so in an enforcement proceeding, but must bring a separate action in any court of competent jurisdiction to set aside the award, where the standard of review will be the same as that applied by an appellate court reviewing a decision of a trial court sitting without a jury. 11.7 ARBITRATION FEES AND COSTS. Company and Employee shall equally share the fees and costs of the Arbitrator. Each party will deposit funds or post other appropriate security for its share of the Arbitrator's fee, in an amount and manner determined by the Arbitrator, 10 days before the first day of hearing. Each party shall pay for its own costs and attorneys' fees, if any, provided that the Arbitrator, in its sole discretion, may award reasonable fees to the prevailing party in a proceeding. 12. GENERAL TERMS AND CONDITIONS. This Agreement constitutes the entire understanding of the parties relating to the employment of Employee by the Company, and supersedes and replaces all written and oral agreements heretofore made or existing by and between the parties relating thereto. This Agreement shall be construed in accordance with the laws of the state of Oregon, without regard to any conflicts of laws rules thereof. This Agreement shall inure to the benefit of any successors or assigns of the Company. All captions used herein are intended solely for convenience of reference and shall in no way limit any of the provisions of this Agreement. - 7 - The parties have executed this Employment Agreement as of the date stated above. EPITOPE, INC. By: J. RICHARD GEORGE, PH.D. Title: - 8 - EXHIBIT A TO EMPLOYMENT AGREEMENT SPECIFIC DUTIES OF EMPLOYEE AS VICE PRESIDENT OF SCIENTIFIC AFFAIRS - EPITOPE MEDICAL PRODUCTS [Specify any relevant duties.] EXHIBIT B TO EMPLOYMENT AGREEMENT SEPARATION AGREEMENT AND RELEASE A. This Separation Agreement and Release ("Agreement") is made and entered into as of this ----- day of --------------, -----, by and between Company, Inc., an Oregon corporation ("Company"), and ---------------------- ("--------------") in order to provide the terms and conditions of - --------------'s termination of employment, to fully and completely resolve any and all issues that -------------- may have in connection with his employment with Company or the termination of that employment, and to promote an amicable long-term relationship between Company and --------------. B. In consideration of the mutual promises and conditions contained herein, the parties agree as follows: 1. SEPARATION. -------------- has been [is currently] employed at Company as --------------. -------------- shall have no further job responsibilities at Company after --------------, and his employment shall be terminated effective as of such date. 2. PAYMENT TO --------------. Pursuant to the Employment Agreement entered into between the parties, Company agrees to provide additional compensation to -------------- in the amount of --------------- provided - -------------- executes and does not revoke this Agreement. 3. RELEASE OF CLAIMS. In return for the benefits conferred by this Agreement (and described in the Employment Agreement), which -------------- acknowledges Company has no legal obligation to provide if -------------- does not enter into this Agreement, --------------, on behalf of himself and his heirs, executors, administrators, successors and assigns, hereby releases and forever discharges Company and its past, present and future affiliates, subsidiaries, predecessors, successors and assigns, and each of their past, present and future shareholders, officers, directors, employees, agents and insurers, from any and all claims, actions, causes of action, disputes, liabilities or damages, of any kind, which may now exist or hereafter may be discovered, specifically including, but not limited to, any and all claims, disputes, actions, causes of action, liabilities or damages, arising from or relating to --------------'s employment with Company, or the termination of such employment, except for any claim for payment or performance pursuant to the terms of this Agreement. This release includes, but is not limited to, any claims that -------------- might have for reemployment or reinstatement or for additional compensation or benefits and applies to claims that he might have under either federal, state or local law dealing with employment, contract, tort, wage and hour, or civil rights matters, including, but not limited to, Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the Family and Medical Leave Act, similar state laws, and any regulations under such laws. This release shall not affect any accrued rights -------------- may have under any medical insurance, workers' compensation or retirement plan because of his prior employment with - 1 - Company. -------------- ACKNOWLEDGES AND AGREES THAT THROUGH THIS RELEASE HE IS GIVING UP ALL RIGHTS AND CLAIMS OF EVERY KIND AND NATURE WHATSOEVER, KNOWN OR UNKNOWN, CONTINGENT OR LIQUIDATED, THAT HE MAY HAVE AGAINST Company AND THE OTHER PERSONS NAMED ABOVE, EXCEPT FOR THE RIGHTS SPECIFICALLY EXCLUDED ABOVE. 4. CONFIDENTIALITY. -------------- agrees to keep this Agreement and each of its terms, specifically including without limitation the amount of the payment described in this Agreement, and the fact that he has received payment, strictly confidential. -------------- may disclose the terms of this Agreement only to his attorney or accountant, or as required by law. - --------------- understands that Company may be required to publicly disclose the terms of this Agreement. 5. NON-DISPARAGEMENT. -------------- shall not make any disparaging or derogatory remarks of any nature whatsoever about Company, its officers, directors or employees, or its products, either publicly or privately, unless required by law. 6. NON-ADMISSION OF LIABILITY. This Agreement shall not be construed as an admission of liability or wrongdoing by Company. Neither this Agreement nor any of its terms, provisions, or conditions constitute an admission of liability or wrongdoing or may be offered or received in evidence in any action or proceeding as evidence of an admission of liability or wrongdoing. 7. EMPLOYMENT AGREEMENT. -------------- acknowledges and reaffirms his obligations under Section 4 of the Employment Agreement executed by him in conjunction with his employment at Company. The terms of such Employment Agreement are hereby incorporated herein and made a part of this Agreement. -------------- agrees to strictly comply with such terms of the Employment Agreement. 8. RETURN OF PROPERTY. -------------- agrees to and hereby represents that he has returned to Company all of Company's property and all materials containing confidential information of Company, that were in his possession or under his control. 9. MISCELLANEOUS. 9.1 ENTIRE AGREEMENT. This document constitutes the entire, final, and complete agreement and understanding of the parties with respect to the subject matter hereof and supersedes and replaces all written and oral agreements and understandings heretofore made or existing by and between the parties or their representatives with respect thereto, other than the Employment Agreement executed between the parties. There have been no representations or commitments by Company to make any payment or perform any act other than those expressly stated herein. - 2 - 9.2 WAIVER. No waiver of any provision of this Agreement shall be deemed, or shall constitute a wavier of any other provision, whether or not similar, nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the parties making the waiver. 9.3 BINDING EFFECT. All rights, remedies, and liabilities herein given to or imposed upon the parties shall extend to, inure to the benefit of and bind, as the circumstances may require, the parties and their representative heirs, personal representatives, administrators, successors and assigns. 9.4 AMENDMENT. No supplement, modification or amendment of this Agreement shall be valid, unless the same is in writing and signed by both parties. 9.5 RECOVERY OF ATTORNEY FEES BY PREVAILING PARTY. If it becomes necessary to enforce this Agreement, or any part hereof, the prevailing party shall be entitled to recover its reasonable attorney fees and costs incurred therein, including all attorney fees and costs on appeal. 9.6 GOVERNING LAW. This Agreement and the rights of the parties hereunder shall be governed, construed and enforced in accordance with the laws of the state of Oregon, without regard to its conflict of law principles. Any suit or action arising out of or in connection with this Agreement, or any breach hereof, shall be brought and maintained in the Circuit Court of the State of Oregon for the County of Multnomah. The parties hereby irrevocably submit to the jurisdiction of such court for the purpose of such suit or action and hereby expressly and irrevocably waive, to the fullest extent permitted by law, any claim that any such suit or action has been brought in an inconvenient forum. 9.7 -------------- GIVEN 21 DAYS TO CONSIDER AGREEMENT. -------------- acknowledges that Company advised him in writing to consult with an attorney before signing this Agreement and that he has had at least 21 days to consider whether to execute this Agreement. 9.8 REVOCATION. -------------- may revoke this Agreement by written notice delivered to the President and Chief Executive Officer of the Company within seven days following the date he signed the Agreement. If not revoked under the preceding sentence, this Agreement becomes effective and enforceable after the seven-day period has expired. - 3 - 9.9 MISCELLANEOUS. -------------- acknowledges that he has freely and voluntarily executed this Agreement, with a complete understanding of its terms and present and future effects. [NAME OF EMPLOYEE] EPITOPE, INC. By: Date: Title: Date: - 4 - EX-10.24 11 AMENDED AND RESTATED EMPLOYEE BENEFITS AGREEMENT AMENDED AND RESTATED EMPLOYEE BENEFITS AGREEMENT THIS AMENDED AND RESTATED EMPLOYEE BENEFITS AGREEMENT (this "Agreement") is entered into by and between Epitope, Inc., an Oregon corporation ("Epitope"), and Agritope, Inc., a Delaware corporation ("Agritope"), as of December 19, 1997. RECITALS A. The board of directors of Epitope has determined that it is in the best interests of Epitope and its shareholders to separate the businesses of Epitope and Agritope. B. In furtherance of the plan to separate the businesses, Epitope and Agritope have entered into that certain Separation Agreement dated December 1, 1997 (the "Separation Agreement"), pursuant to which Epitope will make a dividend distribution to its shareholders (the "Distribution") of all the issued and outstanding shares of Agritope common stock, par value $.01 per share, including certain preferred stock purchase rights attached thereto, held by Epitope, on the terms and conditions contained therein. C. In connection with the Distribution, Epitope and Agritope desire to provide for the allocation between them of assets, liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs following the Distribution. