-----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, Q5yZnP1jCtLo318lmG2t6r16khHjwj7ebXaNdmCE8GzSIbk/7zyfOYNlE15yyU1I OCpHvUNTNSbnc2uOxcWd6A== 0000910117-98-000176.txt : 19981228 0000910117-98-000176.hdr.sgml : 19981228 ACCESSION NUMBER: 0000910117-98-000176 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981224 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGRITOPE INC CENTRAL INDEX KEY: 0001044865 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 930820945 STATE OF INCORPORATION: OR FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23531 FILM NUMBER: 98775273 BUSINESS ADDRESS: STREET 1: 16160 SW UPPER BOONES FERRY RD CITY: PORTLAND STATE: OR ZIP: 97224 BUSINESS PHONE: 5036707702 MAIL ADDRESS: STREET 1: 16160 SW UPPER BOONES FERRY RD CITY: PORTLAND STATE: OR ZIP: 97224 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 000-23531 AGRITOPE, INC. (Exact name of registrant as specified in its charter) Delaware 93-0820945 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 16160 SW Upper Boones Ferry Road Portland, Oregon 97224-7744 (Address of principal executive offices) (Zip code) (503) 670-7702 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock (including Preferred Stock Purchase Rights), $.01 par value (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] The aggregate market value of the registrant's common stock held by non-affiliates of the registrant, as of November 30, 1998, was approximately $4,706,000. The number of shares outstanding of the registrant's common stock, par value $.01 per share, on November 30, 1998 was 4,050,150. DOCUMENTS INCORPORATED BY REFERENCE Parts of the registrant's Proxy Statement dated January 20, 1999 prepared in connection with the Annual Meeting of Stockholders to be held on February 22, 1999 are incorporated by reference into Part III of this Report. T A B L E O F C O N T E N T S PART I Page ITEM 1. BUSINESS................................................... 3 ITEM 2. PROPERTIES................................................. 10 ITEM 3. LEGAL PROCEEDINGS.......................................... 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS........................................ 11 ITEM 6. SELECTED FINANCIAL DATA.................................... 12 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.................................. 12 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 16 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE................................... 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 16 ITEM 11. EXECUTIVE COMPENSATION..................................... 16 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K................................................... 17 PART I 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. With respect to the Company, these factors include its limited independent operating history; uncertainty of additional funding; loss or impairment of sources of capital; dependence on strategic partners; uncertainties relating to patents and proprietary information; dependence on key personnel; technological change and competition; uncertainties as to acceptance of genetically engineered products; changes in laws or regulations; as well as the other factors discussed in Exhibit 99 hereto which is hereby incorporated by reference. Given these uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements. Agritope does not intend to update any forward-looking statements. ITEM 1. BUSINESS Agritope Inc. ("Agritope," or the "Company") is a developer of biotechnology and provider of products utilizing biotechnology to the agricultural industry. The technology developed or acquired by the Company includes a variety of genes, promoters and enabling technologies. In addition, through its majority owned subsidiary, Vinifera, Inc. ("Vinifera"), the Company propagates and markets grapevines and provides disease screening and elimination services to the U.S. wine grape production industry. The Company is utilizing its patented ethylene control technology to produce a wide variety of fruits and vegetables that are resistant to the decaying effects of ethylene. The Company has also acquired certain rights to certain proprietary genes (the "Salk Genes") from the Salk Institute for Biological Studies (the "Salk Institute"). Agritope believes that the Salk Genes may have the potential to confer disease resistance, enhance crop yield, control flowering, regulate cell division and enhance gene expression in plants. Agritope has an option to obtain a worldwide license to use the Salk Genes in a wide range of fruit and vegetable species. The Company consists of two units: Agritope Research and Development and Vinifera, Inc. ("Vinifera"). Agritope Research and Development contributes biotechnology and product development to strategic partners and provides disease screening and elimination programs to Vinifera. Through Vinifera, Agritope believes that it offers one of the most technically advanced grapevine plant propagation and disease screening and elimination programs available to the wine and table grape production industry. B I O T E C H N O L O G Y P R O G R A M Historically, Agritope's biotechnology program focused on using the tools and techniques of plant genetic engineering to regulate the synthesis of ethylene in ripening fruits and vegetables. Recently, the Company has begun research into genetically regulating