-----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, OaTgyw22sPY3dlSTUKUGi7kSFIj/g9OGkx0rB4tAud7K2BzbpuZZcTzJmUxWFYmB T7brRAR7jBDmXd7+GJ+DBQ== 0000892917-98-000008.txt : 19980206 0000892917-98-000008.hdr.sgml : 19980206 ACCESSION NUMBER: 0000892917-98-000008 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19980205 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/A SEC ACT: SEC FILE NUMBER: 001-10492 FILM NUMBER: 98521966 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/A 1 AMENDMENT NO. 1 TO ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------ Amendment No. 1 FORM 10-K/A (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 93-07479127 (State or other jurisdiction of (I.R.S. employer identification incorporation or organization) number) 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(g) of the Act: Common Stock, no par value 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 voting stock 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: None Table of Contents for Revised Sections PART I Page ---- None. PART II ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3 PART III None. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 6
- 2 - 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. T A R G E T E D S T O C K A N D A G R I T O P E S P I N - O F F 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. Epitope has distributed all of its ownership interest in Agritope to Epitope's shareholders through a stock dividend. Epitope no longer owns or controls any shares of Agritope stock. D I S C O N T I N U E D O P E R A T I O N S AGRITOPE. Agritope was 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 - 3 - 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 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. R E S U L T S O F O P E R A T I O N S 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 one 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 discussions with SB and SB's decision to discontinue pursuit of a plan to develop and market over-the-counter products for disease detection, the parties terminated the development, license and supply agreement between SB and 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 - 4 - 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. 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 transition 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 offset the reduction in allocations to Agritope. - 5 - 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. L I Q U I D I T Y A N D C A P I T A L R E S O U R C E S (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. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K. (a)(1) and (a)(2) Consolidated Financial Statements and Schedules. INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Accountants.................................................................................7 Consolidated Balance Sheets at September 30, 1997 and 1996........................................................8 Consolidated Statements of Operations for years ended September 30, 1997, 1996, and 1995.............................................................................9 Consolidated Statements of Changes in Shareholders' Equity for years ended September 30, 1997, 1996, and 1995............................................................................11 Consolidated Statements of Cash Flows for years ended September 30, 1997, 1996, and 1995............................................................................13 Notes to Consolidated Financial Statements.......................................................................15
- 6 - R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S 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 - 7 - C O N S O L I D A T E D B A L A N C E S H E E T S 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. - 8 - C O N S O L I D A T E D S T A T E M E N T S O F O P E R A T I O N S 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. - 9 - C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N S H A R E H O L D E R S' E Q U I T Y 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. - 10 - C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S 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 1,045,632 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.......................................... (7,682,710) - - ----------- ----------- ----------- Net cash (used in) provided by financing activities....... (6,014,499) 5,845,914 20,286,898 Net (decrease) increase in cash and cash equivalents...... (3,764,783) 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. - 13 - N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S N O T E 1 T H E C O M P A N Y 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. N O T E 2 S U M M A R Y O F S I G N I F I C A N T A C C O U N T I N G P O L I C I E S 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 - 14 - 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. 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. - 15 - 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. 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. - 16 - N O T E 3 D I S C O N T I N U E D O P E R A T I O N S 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 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 - 17 - 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)
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. N O T E 4 P R O P E R T Y A N D E Q U I P M E N T 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
N O T E 5 S H A R E H O L D E R S' E Q U I T Y 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: - 18 - PURPOSE SHARES Outstanding warrants................................................... 2,000,640 Outstanding stock options.............................................. 3,499,865 Employee Stock Purchase Plan subscriptions............................. 76,460 ------ 5,576,965
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 - 19 - 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
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 - 20 - 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. 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. N O T E 6 I N C O M E T A X E S 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. - 21 - 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 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................................... $ -- $ --