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, Epitope and Agritope agree as follows: ARTICLE 1 DEFINITIONS Capitalized terms shall have the meanings given below or elsewhere in this Agreement, or as set forth in the Separation Agreement. 401(k) Retirement Plan: A defined contribution plan maintained pursuant to Section 401(k) or 401(a) of the Code for Employees and their beneficiaries. The following are specific 401(k) Retirement Plans: (i) Agritope 401(k) Plan: The Agritope, Inc. 401(k) Profit Sharing Plan to be adopted by Agritope prior to the Distribution Date pursuant to Section (a) of this Agreement. (ii) Epitope 401(k) Plan: The Epitope, Inc. 401(k) Profit Sharing Plan, in effect as of the date hereof. - 1 - Additional Insurance Plans: Insurance plans providing insurance benefits other than Medical/Dental Plan benefits to Employees, including Life Insurance and Accidental Death and Dismemberment Insurance. Agritope Board: The board of directors of Agritope. Agritope Option Plan: The Agritope, Inc. 1997 Stock Award Plan to be adopted pursuant to Section of this Agreement. Agritope Stock Distribution Value: See definition in Section . Agritope Stock Plans: The Agritope Option Plan and the Agritope Purchase Plan. Each Agritope Stock Plan will contain substantially the same material provisions as the corresponding Epitope Plan. Distribution Date: The effective date of the Distribution, as determined by the Epitope board of directors. Distribution Ratio: The number (which may be or include a fraction) of shares of Agritope Stock to be issued in the Distribution to Epitope shareholders for each share of Epitope Stock as determined by the Epitope Board. Employee: An individual who, on the Distribution Date, is an employee of either Epitope or Agritope or any of its subsidiaries. There will be two categories of Employees after the Distribution: Agritope Employee: Any individual who is an employee of Agritope or any of its subsidiaries immediately after the Distribution. Epitope Employee: Any individual who is an employee of Epitope immediately after the Distribution. Epitope Option Plans: The Epitope, Inc. Incentive Stock Option Plan and the Epitope, Inc. 1991 Stock Award Plan. ERISA: The Employee Retirement Income Security Act of 1974, as amended, or any successor legislation. Existing Agritope Option Plan: The Agritope, Inc. 1992 Stock Award Plan. Existing Epitope Option: Each unexercised option to purchase Epitope Stock outstanding as of the close of business on the day before the Distribution Date, issued pursuant to an Epitope Option Plan or the Existing Agritope Option Plan. - 2 - Medical/Dental Plan: A plan providing health benefits to Employees and their dependents, including: (i) Agritope Medical/Dental Plans: The Medical/Dental Plans to be established by Agritope in accordance with Section hereof and (ii) Epitope Medical/Dental Plans: The Epitope Medical/Dental Plans in effect as of the date hereof and continued by Epitope after the Distribution Date. Plan: Any plan, policy, arrangement, contract or agreement providing compensation or benefits for any group of Employees or for any individual Employee or the dependents or beneficiaries of any such Employee, including without limitation any employee welfare and employee pension benefit plans (as defined in ERISA) and any employee option plans. The term "Plan" as used in this Agreement does not include any contract, agreement or understanding entered into by Epitope or Agritope relating to settlement of actual or potential employee-related litigation claims. Purchase Plan: A stock-based Plan meeting the requirements of Section 423 of the Code. The following are specific Purchase Plans: (i) Agritope Purchase Plan: The Agritope, Inc. 1997 Employee Stock Purchase Plan to be adopted by Agritope prior to the Distribution Date pursuant to Section . (ii) Epitope Purchase Plan: The Epitope, Inc. 1993 Employee Stock Purchase Plan, as amended, in effect as of the date hereof. Qualified Beneficiary: An individual (or dependent thereof) who either (1) experiences a "qualifying event" (as that term is defined in Code Section 4980B(f)(3) and ERISA Section 603) while a participant in any Medical/Dental Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code Section 4980B(g)(1) and ERISA Section 607(3)) under any Medical/Dental Plan. Service Time: The period taken into account under any Plan for purposes of determining length of service or plan participation to satisfy eligibility, vesting, benefit accrual and similar requirements under such Plan. Welfare Plan: Any Plan that provides medical, health, disability, accident, life insurance, death, dental or any other welfare benefit, including, without limitation, any post-employment benefit. - 3 - ARTICLE 2 EMPLOYMENT AND CREDITS 2.1 Allocation of Responsibilities on Distribution Date. On the Distribution Date, except as otherwise agreed between the parties, Agritope shall retain or assume, as the case may be, sole responsibility as employer for Agritope Employees, and shall cause any Agritope Employee that is then a party to any employment, change in control or other employment-related agreement with Epitope to terminate such agreement effective as of the Distribution Date (except confidentiality, indemnification, and similar agreements relating primarily to past services to Epitope). Except as otherwise provided in this Agreement, the fact that Agritope assumes or retains responsibility as employer of Agritope Employees as of the Distribution Date shall not, of itself, cause such employee to be deemed terminated under any Plan maintained by Epitope or Agritope. 2.2 Service Time. For purposes of determining Service Time under any Welfare Plan, Agritope shall credit each Agritope Employee with such Employee's Service Time and original hire date as may be reflected in Epitope's employment records as of the Distribution Date. Such Service Time and hire date shall continue to be maintained for as long as the Employee's employment with Agritope does not terminate. Agritope shall be free to make such determinations relating to Service Time under any Agritope Stock Plans as Agritope, in its sole discretion, deems appropriate. Subject to the provisions of ERISA, Agritope may, in its sole discretion, make such decisions as it deems appropriate with respect to determining Service Time for any Agritope Employee whose employment with Agritope is terminated following the Distribution Date but who is subsequently reemployed by Agritope. ARTICLE 3 STOCK OPTIONS 3.1 Amendment of Epitope Option Plans. Prior to the Distribution Date, Epitope shall take all action necessary and appropriate to amend the Epitope Option Plans and, to the extent necessary and permissible without the consent of option holders, outstanding options issued under the plans to be consistent with the terms of this Section . (a) Effect of Employment by Agritope. For purposes of determining the period during which Existing Epitope Options remain exercisable, employment by Agritope or any of its majority owned subsidiaries following the Distribution Date shall be deemed employment by Epitope, notwithstanding the fact that Agritope will no longer be a subsidiary of Epitope after the Distribution Date. For continued or future vesting and all other purposes relating to Existing Epitope Options, employment by Agritope or any of its majority owned subsidiaries after the Distribution Date shall not be deemed employment by Epitope. Accordingly, any affected holder of an Existing Epitope Options granted under Epitope Option Plans will be treated as a terminated employee and options will continue to vest according to the schedule provided in the applicable award agreement. - 4 - (b) Adjustment to Exercise Price of Existing Epitope Options. The per share exercise price of each Existing Epitope Option issued under the Epitope Option Plans shall be reduced one day after the Distribution Date by subtracting the Agritope Stock Distribution Value (as defined below) from the stated exercise price. "Agritope Stock Distribution Value" is equal to (a) $7, being the price per share at which foreign investors have agreed to purchase Agritope Stock, multiplied by (b) the number of shares of Agritope Stock that are issued in the Distribution or that investors have agreed as of the Distribution Date to purchase, plus the 214,285 shares of Agritope Preferred to be purchased by Vilmorin & Cie, divided by (c) the number of shares of Epitope Stock outstanding on the Record Date. 3.2 Amendment of Existing Agritope Option Plan. Prior to the Distribution Date, Agritope shall take all action necessary and appropriate to amend the Existing Agritope Option Plan and/or outstanding Award Agreements (as defined in the Existing Agritope Option Plan) entered into in connection with the Plan to be consistent with the terms of this Section . (a) Issuance of Epitope Stock Upon Exercise. Epitope Stock shall be issued upon exercise of Existing Epitope Options granted pursuant to the Existing Agritope Option Plan, notwithstanding the fact that the options are denominated in shares of Agritope Stock. The existing agreement between Epitope and Agritope providing for issuance of Epitope Stock upon exercise of such options will be amended to remain in effect following the Distribution. (b) Effect of the Distribution. If the holder of Existing Epitope Options granted under the Existing Agritope Option Plan is an Agritope Employee after the Distribution, such holder shall for continued or future vesting purposes be deemed terminated on the Distribution Date but, for purposes of determining the period options remain exercisable, such holder shall not be deemed terminated until employment by Agritope is terminated. Accordingly, Existing Epitope Options granted under the Existing Agritope Option Plan shall continue to vest following the Distribution Date according to the vesting schedule applicable to terminated employees set forth in the applicable Award Agreement. If such option holder is an Epitope Employee, such options shall continue to vest and be exercisable as set forth in the Existing Agritope Option Plan or outstanding Award Agreements. (c) Adjustment to Exercise Price of Options Issued Under Existing Agritope Plan. The per share exercise price of each Existing Epitope Option issued under the Existing Agritope Option Plan (which price is stated in terms of Agritope Stock) shall be reduced one day after the Distribution Date by subtracting from the stated exercise price the product of (a) the Agritope Stock Distribution Value, multiplied by (b) the number (which will be a fraction) of shares of Epitope Stock to be issued in lieu of each share of Agritope Stock for which the option is exercised. - 5 - (d) No Further Option Grants. Agritope shall not grant any additional options under the Existing Agritope Option Plan. 3.3 Effect of the Distribution on Change in Control Provisions. Nothing in this Agreement or in any amendment to the Epitope Option Plans, the Existing Agritope Option Plan or to any award agreement issued under any Plan shall be interpreted to modify the change in control provisions in any Existing Epitope Options. Existing Epitope Options shall continue to become immediately and fully vested and exercisable as to all shares covered by such option upon a Change in Control Date (as defined in the terms and conditions applicable to Existing Epitope Options). 