other physiological processes in plants. Ethylene is a gaseous plant hormone, which in higher plant species is responsible for fruit and vegetable ripening and senescence as well as numerous other physiological effects. The Company has identified and patented a single gene that can be inserted into plants and expressed to regulate the plant's ability to produce ethylene. In addition, Agritope is conducting research in the area of disease control, including screening plants for the presence of disease and creating genetically engineered plants with resistance to pathogens. RIPENING CONTROL. The fresh produce industry is based largely upon rapid harvesting, processing and distribution of fruits and vegetables in order to prevent spoilage and ensure the arrival of product at retail outlets in acceptable condition for consumer purchase and use. The post-harvest period for most fruits and vegetables is one of continuous ripening and senescence, as evidenced by rapid changes in color, texture, flavor, nutrient content, and other quality attributes. Product losses due to perishability during harvesting, processing, packing, shipping and distribution can reach substantial portions of overall crop yield. Growers frequently incur losses resulting from the abandonment of crops in the field or having shipments refused by receivers because the produce is overripe. In addition, wholesalers and retailers may be forced either to discard or sell overripe produce at reduced prices and consumers often must use produce shortly after purchase to avoid spoilage. Studies published in the Marketing Research Report of the U.S. Department of Agriculture ("USDA") have estimated post-harvest losses of 30 percent and 40 percent, respectively, for strawberries shipped from Florida to the Chicago and New York markets. In the U.S. fruit and vegetable markets, post-harvest losses are estimated to amount to several billion dollars annually. 3 Post-harvest losses are largely attributable to the effects of ethylene. Because ethylene is a gas, it not only affects the plant producing it, but also surrounding plants as well. The physiological effects of ethylene include initiation and enhancement of ripening, senescence, leaf abscission and drooping, and flower fading and wilting. Common examples include the ripening and subsequent rotting of tomatoes and apples, discoloration in lettuce and broccoli, and the short bloom life of cut flowers. The importance of controlling ethylene production in plants has been recognized for decades, and has been addressed primarily through the use of controlled atmosphere storage, chemical treatment, and special packaging. Conventional techniques for controlling ethylene production have serious disadvantages that include high cost, time-critical handling requirements and lack of consistent ripening. For example, the majority of product sold in the fresh tomato market today is composed of "gas-green" tomatoes. These tomatoes are picked and packed while still green and firm. Prior to shipping to wholesale customers, green tomatoes are exposed to ethylene gas in order to initiate ripening of the product. In general, gas-green tomatoes are perceived by consumers to have less desirable taste and texture than vine-ripened tomatoes. Agritope believes the ability to regulate ethylene and control ripening through genetic engineering represents an opportunity to provide a superior product to consumers while also improving profitability for growers and distributors. Growers may achieve higher marketable yields due to fewer losses of overripe product in the field and may lower labor costs by decreasing frequency of harvest. For packer/shippers, better control of product perishability may result in improved inventory flexibility and control, and more uniform product quality. ETHYLENE CONTROL TECHNOLOGY. Agritope's ethylene control technology is focused on the use of a patented gene known as SAMase. The expression of SAMase in plants produces an enzyme that acts to degrade one of the important precursor compounds (S-adenosylmethionine or "SAM") necessary for the production of ethylene. Agritope has genetically engineered plants to express the SAMase gene only when certain levels of rising ethylene concentrations are reached in the tissues of the fruit or plant. This feature causes the production of greater levels of the enzyme that degrades SAM in response to a correspondingly higher level of ethylene. Agritope believes that this technology thus offers a major advantage over other approaches to ripening control in that the production of ethylene may be specifically reduced to levels that allow for the initiation of ripening but that delay the spoiling effects of excess ethylene. Therefore, the fruit can be maintained at an optimal level of ripeness for an extended period of time. An additional benefit of Agritope's technology is that the reaction catalyzed by the SAMase gene results in compounds normally found in plants. Agritope believes its SAMase technology can be utilized for the control of ethylene in any plant species where ethylene affects ripening or senescence. Agritope's application of ethylene control technology to various fruit and vegetable crops is at different stages, as described below. There are difficult scientific objectives to be achieved with respect to application of the technology to certain crops before the technical or commercial feasibility of the