N O T E 7 R E S E A R C H A N D D E V E L O P M E N T A R R A N G E M E N T S 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." N O T E 8 D I S T R I B U T I O N A N D S U P P L Y C O N T R A C T S The Company has entered into several contractual arrangements, including those discussed in the following paragraphs, for distribution of certain of its products to customers. - 22 - 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. 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. N O T E 9 C O M M I T M E N T S 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. N O T E 1 0 P R O F I T S H A R I N G A N D S A V I N G S P L A N 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 - 23 - 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. N O T E 1 1 G E O G R A P H I C A R E A I N F O R M A T I O N 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. - 24 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 2, 1998. EPITOPE, INC. By /s/ Charles E. Bergeron Charles E. Bergeron Chief Financial Officer - 25 - 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. - 26 - 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. - 27 - 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 Employment Agreement dated January 19, 1998, between Charles E. Bergeron and Registrant.* 10.22 Employment Agreement dated January 13, 1998, 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 owns a 60 percent interest in Epitope KK, a Japanese limited liability company. 23. Consent of Price Waterhouse LLP. 24.** Powers of Attorney. 27.** Financial Data Schedule. * Management contract or compensatory plan or arrangement ** Previously filed. - 28 - EX-10.21 2 EMPLOYMENT AGREEMENT - CHARLES E. BERGERON EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of January 19, 1998, between Charles E. Bergeron ("Employee") and Epitope, Inc., an Oregon corporation (the "Company"). 1. SERVICES. 1.1 EMPLOYMENT. The Company agrees to employ Employee as Chief Financial Officer 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. Such consent will not be unreasonably withheld. 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 or the board of directors 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 has granted 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 and continuous refusal or failure to comply with the policies or standards of the Company or to perform any material 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 reasonably has the right to expect of an employee. 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 reduction in Employee's salary below the amount being paid on the date of this Agreement (except as part of and in proportion to a reduction in all executive officers' salaries) or a substantial diminution in Employee's duties or title below those or that stated in this Agreement. 7.4.2 A relocation by the Company of the principal place where Employee's duties are to be performed to a place outside of the Portland metropolitan area. 7.4.3 A "Change of Control" of the Company. For purposes of this Agreement, a "Change of Control" shall mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A as in effect on the date hereof pursuant to the Securities Exchange Act of 1934 (the "Exchange Act"); provided that, without limitation, such a change of control shall be deemed to have occurred at such time as (i) any Acquiring Person hereafter becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 30 percent or more of the combined voting power of Voting Securities; (ii) during any period of 12 consecutive calendar months, individuals who at the beginning of such period constitute the board of directors cease for any reason to constitute at least a majority thereof unless the election, or the nomination for election, by the Company's shareholders of each new director was approved by a vote of at least a majority of the directors then still in office who were directors at the beginning of the period; (iii) there shall be consummated (a) any consolidation or merger of the Company in which the Company is not the continuing or surviving corporation or pursuant to which Voting Securities would be converted into cash, securities, or other property, other than a merger of the Company in which the holders of Voting Securities immediately prior to the merger have the same, or substantially the same, proportionate ownership of common stock of the surviving corporation immediately after the merger, or (b) any sale, lease, exchange, or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company; or (iv) approval by the shareholders of the Company of any plan or proposal for the liquidation or dissolution of the Company. For purposes of this Agreement, "Acquiring Person" means any person or related persons which constitute a "group" for purposes of Section 13(d) and Rule 13d-5 under the Exchange Act, as such Section and Rule are in effect as of the date of this Agreement; provided, however, that the term Acquiring Person shall not include: (i) the Company or any of its subsidiaries; (ii) any employee benefit plan of the Company or any of - 5 - 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 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, 7.4.2, or 7.4.3 as a termination without cause but continues to work for the Company or any of its subsidiaries, then any amounts Employee receives as compensation during the 12-month period shall be credited against the amounts payable to Employee under this section. Unless Employee elects to continue working for the Company or any of its subsidiaries, as a condition to receipt of the compensation described in the preceding sentence Employee shall sign, deliver, and abide by a 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. - 6 - 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 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 - 7 - 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 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 - 8 - 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 (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. /s/ C. E. Bergeron By: /s/ John W. Morgan Charles E. Bergeron Title: Pres. & CEO - 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. 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. - 2 - 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 3 EMPLOYMENT AGREEMENT - J. RICHARD GEORGE, PH.D. EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of January 13, 1998, 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 Chief Scientific Officer, 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. /s/ J. Richard George By: /s/ John W. Morgan J. Richard George, Ph.D. Title: President and C.E.O. - 8 - EXHIBIT A TO EMPLOYMENT AGREEMENT SPECIFIC DUTIES OF EMPLOYEE AS VICE PRESIDENT OF SCIENTIFIC AFFAIRS - EPITOPE MEDICAL PRODUCTS Responsible for Research and Development efforts and Product Development; other duties and responsibilities as assigned by the President and Chief Executive Officer. 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: ------------------------------------ /s/ J. Richard George Date: Jan. 13, 1998 Title: --------------------------------- Date: ---------------------------------- - 4 - EX-23 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus 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 7 of this Form 10-K/A. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Portland, Oregon January 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----