3.4 Adoption of Agritope Option Plan. Prior to the Distribution Date, Agritope shall take, or cause to be taken, all action necessary and appropriate (i) to prepare and ratify the adoption of the Agritope Option Plan, and (ii) to present the Agritope Option Plan to Epitope, as the sole shareholder of Agritope, for approval. Agritope and Epitope shall cooperate in the adoption of the Agritope Option Plan and the reservation for issuance under the plan of such shares of Agritope Stock as are deemed necessary and appropriate by the Agritope Board. 3.5 Communication Regarding Termination Of Employment. Agritope shall notify Epitope of the termination of employment of any Agritope Employee holding an Existing Epitope Option within ten days of such termination. Such notice with respect to termination shall specify the date of termination, whether the termination was for cause or came as a result of retirement, and such other information as Epitope shall reasonably request. ARTICLE 4 STOCK PURCHASE PLANS 4.1 Epitope Purchase Plan. The Epitope Purchase Plan will continue in full force and effect in accordance with its terms. Participants under the Epitope Purchase Plan will be eligible to participate in the Distribution only to the extent that, by operation of the Epitope Purchase Plan or otherwise, they are shareholders of record on the Record Date; provided, however, that participants who are entitled to receive shares of Epitope Common Stock under the Epitope Purchase Plan as of the Record Date but have not yet been mechanically recorded as shareholders of record on the Record Date will be treated as shareholders of record for purposes of the Distribution. Employment by Agritope or any of its majority-owned subsidiaries following the Distribution Date shall not be deemed employment by Epitope for purposes of the Epitope Purchase Plan and any Agritope Employee shall be treated as a terminated employee under the Epitope Purchase Plan. For purposes of the continuing operation of the Epitope Purchase Plan, Epitope will adjust the Maximum Purchase Price (as defined in the Epitope Purchase Plan) to account for the effect of the Distribution by subtracting the Agritope Stock Distribution Value from the Maximum Purchase Price. - 6 - 4.2 Adoption of Agritope Purchase Plan. Prior to the Distribution Date, Agritope shall take, or cause to be taken, all action necessary and appropriate (i) to ratify the adoption of the Agritope Purchase Plan, and (ii) to present the Agritope Purchase Plan to Epitope, as the sole shareholder of Agritope, for approval. ARTICLE 5 OTHER BENEFIT PLANS 5.1 401(k) Retirement Plans. (a) Establishment of Agritope 401(k) Plan. Effective January 1, 1998, Agritope shall establish and thereafter administer the Agritope 401(k) Plan, in such form as may be approved by the Agritope Board, which is intended to qualify under Sections 401(a), 501(a) and 401(k) of the Code and to be in compliance with the requirements of ERISA. The Agritope 401(k) Plan will provide credit for services rendered to Epitope or any of its subsidiaries prior to the Distribution Date in determining Service Time. (b) Continuation of Benefits. Agritope Employees shall continue to be eligible to participate in the Epitope 401(k) Plan until such time as the Agritope 401(k) Plan is established and becomes effective. Effective as of the effective date of the Agritope 401(k) Plan, which is expected to be January 1, 1998, Agritope will provide benefits under the Agritope 401(k) Plan to all Agritope Employees who were participants in, or otherwise entitled to benefits under, the Epitope 401(k) Plan. All Agritope Employees who wish to participate in the Agritope 401(k) Plan will be required to enroll in the Agritope 401(k) Plan in accordance with its terms. (c) Vesting and Distribution of Accounts. Agritope Employees shall become fully vested (if not already fully vested) in their Matching Accounts, as defined under the Epitope 401(k) Plan, as of the Distribution Date. Agritope Employees shall be entitled to distribution from the Epitope 401(k) Plan of all of their accounts within a reasonable time after the Distribution Date. The Agritope 401(k) Plan shall accept a rollover contribution from any Agritope Employee who elects that their distribution from the Epitope 401(k) Plan be rolled over to the Agritope 401(k) Plan. (d) Epitope to Provide Information. Epitope shall provide Agritope, as soon as practicable after the Distribution Date, with a list of Agritope Employees who, to the best knowledge of Epitope, were participants in or otherwise entitled to benefits under the Epitope 401(k) Plan on the Distribution Date, together with a listing of each participant's Service Time under the Epitope 401(k) Plan and a listing of each such Agritope Employee's account balance thereunder. Epitope shall provide Agritope with such additional information in the possession of Epitope or Epitope's agent as may be reasonably requested by Agritope related to the effective administration of the Agritope 401(k) Plan. - 7 - (e) Cooperation. Agritope and Epitope shall, in connection with the plan-to-plan transfer described in , use their best efforts to cooperate in the plan-to-plan transfer of funds and in making any and all appropriate filings required by the Commission or the Internal Revenue Service, or required under the Code, ERISA, or any applicable securities laws and the regulations thereunder. (f) Effect of the Distribution. The Distribution and subsequent transfer of account balances shall not be treated as a termination or partial termination of the Epitope 401(k) Plan or of Agritope Employees under the Epitope 401(k) Plan. 5.2 Medical/Dental Plan Liability and Coverage. (a) Continuation of Coverages After the Distribution. Epitope shall continue to provide coverage to Agritope Employees under Epitope Medical/Dental Plans after the Distribution Date until such time as new medical/dental plans are established by Agritope. If during the period from the Distribution Date until the establishment of Agritope Medical and Dental Plans, Epitope, in its reasonable discretion, determines that continued coverage of Agritope Employees under Epitope Medical/Dental Plans will have an adverse effect on the business plans or strategies of Epitope, Epitope may, upon 90 days written notice to Agritope, terminate such coverage. After the Distribution Date, Agritope shall be responsible for all costs under the Epitope Medical/Dental Plans attributable to Agritope Employees, as shall be determined by Epitope in its reasonable discretion. (b) Agritope Medical/Dental Plans. Unless the parties otherwise agree, Agritope shall establish Agritope Medical/Dental Plans to provide coverages to Agritope Employees substantially similar to those available under the corresponding Epitope Medical/Dental Plans on or before January 1, 1999. In connection with the establishment of Agritope Medical/Dental Plans, Agritope Employees and their eligible dependents and beneficiaries shall have no preexisting condition limitation imposed other than that which is or was imposed under the plan or plans in which they were enrolled before the date Agritope Medical/Dental Plans are established and become effective (the "Cutoff Date"), and will be credited with any expenses incurred toward deductibles, out-of-pocket expenses, maximum benefit payments, and any benefit usage toward plan limits that would have been applicable under the plan or plans in which they were enrolled before the Cutoff Date. (c) Responsibility for Coverages after the Cutoff Date. Immediately after the Cutoff Date, Agritope shall provide coverage to Agritope Employees under Agritope Medical/Dental Plans. Epitope Medical/Dental Plans shall continue to be responsible for claims that arise prior to the Cutoff Date subject to the cost reimbursement provisions set forth in Section . - 8 - (d) COBRA. Epitope shall be responsible for complying with the requirement of Code Section 4980B and Part 6 of Title I of ERISA ("COBRA Requirements") with respect to any Employee in its group health plan and their "qualified beneficiaries" whose "qualifying event" (as such terms are defined in Code Section 4980B) occurs prior to the Distribution Date. After the Distribution Date, Agritope shall be responsible for compliance with COBRA Requirements with respect to Agritope Employees whose "qualifying event" occurs on or after the Distribution Date. (e) No Qualifying Event. The Distribution described in the Separation Agreement shall not, by itself, create a "qualifying event" (as described in Code Section 4980B(f)(3) and ERISA Section 603). (f) Refunds. In the event that subsequent to the Cutoff Date, refunds are received from carriers providing medical or dental insurance, such refunds will belong to Epitope, to the extent attributable to Epitope Employees. Agritope shall receive such refunds to the extent attributable to Agritope Employees, as shall be determined by Epitope in its reasonable discretion. 