modified crops can be demonstrated. There can be no assurance that the technology can be successfully applied to particular crops or that the modified crops can be successfully and profitably produced, distributed and sold. A U.S. patent covering the use of any gene that encodes S-adenosylmethionine hydrolase (the enzyme expressed in any plant species by the SAMase gene) protects Agritope's ripening control technology. In addition to the patent on the SAMase gene, utility claims have been allowed on the promoter/gene combination used by Agritope in applications currently under development as well as potential applications in all other fruit-bearing plants. In the area of regulated gene expression and ripening control, Agritope has five additional U.S. patents issued as well as a sixth U.S. patent allowed but not yet issued. Agritope also has five pending U.S. patents in this area. Additionally, Agritope has three issued foreign patents as well as 25 pending foreign applications. THE SALK GENES. In addition to its ethylene control technology, Agritope acquired in fiscal 1997 certain rights to certain proprietary genes discovered by scientists at the Salk Institute. The Company believes that the Salk Genes may have the potential to confer disease resistance, enhance yield, control flowering , regulate cell division and enhance gene expression in plants. Agritope believes these new technologies will allow Agritope to leverage its ability to genetically engineer fruits and vegetables and enhance its ability to broaden its pipeline of new genetically engineered products. U.S. and foreign patent filings have been made with respect to each of the Salk Genes. A U.S. patent covering one gene, LEAFY, recently issued to the Salk Institute as patent number 5,637,785. Under the terms of the Salk agreement, Agritope has an option to obtain an exclusive or nonexclusive worldwide license to use the Salk Genes in a wide range of fruit and vegetable crops. The agreement permits Agritope to use each Salk Gene for research and evaluation purposes, for which Agritope will pay an annual access fee until it elects to license the gene for commercial purposes. Agritope will pay a license issue fee and royalty for each Salk Gene it elects to license. Agritope has also agreed to reimburse a percentage of applicable 4 Salk Institute patent costs. Salk Institute retains ownership of the Salk Genes, subject to applicable U.S. government rights. Agritope will own any modified plant species and fruit and vegetable crops it develops using the Salk Genes, and will therefore have control of the marketing and distribution rights to such products. Agritope's work with the Salk Genes to produce desirable fruit and vegetable crops is at an early stage. There are difficult scientific objectives to be achieved before the technological or commercial feasibility of the products can be demonstrated. There can be no assurance that any of Agritope's products under development using the Salk Genes, if and when fully developed and tested, will perform in accordance with Agritope's expectations, that necessary regulatory approvals will be obtained in a timely manner, if at all, or that these products can be successfully and profitably produced, distributed and sold. Agritope is currently conducting research regarding the following specific Salk Genes: DIR1 is a gene that may confer systemic acquired resistance ("SAR") to plants. SAR is the ability of plants to develop a powerful disease resistance state. After exposure to a non-lethal inoculum of a bacterial, viral or fungal pathogen, a plant will possess a heightened ability to defend itself against a broad range of new pathogenic challenges. The phenomenon of SAR has been studied for years but only recently at the molecular level. Scientists at the Salk Institute, in collaboration with those at the Samuel Roberts Nobel Foundation, have discovered a gene, DIR1, which appears to play a key role in the maintenance of SAR. Agritope intends to utilize DIR1 in the development of plant varieties that have increased disease resistance to a broad range of plant pathogens. In vitro transformation experiments using DIR1 are in progress in a processing tomato variety. Current research plans call for the transgenic plants with transgene DIR1 to be soil planted in early 1999 and evaluated for resistance to specific fungal, bacterial or viral pathogens of tomato. DET2 is a gene that controls brassinosteroid synthesis in plants. Brassinosteroids are compounds that are naturally produced in minute quantities in plants and play a key role in plant growth and development. In addition to being difficult to extract (due to their small quantity within the plant), brassinosteroids are also exceedingly difficult to synthesize using organic synthesis methods. Nevertheless, research has demonstrated that application of purified brassinosteroids to crop plants can result in enhanced yields. Scientists at the Salk Institute have identified a key enzymatic step that limits brassinosteroid synthesis in plants and cloned the gene, DET2, which encodes the enzyme. Expression of the gene in transgenic plants has produced plants with enhanced growth properties due to increased synthesis of brassinosteroid by the transgenic plant. Agritope has generated transgenic plants of a processing tomato variety with DET2 for brassinosteroid synthesis. Currently, the second generation of transgenic