5.3 Life Insurance/Accidental Death and Dismemberment Coverages. (a) Continuation of Coverages After the Distribution. Epitope shall continue to provide coverage to Agritope Employees under Epitope's Additional Insurance Plans after the Distribution Date until such time as Additional Insurance Plans are established by Agritope. If during the period from the Distribution Date until the establishment by Agritope of Additional Insurance Plans, Epitope, in its reasonable discretion, determines that continued coverage of Agritope Employees under Epitope's Additional Insurance Plans will have an adverse effect on the business plans or strategies of Epitope, Epitope may, upon 90 days' written notice to Agritope, terminate such coverage. After the Distribution Date, Agritope shall be responsible for all costs under Epitope's Additional Insurance Plans attributable to Agritope Employees, as shall be determined by Epitope in its reasonable discretion. (b) Agritope's Additional Insurance Plans. Unless the parties otherwise agree, Agritope shall establish Additional Insurance Plans to provide coverages to Agritope Employees substantially similar to those available under Epitope's corresponding Additional Insurance Plans on or before January 1, 1999. (c) Responsibility for Coverages. Immediately after Agritope's Additional Insurance Plans become effective, Agritope shall be solely responsible for providing all coverages relating to Additional Insurance Plans to Agritope Employees. - 9 - 5.4 Vacation And Sick Pay Liabilities. Effective on the Distribution Date, Epitope shall retain, as to Epitope Employees, and Agritope shall assume or retain, as the case may be, as to Agritope Employees, all liabilities (whether vested or unvested, and whether funded or unfunded) for vacation and sick leave accrued as of the Distribution Date. Agritope shall be solely responsible for the payment of such vacation or sick leave to Agritope Employees after the Distribution Date. Each of Epitope and Agritope shall provide to its own Employees on the Distribution Date the same vested and unvested balances of vacation and sick leave as credited to such Employee on the Epitope payroll systems as of the Distribution Date. Nothing in this Agreement shall be construed to limit the right of either Epitope or Agritope to change its vacation or sick leave policies as it deems appropriate. 5.5 Flexible Spending Accounts. Effective as of the Distribution Date, Agritope shall establish Flexible Spending Account Plans that are substantially equivalent to those currently provided by Epitope. Spending account balances for Agritope Employees will not be transferred by Epitope to the new plans established by Agritope. Agritope Employees will have 90 days after the Distribution Date to make claims for payment from their existing spending account balances. ARTICLE 6 RELATED MATTERS 6.1 Notice of Costs. Epitope and Agritope acknowledge that Epitope and Agritope may have incurred or may incur costs and expenses, including, but not limited to, contributions to Plans and the payment of insurance premiums arising from or related to any of the Plans that are, as set forth in this Agreement, the responsibility of the other party hereto. Accordingly, Epitope and Agritope shall (i) give notice to the other party of the costs and expenses incurred or the costs and expenses to be incurred and (ii) demand that the other party, if it has the obligation to pay, pay or reimburse the cost and expense. 6.2 Payroll Reporting And Withholding. (a) Agritope and Epitope hereby adopt the "standard procedure" for preparing and filing IRS Forms W-2 (Wage and Tax Statements) and W-3 (Transmittal of Income and Tax Statements), as described in Section 4 of Revenue Procedure 96-60 ("Rev. Proc. 96-60"). Under this procedure Epitope must perform all reporting duties for the wages and other compensation it has paid to Employees prior to the Distribution Date, including the furnishing and filing of Forms W-2 and W-3. Agritope will be responsible for all reporting duties for the wages and other compensation it pays to Agritope Employees. (b) Epitope will keep on file all Forms W-4 (Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit Advance Payment Certificate) provided by Agritope Employees. Agritope Employees must provide Agritope with new Forms W-4 and W-5 for the year in which the Distribution occurs. - 10 - (c) With respect to Agritope Employees with garnishments, tax levies, child support orders, qualified medical child support orders, and wage assignments in effect with Epitope on the Distribution Date, Agritope shall be responsible for honoring such payroll deduction authorizations or court or governmental orders applicable to Agritope Plans, and will continue to make payroll deductions and payments to any authorized payee, as specified by the court or governmental order that was filed with Epitope. Epitope shall provide Agritope with full information about any such matters before the Distribution Date. (d) Unless otherwise prohibited by law or provided by this Agreement or another agreement entered into in connection with the Distribution, or by a Plan document, with respect to Agritope Employees with authorizations for payroll deductions in effect with Epitope on the Distribution Date, Agritope as the successor employer will honor such payroll deduction authorizations relating to each Agritope Employee, and shall not require that such Agritope Employee submit a new authorization to the extent that the type of deduction by Agritope does not differ from that made by Epitope. Any such payroll deduction in favor of Epitope shall continue to be withheld by Agritope for Epitope's benefit. 6.3 Access to Records and Confidentiality. Epitope shall retain all employment records, personnel files, and other information relating to Epitope Employees and payroll records relating to Agritope Employees. Agritope shall take possession of all personnel and employment records, except payroll records, relating to Agritope Employees after the Distribution Date. Agritope and Epitope will make available to the other party such records, documents, and other information relating to employment matters involving Agritope Employees and other matters covered in this Agreement as may be reasonably requested. The parties shall cooperate in providing any information necessary for the resolution of any dispute that may arise between Epitope or Agritope and any third party arising out of subject matter covered by this Agreement after the Distribution Date. Epitope and Agritope will each, upon adequate notice and reasonable request, make its employees and facilities available to the other party and shall permit the other party to copy at its own expense records relating to Agritope Employees as necessary and appropriate. Except as required by law or with the prior written consent of Epitope and any affected Employee, all records, documents, and other information provided to Agritope by Epitope related to Agritope Employees and other matters covered in this Agreement shall be kept confidential by Agritope and its representatives and shall not be disclosed to any other person or entity. ARTICLE 7 EMPLOYMENT MATTERS 7.1 Separate Employers. After the Distribution Date, Epitope and Agritope will be separate and independent employers. - 11 - 7.2 Employment Policies And Practices. Epitope and Agritope may adopt such employment policies, compensation practices, retirement plans, welfare benefit plans, and other employee benefit plans or policies of any kind or description, as each may determine, in its sole discretion, are necessary and appropriate, in addition to those required under this Agreement. Except as otherwise expressly provided herein, no provision of this Agreement shall be construed as a limitation on the right of Epitope or Agritope to amend or terminate any policies, practices, or Plan. 7.3 Funding Of Plans. Any claims by or on behalf of Employees or any federal, state or local government agency for alleged underfunding of, or failure to make payments to, health and welfare funds based on acts or omissions occurring on or before the Distribution Date or arising from or in connection with the Distribution, will be the sole responsibility of each party as to its own employees (i.e., Epitope with respect to Epitope Employees and Agritope with respect to Agritope Employees). 7.4 Employment Tax Rates. Agritope shall comply with ORS Chapter 657 in determining whether to assume the state unemployment tax experience of Epitope for purposes of establishing its own unemployment tax experience rates. ARTICLE 8 MISCELLANEOUS 8.1 Indemnification. Each party to this Agreement shall indemnify, defend, and hold harmless the other party against losses incurred as a result of claims relating to matters covered in this Agreement to the extent provided in the Separation Agreement. In addition, subject to the indemnification procedures set forth in the Separation Agreement: (a) Indemnification by Epitope. Epitope shall indemnify, defend, and hold harmless Agritope and its subsidiaries from and against any liabilities incurred as a result of claims made against Agritope by Epitope Employees relating to or arising out of employment of Epitope Employees by Epitope after the Distribution Date, employee benefits provided to Epitope Employees after the Distribution Date, or termination in connection with the Distribution of any Employee who becomes or remains an Epitope Employee on or after the Distribution Date; and (b) Indemnification by Agritope. Agritope shall indemnify, defend, and hold harmless Epitope and any future subsidiary of Epitope from and against any liabilities incurred as a result of claims made against Epitope by Agritope Employees relating to or arising out of employment of Agritope Employees by Agritope after the Distribution Date, employee benefits provided to Agritope Employees after the Distribution Date, or termination in connection with the Distribution of any Employee who becomes or remains an Agritope Employee on or after the Distribution Date. - 12 - 8.2 No Third-Party Beneficiaries. No provision of this Agreement shall be construed to create a right in any Employee, or dependent or beneficiary of such Employee, including without limitation any right under a Plan which such person would not otherwise have under the terms of the Plan itself. This Agreement is for the benefit of the parties hereto and is not intended to confer upon any other person except the parties hereto any rights or remedies. 8.3 Attorney-Client Privilege. Consistent with the provisions of Section 6.6 of the Separation Agreement, provisions requiring either party to this Agreement to cooperate shall not be deemed to be a waiver of the attorney/client privilege for either party nor shall they require either party to waive its attorney/client privilege. 8.4 Dispute Resolution. Any disputes between the parties arising out of or related to this Agreement shall be resolved or decided as set forth in the Separation Agreement. 8.5 Relationship of the Parties. Neither party is an agent of the other party and neither party has any authority to bind the other party, transact any business in the other party's name or on its behalf, or make any promises or representations on behalf of the other party unless otherwise agreed to in writing. Each party will perform all of its respective obligations under this Agreement as an independent contractor. 8.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior written or oral agreements between the parties with respect to the subject matter hereof, including the Employee Benefits Agreement between the parties dated as of December 1, 1997. 8.7 Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the state of Oregon. 8.8 Jurisdiction and Venue. Subject to the arbitration provisions of the Separation Agreement, each party consents to the personal jurisdiction of the state and federal courts located in the state of Oregon and hereby waives any argument that venue in any such forum is not convenient or proper. 8.9 Notices. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given (i) on the date of service if served personally on the party to whom notice is given; (ii) on the day of transmission if sent via facsimile transmission to the facsimile number given below, provided telephonic confirmation of receipt is obtained promptly after completion of transmission; (iii) on the business day after delivery to an overnight courier service or the express mail service maintained by the United States Postal Service, provided receipt of delivery has been confirmed; or (iv) on the fifth day after mailing, provided receipt of delivery is confirmed, if mailed to the party to whom notice is to be given, by registered or certified mail, postage prepaid, properly addressed and return-receipt requested, to the party as follows: - 13 - If to Epitope: Epitope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Facsimile No. (503) 641-8665 If to Agritope: Agritope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Facsimile No. (503) 520-6196 Any party may change its address and facsimile number by giving the other party written notice of its new address and facsimile number in the manner set forth above. 8.10 Modification of Agreement. No modification, amendment or waiver of any provision of this Agreement shall be effective unless the same shall be in writing and signed by each of the parties hereto and then such modification, amendment or waiver shall be effective only in the specific instance and for the purpose for which given. 8.11 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, but neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either party without the prior written consent of the other party, and such consent shall not be unreasonably withheld. 8.12 Titles and Headings. Titles and headings included are for convenience and are not intended to constitute a part of or to affect the meaning or interpretation of this Agreement. 8.13 Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable, the enforceability of the remaining provisions hereof shall not in any way be affected or impaired thereby. 8.14 No Waiver. Neither the failure nor any delay on the part of any party hereto to exercise any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or further exercise of the same or any other right, nor shall any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. 8.15 Survival. All covenants and agreements of the parties contained in this Agreement will survive for five years following the Distribution Date. - 14 - 8.16 Counterparts. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement, and shall become a binding agreement when a counterpart has been signed by each party and delivered to the other party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered as of the date first written above. EPITOPE, INC. By: Its: AGRITOPE, INC. By: Its: - 15 - EX-10.25 12 TRANSITION SERVICES AND FACILITIES AGREEMENT TRANSITION SERVICES AND FACILITIES AGREEMENT This TRANSITION SERVICES AND FACILITIES AGREEMENT (this "Agreement"), dated as of December 1, 1997, is between EPITOPE, INC., an Oregon corporation ("Epitope"), and AGRITOPE, INC., a Delaware corporation ("Agritope"). Agritope desires to engage Epitope to provide certain services and facilities for Agritope, and Epitope desires to provide such services and facilities for Agritope, on the terms and conditions set forth herein. Capitalized terms not otherwise defined shall have the meanings given in Section 6. Epitope and Agritope agree as follows: 1. Services. Agritope hereby engages Epitope to provide Services to Agritope at such times as Agritope may reasonably request. In performing Services, Epitope shall use the same degree of care that it uses in connection with its own business. Nothing in this Agreement shall require Epitope to provide Services at a time or in a manner that would interfere with the normal conduct of Epitope's business. 2. Facilities. Epitope hereby agrees to provide Facilities to Agritope until such time as Agritope relocates its office and research and development operation to other leased Facilities. 3. Subcontractors. With Agritope's consent, which shall not be unreasonably withheld, Epitope may engage third parties to provide Services under this Agreement to Agritope. Epitope may do so without Agritope's consent for Services usually provided to Epitope by third parties. 4. Payments for Services and Facilities. 4.1 Services Payments. Agritope shall reimburse Epitope for all Services Costs. After the end of each month or such other period as the parties may agree, Epitope shall submit an invoice to Agritope for Services Costs incurred during the period. Any delay in delivering the invoice shall not relieve Agritope of its reimbursement obligations. Agritope shall pay the amount of each invoice within 10 days after receiving it. Amounts not paid when due shall, at Epitope's option, accrue late charges at the rate of 1.5 percent per month. 4.2 Calculation of Services Costs. "Services Costs" are all direct and indirect costs incurred by Epitope in providing Services, whether paid or accrued. Services Costs shall be determined using Epitope's internal cost accounting system. Epitope shall allocate costs of personnel who provide services to both Epitope and Agritope, and indirect costs such as general and administrative costs, on a reasonable basis consistent with Epitope's internal cost accounting system. Upon reasonable notice to Epitope, Agritope personnel shall have the right to review Epitope records to verify the determination of Services Costs. 4.3 Facilities Payment. Agritope shall pay Epitope a monthly fee of $15,945 for use of the Facilities on the first day of each month. 5. Term and Termination. 5.1 Initial Term and Renewals. The initial term of this Agreement shall expire on December 31, 1997, but this Agreement shall continue in effect for successive one-month terms thereafter unless either party gives the other written notice of termination at least 15 days before expiration of any term. 5.2 Termination. Either party may terminate this Agreement effective immediately upon written notice to the other party if such other party fails to perform any of its material obligations under this Agreement and such failure continues for a period of 60 days, or 10 days in the case of a failure to make payment, after written notice thereof from the non-breaching party. 6. Definitions. Capitalized terms not otherwise defined in this Agreement shall have the respective meanings set forth below: 6.1 "Affiliate" of a Person means a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with such Person. 6.2 "Agritope Personnel" means Agritope, its successors and assigns, and the directors, officers, employees, and agents thereof. 2 6.3 "Facilities" means the portion of Epitope's office space and research and development facilities in Beaverton, Oregon, consisting of approximately 6,300 square feet of office, manufacturing and laboratory space currently used by Agritope and the related fixtures and furniture. 6.4 "Force Majeure" means any act of nature, accident, explosion, fire, storm, earthquake, flood, drought, peril of the sea, riot, embargo, war, foreign, federal, state or municipal order of general application, seizure, requisition, allocation, failure or delay of transportation, shortage of supplies, equipment, fuel or labor, or other circumstance or event beyond the reasonable control of affected party. 6.5. "Services" means the services listed in Schedule A, as amended from time to time, and any other services requested by Agritope that Epitope agrees to provide. 6.6. "Services Costs" has the meaning given in Section 4.2. 7. General. 7.1 Amendments. Any modification of this Agreement or waiver of terms must be in writing and signed by the party to be bound. 7.2 Assignment. Except as provided below or in Section 3, neither may assign its rights or delegate its obligations under this Agreement without the written consent of the other party. Epitope may assign its rights and delegate its obligations to an Affiliate or a successor to Epitope's business if the Affiliate or successor assumes all of Epitope's obligations under this Agreement. 7.3 Attorney Fees. In any litigation concerning this Agreement, the prevailing party shall be entitled to recover all reasonable expenses of litigation, including reasonable attorney fees at trial and on any appeal or petition for review. 7.4 Execution in Counterparts. This Agreement may be executed in counterparts which together shall constitute one instrument. 7.5 Entire Agreement. This Agreement constitutes the entire agreement and understanding between the parties with respect to its subject matter and supersedes any prior agreement or understanding. 3 7.6 Force Majeure. Neither party shall be liable for any failure or delay in performing its obligations, other than payment obligations, caused by Force Majeure. The other party may, however, terminate this Agreement as permitted in Section 5.2 if such failure or delay continues for more than 60 days. 7.7 Governing Law. This Agreement shall be governed by and construed in accordance with Oregon law. 7.8 Headings. Headings in this Agreement are for convenience only and shall not affect its meaning. 7.9 No Agency. Nothing in this Agreement creates any partnership, employment or agency relationship between the parties. Neither party shall have the right to act on behalf of or bind the other, and neither shall take any action that could lead a third party to believe it has the right to do so. 7.10 Notices. Notices under this Agreement shall be in writing, shall refer specifically to this Agreement, and shall be personally delivered, sent by electronic facsimile transmission promptly confirmed by mail, or sent by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address or facsimile number specified below (or such other address or number as may be specified by notice to the other party): Epitope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Attention: President Fax: (503) 641-8665 Agritope, Inc. 8505 S.W. Creekside Place Beaverton, Oregon 97008 Attention: President Fax: (503) 520-6196 Any notice or communication given in conformity with this Section 7.10 shall be deemed to be effective when received by the addressee, if delivered by hand or electronic facsimile transmission, or three days after mailing, if mailed. 