plants are being raised in the greenhouse. These are scheduled to be evaluated in small-scale field trials in 1999 for comparison of yield to non-transformed control plants. Transformation experiments with DET2 have also been initiated in a Romaine variety of lettuce. BRI1 is a gene that encodes the plant receptor for brassinosteroids. The BRI1 gene encodes a receptor-like protein kinase involved in brassinosteroid signaling and provides further opportunities for biotechnological applications related to yield increase in transgenic plants. In principle, it is possible to manipulate both hormone biosynthesis with DET2, as described above, as well as the level of brassinosteroid receptor through BRI1. In theory, it is possible to generate BRI1 derivatives that have been activated as if brassinosteroid were bound to the gene. Both approaches, either separately or together, have the potential to greatly stimulate plant growth and yield. Transformation experiments with BRI1 are in progress in a processing tomato variety and lettuce. Cyclin is a gene that is involved in regulating cell division. Salk Institute scientists have expressed the cyclin gene in transgenic plants and believe it may play a role in accelerating plant growth, which is especially noticeable in the roots. Furthermore, transgenic crop plants containing the cyclin gene are also expected to have enhanced vegetative growth properties. Agritope intends to test the cyclin gene initially in commercial tomato and lettuce varieties. LEAFY is a gene that is responsible for the initiation of flower development in plants. Scientists at the Salk Institute have demonstrated accelerated flowering in several species as a result of LEAFY expression. Transgenic aspen trees expressing LEAFY develop flowers within months rather than the 8 to 10 years that a non-transgenic aspen requires. Agritope intends to investigate uses of the LEAFY gene in tree fruits, vegetables and grapevines. Additionally, inhibiting LEAFY expression in selected crop species may retard or prevent flowering, which could be of value in vegetable crops such as lettuce and celery. Similar to the genes mentioned above, the effect of LEAFY is being tested initially in tomato at Agritope. In vitro manipulations are in progress for expression of LEAFY in a processing tomato variety to assess the flowering time, normal flower, fruit and seed set. Booster Element ("BE") is a genetic element (a small piece of DNA) that can be combined with plant gene promoters to enhance gene expression. The BE technology is applicable to a range of plant genetic engineering strategies, including the 5 Company's SAMase ripening control technology, and Salk Genes. For example, certain crops may need a higher level of SAMase expression to produce a specific level of ripening control. BE may up-regulate the promoters controlling SAMase expression and thus improve the utility of the SAMase technology. The effect of BE in combination with two different fruit-specific promoters is being tested in tomato. Several transgenic plants of Cherry tomato containing SAMase under the transcriptional control of the latter two promoters with BE are being generated. The level of SAMase expression (level of SAMase protein) in the transgenic fruits generated in the presence or absence of BE is under evaluation. ADDITIONAL TECHNOLOGIES. Agritope is also conducting research on several additional early-stage technologies. For example, Agritope scientists have devised a genetic engineering strategy to confer seedlessness to fruit crops. In addition, Agritope has completed a Phase I Small Business Innovation Research ("SBIR") grant to develop a novel geminivirus resistance strategy and to incorporate the approach into commercial tomato varieties. A second Phase I grant to continue the project is pending. Geminiviruses are a class of plant viruses that cause widespread damage in several crops including tomato, pepper, beans, melon, squash and cotton. Agritope has entered into an option agreement with The Ohio State University to use the geminivirus resistance strategy in a wide range of crop species susceptible to white-fly transmitted geminiviruses. Agritope maintains a leading position in promoter discovery, allowing the targeted expression of introduced genes to certain tissues or to specific developmental stages in plants. Company scientists have isolated or synthesized a number of fruit-specific promoters for a wide variety of fruits and vegetables, including apple, banana, peach, melon, tomato, and raspberry. In conjunction with work targeted at developing seedless plant varieties, two different seed-specific plant promoters have been identified and isolated. Other plant promoters identified include those that will target gene expression in a root-specific, senescence or wounding-associated manner. These promoters may be useful for the directed expression of our ethylene control genes as well as the Salk Genes and others. E X I S T I N G D E V E L O P M E N T P R O G R A M S Agritope's research and development programs are currently directed toward several highly perishable fruit and vegetable crops described below. Melon. The U.S. wholesale fresh melon market is estimated to exceed $1.3 billion annually. Perishability in melons results in substantial product losses during the processes of production, harvesting and distribution. Agritope believes that melons represent a substantial market