7.11 Severability. If any provision of this Agreement is held invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (a) the affected provision shall remain in full force and effect in all other jurisdictions, (b) all other provisions shall remain in full 4 force and effect, and (c) the parties will use their best efforts to find and employ other means to achieve the same or substantially the same result as that contemplated by the provision held invalid or unenforceable. The parties have executed this Agreement as of the date first stated above. EPITOPE, INC. By /s/ John W. Morgan President and Chief Executive Officer AGRITOPE, INC. By /s/ Adolph J. Ferro Chairman, President and Chief Executive Officer 5 SCHEDULE A ---------- 1.Management information services consisting of software support and hardware maintenance at the rate of $1,690 per month. 2. Telephone services based on third-party billings. 3. Equipment maintenance, other than computer hardware, on call at the rate of $25 per hour. 4. Front desk receptionist services at no charge (Agritope will provide its own telephone receptionist services). EX-10.26 13 TAX ALLOCATION AGREEMENT TAX ALLOCATION AGREEMENT This agreement (the "Agreement") dated as of December 1, 1997, is being entered into by Epitope, Inc., an Oregon corporation, and Agritope, Inc., a Delaware corporation, in connection with a Separation Agreement (the "Separation Agreement") dated as of December 1, 1997 by and between such parties. RECITALS A. Agritope is currently a wholly owned subsidiary of Epitope, and, as such, Epitope and Agritope have joined in filing consolidated federal Tax Returns (as defined below) and certain consolidated, combined or unitary state, local, or foreign Tax Returns; B. Pursuant to the Separation Agreement, Epitope will, among other things, distribute to holders of its common stock all the issued and outstanding common stock of Agritope, together with associated preferred stock purchase rights (the "Distribution"); C. Following the Distribution, Epitope and Agritope will be operated as independent public companies, and Agritope will no longer be a wholly owned subsidiary of Epitope; and D. Epitope and Agritope want to provide for the allocation between the Epitope Group and the Agritope Group (both defined below) of all responsibilities, liabilities, and benefits relating to or affecting Taxes (defined below) paid or payable by either of them for all taxable periods, whether beginning before or after the Distribution Date (defined below) and to provide for certain other matters. ACCORDINGLY, in consideration of the foregoing and the mutual covenants and agreements contained in this Agreement, Epitope and Agritope agree as follows: 1. ADDITIONAL DEFINITIONS; CERTAIN TAX PERIODS. 1.1 ADDITIONAL TAX DEFINITIONS. As used in this Agreement, capitalized terms defined immediately after their use will have the respective meanings so provided, and the following additional terms will have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Agritope" means Agritope, Inc., a Delaware corporation, the successor corporation in that certain merger with Agritope, Inc., an Oregon corporation, dated December 1, 1997. 1 "Agritope Group" means Agritope and all of its present and future subsidiaries. "Agritope Taxes" means, subject to Section 1.3, (i) all Taxes imposed on, assessed against, collected with respect to, or measured by the net or gross income, profits, receipts, assets, equity, or other basis related to the Agritope Group or its respective assets or operations that arise in or are attributable to any and all Pre-Closing Periods and Post-Closing Periods and (ii) all Reserved Taxes. "Agritope Tax Returns" means all Tax Returns filed or required to be filed by or with respect to any member of the Agritope Group or its assets or operations (including any consolidated, combined, or unitary Tax Returns). "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Distribution Date" means the date on which Epitope distributes the stock of Agritope in accordance with the Separation Agreement. "Epitope" means only Epitope, Inc., an Oregon corporation, as a separate legal entity, excluding all other affiliated corporations. "Epitope Group" means Epitope and all of its present and future subsidiaries (excluding members of the Agritope Group). "Epitope Taxes" means, subject to Section 1.3, all Taxes imposed on, assessed against, collected with respect to, or measured by the net or gross income, profits, receipts, assets, equity, or other basis related to the Epitope Group or its respective assets or operations that arise in or are attributable to any and all Pre-Closing Periods, excluding any Reserved Tax and excluding any Agritope Taxes. "Pre-Closing Periods" means all taxable periods (i) ending on or before the Distribution Date and (ii) the portion, to and including the Distribution Date, of any taxable period that begins on or before the Distribution Date and ends after the Distribution Date. "Post-Closing Periods" means all taxable periods (i) beginning after the Distribution Date and (ii) the portion after the Distribution Date of any taxable period that begins on or before the Distribution Date and ends after the Distribution Date. "Reserved Tax" means a Tax liability separately accrued or deferred on the balance sheet of any member of the Agritope Group as of the Distribution Date. Taxes will be accrued on such balance sheet in a manner consistent with past practices. 2 "Tax" means any and all liability for any taxes imposed on the income or assets of a corporation, including without limitation, any liability under the Code and all federal, state, local, and foreign income, alternative minimum, franchise, profits, gross receipts, and unitary taxes or similar taxes or other fees or assessments imposed with respect to such items irrespective of the basis on which such taxes are measured and any interest, penalties, or additions in respect of such tax. "Tax Return" means any return, report, information return, or other documents (including any related supporting schedules, statements or information) filed or required to be filed with any tax authority or governmental entity in connection with the determination, assessment, or collection of any Taxes of any party or the administration of any laws, regulations, or administrative requirements relating to any such Taxes. 1.2 TAX PERIODS INCLUDING PRE-CLOSING PERIOD AND POST-CLOSING PERIOD ACTIVITY. For purposes of determining Agritope Taxes, for Tax periods that begin on or before the Distribution Date and end after the Distribution Date, such Taxes will be determined on the basis of an interim "closing of the books" computation as of the end of the Distribution Date, and any net operating losses (or other tax attributes) will be subject to Section 1.3. With respect to the Epitope federal consolidated income tax return for the taxable year including the Distribution Date, appropriate allocation and cutoff of income or loss will be made as required in the federal consolidated income tax return regulations. Any subsequent adjustments occurring with respect to such period, including the Distribution Date, will be appropriately allocated to the Pre-Closing Period and the Post-Closing Period based on a simulated Tax Return for each period. 1.3 PRE-CLOSING PERIOD NET OPERATING LOSSES. (a) In accordance with Treasury Regulations Section 1.1502-11(b), net operating losses of the Agritope Group will not be used to offset gain or income recognized by Epitope in connection with the Distribution. (b) Subject to the limitations of Section 1.3((a)), any net operating losses (or other tax attributes) of a member of the Agritope Group or Epitope Group that arise in a Pre-Closing Period will be available to offset taxable income of members of the other group for such Pre-Closing Period under applicable federal or state law. The provisions of this Section 1.3((b)) will apply to any net operating losses (or other tax attributes) existing on the Distribution Date and such net operating losses (or tax attributes) that may arise subsequently on audit or examination of any Pre-Closing Period. No member of a group will be liable to a member of the other group under Section 2 for using net operating losses (or other tax attributes) generated by members of such other group. 3 2. INDEMNIFICATION AND PAYMENT 2.1 PAYMENT OF AND INDEMNIFICATION FOR TAXES. (a) Epitope will pay when due, without setoff, and be responsible for all Epitope Taxes assessed against it by any jurisdiction, including any Taxes incurred by the Epitope Group in connection with the Distribution. Epitope will indemnify and hold harmless the Agritope Group against any and all such Taxes. (b) Agritope will pay when due, without setoff, and be responsible for all Agritope Taxes assessed against it by any jurisdiction, including, without limitation, any liability imposed subsequently for Agritope Taxes for Pre-Closing Periods. Agritope will indemnify and hold harmless the Epitope Group against any such Taxes. (c) No member of the Epitope Group will be obligated to indemnify or hold harmless any member of the Agritope Group for any decrease to any net operating loss carryovers or credit (or the carryovers of any other tax attributes) available to any member of the Agritope Group resulting from adjustments to any item of income, deduction, credit, or exclusion on Tax Returns for which Epitope is responsible (including the Epitope Consolidated Returns, as defined below). (d) No member of the Agritope Group will be obligated to indemnify or hold harmless any member of the Epitope Group for any increase to any net operating loss carryovers or credit (or the carryovers of any other tax attributes) available to any member of the Agritope Group. 3. REFUNDS 3.1 EPITOPE REFUNDS. Agritope will promptly assign and remit (or cause to be promptly assigned and remitted) to Epitope an amount equal to any refunds of or credits against any Taxes received and realized by Agritope (including interest, if any) to the extent attributable to Epitope Taxes, other than a refund or credit (or the right to a refund or credit) that is reflected on the balance sheet of Agritope as of the Distribution Date (a "Balance Sheet Refund"). 3.2 AGRITOPE REFUNDS. Epitope will promptly assign and remit (or cause to be promptly assigned and remitted) to Agritope an amount equal to all Balance Sheet Refunds. 3.3 CARRYBACK FROM AN AGRITOPE POST-CLOSING PERIOD RETURN TO ANY EPITOPE SEPARATE, CONSOLIDATED OR COMBINED FEDERAL OR STATE TAX RETURN. Unless: (i) Epitope, in its sole and absolute discretion, consents to do so or (ii) such carryback is specifically required by law, Agritope will not carry back any losses or credits accruing 4 after the Distribution Date in any Post-Closing Period to any Epitope separate, consolidated, or combined federal or state Tax Return. Agritope will make any elections and take all such actions necessary to avoid and relinquish any such carryback pursuant to Code Section 172(b)(3) and, to the extent feasible, any similar provision of any state, local, or foreign law. Even if such carryback is required by law, the Epitope Group will make no payment to the Agritope Group, and the Agritope Group will be entitled to no refund to the extent that the use of such carryback prevents the Epitope Group or its affiliates from using a credit or loss that it would otherwise use in the year or years to which the Agritope credit or loss is carried back. To the extent that the Epitope Group's utilization of such loss or credit does not have such effect, however, the Epitope Group will pay to Agritope an amount equal to the reduction in its Tax liability for such year that is attributable to the utilization of such Agritope Group credit or loss. 4. TAX RETURNS 4.1 PREPARATION AND FILING. (a) Epitope will file (upon execution of such Tax Return by an authorized officer of Agritope, which authorization will not be unreasonably withheld) all Agritope Group Tax Returns for Pre-Closing Periods ("Agritope Group Pre-Closing Returns"), including, without limitation, all Agritope Group Tax Returns that are (or are a part of) a consolidated or combined Tax Return that includes entities other than members of the Agritope Group, even if the Tax period with respect to such other entities ends after the Distribution Date ("Epitope Consolidated Returns"). (b) Epitope will prepare the Epitope Consolidated Returns (to the extent they relate to the Agritope Group or its assets or operations) and the Agritope Group Pre-Closing Returns in a manner that: (i) is consistent with prior practice (including without limitation as to Tax and accounting methods, conventions, and elections) and (ii) apportions items equitably from period to period consistent with Section 1.2. Epitope will cause the Epitope Consolidated Returns to include and reflect the activities, transactions, and operations of the Agritope Group for all Pre-Closing Periods. (c) Agritope will file all Agritope Group Tax Returns required to be filed for all Post-Closing Periods other than Agritope Group Pre-Closing Returns and Epitope Consolidated Returns (the "Agritope Group Post-Closing Returns"). However, with respect to an Agritope Group Post-Closing Return that is for (i) Taxes of Agritope and (ii) a Tax year with respect to the Agritope Group that begins on or before the Distribution Date (an "Agritope Overlap Return"), Agritope will (a) have a national "Big 6" accounting firm prepare the Agritope Overlap Return consistent with prior practice, including, without limitation, as to Tax and accounting methods, conventions, and elections and (b) provide Epitope with an opportunity to review and comment on such Tax Return at least four weeks before its due date, including extensions. The parties will use all reasonable efforts to resolve any disagreements with respect to any such Tax Return as soon as possible. If 5 they cannot resolve the matter before the due date for such Agritope Overlap Return, including extensions, Agritope may nevertheless file such Tax Return. Subsequently, the parties will refer the matter to a mutually acceptable accounting firm (other than the firm that prepared the returns) of nationally recognized standing (an "Independent Firm") whose fees are to be borne by Agritope and Epitope equally. The Independent Firm will seek to resolve the matter as soon as practicable. Upon the Independent Firm's determination, an amended Agritope Overlap Return will be filed in accordance with such determination if it differs materially from the Tax Return filed originally. (d) Agritope, upon its request, will be entitled to copies of Agritope Group Pre-Closing Returns and Epitope Consolidated Returns following the filing to the extent they relate to any member of the Agritope Group. 4.2 TAX RETURN PAYMENTS. Amounts shown due on any Agritope Group Tax Returns will be timely paid by the party responsible for such Taxes as determined in accordance with Section 2 of this Agreement (the "Responsible Party") regardless of which party is obligated to prepare or file such Agritope Group Tax Return under this Section 4. The party obligated to file a particular Agritope Group Tax Return (the "Filing Party") has the right, but not the obligation unless it is the Responsible Party, to pay the Tax shown due, in which case the Responsible Party will immediately reimburse the Filing Party for the payment of such Tax. 5. INFORMATION EXCHANGE AND CONFIDENTIALITY 5.1 COOPERATION. Upon the reasonable request of any party to this Agreement, the other party will promptly provide the requesting party with such cooperation and assistance, documents, and other information as may reasonably be requested by such party in connection with: (i) the preparation and filing of any original or amended Tax Return; (ii) the conduct of any audit or other examination or any judicial or administrative proceeding involving to any extent Taxes or Tax Returns within the scope of this Agreement; or (iii) the verification by a party of an amount payable to or receivable from another party under this Agreement (collectively, "Tax Data"). Such cooperation and assistance will include, without limitation: (i) the provision on demand of books, records, Tax Returns, documentation, or other information relating to any relevant Tax Return; (ii) the execution of any document that may be necessary or reasonably helpful in connection with the filing of any Tax Return or in connection with any audit, proceeding, suit, or action of the type generally referred to in the preceding sentence; (iii) the prompt and timely filing of appropriate claims for refund; and (iv) the use of reasonable efforts to obtain any documentation from a governmental authority or a third party that may be necessary or helpful in connection with the foregoing (collectively, "Tax Documentation"). Each party will make its employees and facilities available on a mutually convenient basis to facilitate such cooperation. 6 5.2 RETENTION. The Tax Data and the Tax Documentation will be retained until the later of (i) 90 days after the expiration of the applicable statute of limitations (including any waivers or extensions for any Taxes or net operating loss carryovers available in any tax year); (ii) eight (8) years after the Distribution Date; and (iii) any retention period required by law or pursuant to any record retention agreement; provided, however, if an audit, examination, investigation, or other proceeding is instituted before the expiration of the applicable statute of limitations (or in the event of any claim under this Agreement), such Tax Data and Tax Documentation will be retained until there is a final determination and the time for any appeal has expired. 5.3 EXPENSES. Subject only to the provisions of Section 6, each party will cooperate in the manner described in this Section 5 at its own expense. 5.4 NOTIFICATION OF CARRYOVERS. Epitope will undertake reasonable efforts to notify Agritope of (i) any carryover of losses or credits that could be partially or totally attributed to and carried over by Agritope pursuant to Treasury Regulations Section 1.1502-79 or any similar law, rule or regulation and (ii) any subsequent adjustment that could affect any such item. 5.5 NOTIFICATION TO SHAREHOLDERS. Epitope will undertake reasonable efforts to provide each Epitope shareholder who receives Agritope Common Stock pursuant to the Separation Agreement with the information necessary to permit such shareholder to properly report the receipt of shares of Agritope stock in the Distribution for federal income tax purposes. 5.6 CONFIDENTIALITY. Except as required by law or with the prior written consent of the other party, all (i) Tax Returns, (ii) Tax Data, (iii) Tax Documentation, (iv) similar documents, schedules, work papers and items, and (v) all information contained in such items which are within the scope of this Agreement will be kept confidential by the parties and their representatives, will not be disclosed to any other person or entity, and will be used only for the purposes provided in this Agreement. 6. CONTESTS AND AUDITS 6.1 NOTICE AND COOPERATION. (a) If any claim, demand, assessment (including a notice of proposed assessment), or other assertion, whether oral or written, is made for Taxes ("Tax Claim") against a party entitled to indemnification with respect to such Taxes pursuant to this Agreement (an "Indemnitee"), or if the Indemnitee receives any notice, whether oral or written, from any jurisdiction with respect to any current or future audit, examination, investigation or other proceeding ("Proceeding"), the Indemnitee will promptly notify the party obligated to so indemnify the Indemnitee (the "Indemnitor") of such Tax Claim or 7 notice of a Proceeding. If an Indemnitor receives notice of a Tax Claim or notice of a Proceeding, whether oral or written, for which the Indemnitor is responsible under this Agreement, such Indemnitor will promptly notify the Indemnitee of such claim, demand, or assessment if such Tax Claim or Proceeding could directly or indirectly affect (adversely or otherwise) any Indemnitee, determined without regard to this Agreement. (b) The party controlling the defense, settlement, or compromise of any Proceeding or any Tax Claim with respect to a Tax Return or any Tax (as determined pursuant to Section 6.2) will keep the other party duly informed of the progress of such Proceeding or Tax Claim to the extent such Proceeding or Tax Claim could directly or indirectly affect (adversely or otherwise) such other party, determined without regard to this Agreement. (c) If the Indemnitor controls the defense, settlement or compromise of any Proceeding or Tax Claim for which it is responsible, the Indemnitee will nevertheless cooperate in such defense, settlement, or compromise as and to the extent reasonably requested by Indemnitor. Such cooperation will be at Indemnitor's expense (on a current basis), including all liabilities, costs, and expenses (including reasonable attorney fees and accounting fees but excluding in-house legal or tax assistance) incurred in connection with such cooperation and authorized by the Indemnitor. (d) If the Indemnitor does not control the defense, settlement, or compromise of any Proceeding or Tax Claim for which it is responsible, it will nevertheless (i) cooperate at its own expense in such defense, settlement, or compromise to the extent reasonably requested by Indemnitee, and (ii) indemnify (on a current basis) the Indemnitee against any reasonable liabilities, costs, and expenses (including reasonable attorney and accounting fees but excluding in-house legal or tax assistance) arising out of or incident to the Proceeding or Tax Claim, including without limitation, those incurred in connection with the defense, settlement, or compromise of such Proceeding or Tax Claim. 6.2 CONTROL. (a) Except as otherwise provided in Section 6.2((b)) or Section 6.3, the Indemnitor will have the right to control the defense, settlement, or compromise of any Proceeding or Tax Claim to the extent that it may be liable under Section 2 of this Agreement. (b) Notwithstanding the provisions of Section 6.2((a)) (and subject to the provisions of Section 6.3): (1) an Indemnitee (in lieu of the Indemnitor) will have the right (but not the obligation) to control the defense, compromise, or settlement of any Proceeding or Tax Claim if the Indemnitor fails to do so or requests the Indemnitee to do so; 8 (2) an Indemnitee (in lieu of the Indemnitor) will have the right (but not the obligation) to control the defense, compromise, or settlement of any Proceeding or Tax Claim if the Indemnitor is (a) the subject of a voluntary bankruptcy, (b) an adjudicated bankrupt, or (c) the subject of an involuntary petition in bankruptcy that has been filed and which has not been discharged within 90 days; (3) Epitope will control the defense, settlement, or compromise of any Proceeding or Tax Claim with respect to any Epitope Consolidated Return and any Agritope Group Pre-Closing Return; and (4) Agritope will control the defense, settlement, or compromise of any Proceeding or Tax Claim with respect to any Agritope Group Post-Closing Return, including any Agritope Overlap Return (but exclusive of any Agritope Group Pre-Closing Return). With respect to Agritope Overlap Returns, Epitope may, at its own expense, attend meetings or conferences with the Tax authorities and receive copies of all relevant correspondence. 6.3 APPROVAL. (a) The Indemnitee will not settle or compromise any Proceeding or Tax Claim without the prior consent of the Indemnitor (which consent will not be unreasonably withheld) if such settlement or compromise will result in an obligation of the Indemnitor pursuant to this Agreement. (b) Agritope will not settle or compromise any Proceeding or Tax Claim with respect to an Agritope Group Post-Closing Return (including an Agritope Overlap Return) involving a Tax period beginning before the Distribution Date without the prior consent of Epitope, which consent will not be unreasonably withheld. (c) A party receiving a request for consent pursuant to this Section 6.3 will respond as soon as practicable and in no event after the tenth day preceding the expiration of the period for appealing the assessment or claim. The parties will seek to resolve any dispute with respect to such matter as quickly as possible. However, if the parties are unable to resolve such dispute promptly, the matter will be referred to an Independent Firm for resolution. 7. MISCELLANEOUS 7.1 EFFECTIVENESS AND TERM. This Agreement will be effective from and after the Distribution Date and will survive until the later of (i) 90 days after the expiration of any applicable statute of limitations (including any waivers or extensions) related to any Taxes or carryovers of net operating losses or credits to any taxable year or (ii) the final conclusion of any Proceeding, including any applicable litigation and appeals of any liability for Taxes; provided, however, that this Agreement will terminate immediately upon a termination of the Separation Agreement. 9 7.2 ENTIRE AGREEMENT. This Agreement contains the entire agreement among the parties with respect to the subject matter. This Agreement terminates and supersedes, on a prospective basis only, all Tax agreements (other than this Agreement) between the Epitope Group and the Agritope Group (or any other predecessor). However, nothing in the preceding sentence will limit or reduce (i) the obligation of Agritope for Reserved Taxes as separately accrued on the balance sheet of the Agritope Group as of the Distribution Date or (ii) the right of the Agritope Group to any Balance Sheet Refund. 7.3 GOVERNING LAW. This Agreement will be governed by and construed and enforced in accordance with the laws of the State of Oregon (regardless of the laws that might otherwise govern under applicable principles of conflict of laws) as to all matters, including, without limitation, matters of validity, construction, effect, performance, and remedies. 7.4 JURISDICTION AND VENUE. Subject to the arbitration provisions of the Separation Agreement, each party consents to the personal jurisdiction of the state and federal courts located in the State of Oregon and waives any argument that venue in any such forum is not convenient or proper. 7.5 NOTICES. Notices under this Agreement will be in writing, will refer specifically to this Agreement, and will be personally delivered, sent by electronic facsimile transmission promptly confirmed by mail, or sent by registered or certified mail, return receipt requested, postage prepaid, in each case to the respective address or facsimile number specified below (or such other address or number as may be specified by notice to the other party): If to Epitope: Epitope, Inc. 8505 SW Creekside Place Beaverton, Oregon 97008 Attention: President Fax: (503) 641-8665 If to Agritope: Agritope, Inc. 8505 SW Creekside Place Beaverton, Oregon 97008 Attention: President Fax: (503) 520-6196 Any notice or communication given in conformity with this Section 7.5 will be deemed to be effective when received by the addressee if delivered by hand or electronic facsimile transmission, or three days after mailing if mailed. 10 7.6 MODIFICATION OF AGREEMENT. No modification, amendment, or waiver of any provision of this Agreement will be effective unless in writing and signed by each of the parties and then such modification, amendment, or waiver will be effective only in the specific instance and for the purpose for which given. 7.7 SUCCESSORS AND ASSIGNS. A party's rights and obligations under this Agreement may not be assigned or transferred without the prior written consent of the other party. Subject to the foregoing, this Agreement will be binding upon and inure to the benefit of the parties, the Epitope Group, the Agritope Group, and their respective successors and permitted assigns and will survive any acquisition, disposition, or other corporate restructuring or transaction involving either party. 7.8 NO THIRD-PARTY BENEFICIARIES. This Agreement is solely for the benefit of the parties to this Agreement and should not be deemed to confer upon third parties any remedy, claim, liability, reimbursement, claim of action, or other right in excess of those existing without this Agreement. 7.9 TITLES AND HEADINGS. The titles and headings to Sections are inserted for convenience of reference only and are not intended to constitute a part of or to affect the meaning or interpretation of this Agreement. Unless otherwise indicated, Section references are to the relevant Sections in this Agreement. 7.10 SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal, or unenforceable, the enforceability of the remaining provisions will in no way be affected or impaired. If any such term, provision, covenant, or restriction is held to be invalid, void, or unenforceable, the parties will use their best efforts to find and employ another means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant, or restriction. 7.11 NO WAIVER. Neither the failure nor any delay on the part of any party to exercise any right under this Agreement will operate as a waiver, nor will any single or partial exercise of any right preclude any other or further exercise of the same or any other right, nor will any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. 7.12 SURVIVAL OF OBLIGATIONS. Notwithstanding anything in this Agreement or the Separation Agreement to the contrary, this Agreement will survive the consummation of the transactions contemplated by the Separation Agreement and will continue throughout the period ending on the later of (i) 90 days after the expiration of all applicable statutes of limitation (including extensions) or (ii) the final determination of (and the expiration of the time to appeal) any Proceeding relating to Taxes or Tax matters covered by (or any claim under) this Agreement and the payment of any corresponding obligation. 11 7.13 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which will be considered one and the same agreement, and will become a binding agreement when one or more counterparts have been signed by each party and delivered to the other party. As evidence of their agreement, the parties have caused this Agreement to be executed and delivered as of the date first written above. EPITOPE, INC. AGRITOPE, INC. By: /s/ John W. Morgan By: /s/ Adolph J. Ferro Its: President and Its: Chairman, President and Chief Executive Officer Chief Executive Officer 12 EX-23 14 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Forms S-3 (Numbers 33-68510, 33-67618, 33-57246, 33-52920, 33-42841, 33-39166, and 33-32673), and the Registration Statements on Forms S-8 (Numbers 33-63220, 33-63218, 33-41712, 33-13416, 33-21545, 33-82788, 33-63106, and 33-60789), of Epitope, Inc. of our report dated October 31, 1997, except for Note 3 as to which the date is December 1, 1997, appearing on page 24 of this Form 10-K. Price Waterhouse LLP Portland, Oregon December 23, 1997 EX-24 15 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints JOHN W. MORGAN, GILBERT N. MILLER, and each of them his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for the undersigned and in the undersigned's name, place, and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Epitope, Inc., for its fiscal year ended September 30, 1997, and any and all amendments to the report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or each of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this power of attorney has been signed by the following persons in the capacities indicated effective as of December 19, 1997. Name Title Name Title ---- ----- ---- ----- /s/ W. Charles Armstrong Director /s/ Douglas Norby Director W. Charles Armstrong R. Douglas Norby /s/ Richard K. Donahue Director /s/ Michael J. Paxton Director Richard K. Donahue Michael J. Paxton /s/ Adolph J. Ferro Director /s/ Roger L. Pringle Director Adolph J. Ferro, Ph.D. Roger L. Pringle Director /s/ G. Patrick Schaeffer Director Andrew S. Goldstein G. Patrick Schaeffer Director Margaret H. Jordan
EX-27 16 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. 12-MOS SEP-30-1996 OCT-01-1996 SEP-30-1997 1,934,480 7,141,640 960,331 (32,284) 1,324,647 11,536,003 5,470,702 (4,269,714) 17,012,303 1,998,110 0 0 0 110,439,726 (95,425,533) 17,012,303 8,083,606 9,360,060 3,512,054 3,512,054 10,811,549 0 8,165 0 0 (4,081,264) (18,359,007) 0 0 (22,440,271) (1.67) 0
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