opportunity for implementation of its ripening control technology. Recent scientific reports have demonstrated a dramatic increase in shelf life for specialty type melons in which the ability to produce ethylene has been impaired. Using proprietary seed varieties supplied by two units of the French seed company Groupe Limagrain Holding S.A. ("Limagrain"), Clause Semences and its U.S. affiliate Harris Moran Seed Company ("Harris Moran"), Agritope is developing commercial melon varieties with controlled ripening and increased post-harvest product life. Transgenic melons containing Agritope's ethylene control gene are currently being evaluated jointly by Harris Moran and Agritope technicians. Field trial evaluation of transgenic melons during the 1998 growing seasons has resulted in the selection of several new hybrid varieties that demonstrate significantly reduced levels of ethylene, more uniform maturity and improved firmness. Counter seasonal seed production of these new hybrids is currently ongoing. This seed will be used for commercial evaluations during the spring and summer of 1999. The product development plan for 1999 calls for obtaining deregulation from the USDA and completion of the FDA Food Safety consultation process. Commercial plantings of the new melon varieties are to be completed with the goal of a complete and thorough evaluation of product performance from field to consumer. Tomato. Annual U.S. wholesale fresh market tomato revenues are estimated at $1.7 billion. In order to facilitate the commercialization of its ethylene control technology for this market, Agritope formed Superior Tomato Associates, L.L.C. ("STA") in 1996. STA is a joint venture with Sunseeds Company, a developer and producer of several leading fresh market tomato varieties. Agritope provides genetic engineering technology and regulatory expertise, has responsibility for managing the joint venture, and has a two -thirds equity ownership interest in STA. Sunseeds provides elite tomato germplasm and breeding expertise in the development of transgenic varieties. STA owns rights to any fresh market cherry, roma and vine-ripened large fruited tomato varieties developed for the joint venture using Agritope ethylene control technology and Sunseeds germplasm. STA also owns any technology jointly developed by Agritope and Sunseeds. The parties otherwise retain all rights to their respective technologies. STA is currently in the process of developing and testing transgenic cherry, roma, and large fruited vine-ripe tomato varieties. Agritope has developed transgenic inbred lines of elite tomato germplasm provided by Sunseeds. Recent 6 field trials have successfully demonstrated the transfer of Agritope's SAMase ripening control technology to a number of these lines. Sunseeds is in the process of conducting further breeding and evaluation field trials of these transgenic lines for evaluation in various hybrid combinations. If results of the current trials are satisfactory, selections from the trials will be evaluated in production scale trials in 2000 that, if successful, will lead to regulatory submissions and, if regulatory clearances are received, commercial-scale seed production. Seeds will then be sold to approved growers, who will pay STA a royalty on net sales of tomatoes grown from the seed. Prior to the formation of STA, Agritope submitted safety, nutritional and environmental information on a prototype transgenic tomato line to both the USDA and the FDA. In March 1996, the USDA issued its finding that this line has no significant environmental impact and would no longer be considered a regulated article. During the same month, the FDA announced that Agritope had completed the food safety consultation process with respect to its prototype transgenic tomato line and that the variety did not raise issues that would require pre-market review or approval by that agency. In addition to receiving these U.S. regulatory clearances, Agritope also conducted field evaluations of SAMase tomato lines in Mexico under permits granted by the Mexican Ministry of Agriculture. In order to commence sale of selected varieties, Agritope will be required to make supplemental submissions to the USDA and FDA that establish that such varieties are comparable to the previously cleared lines. Raspberry. The wholesale raspberry market, estimated at $48 million annually in the U.S., has experienced limited growth because of the extreme perishability of the fruit. Agritope believes that the successful development of raspberries containing its ethylene control technology could permit a significant expansion of the fresh raspberry market. In raspberry, Agritope is pursuing active research in three different areas: (1) enhancement of post-harvest shelf life using Agritope's ethylene control technology; (2) possible control of gray mold and (3) control of raspberry bushy dwarf virus using a pathogen derived resistance gene. Raspberry: Post-harvest shelf life. In collaboration with Sweetbriar Development, Inc. ("Sweetbriar"), the largest fresh raspberry producer in the U.S., Agritope has engineered several of Sweetbriar's proprietary commercial raspberry varieties to contain the SAMase gene. Hundreds of these transgenic plants are undergoing field evaluation at Sweetbriar. In the preliminary field evaluations in 1998, Sweetbriar identified two transgenic lines with significantly firmer fruit than non-transgenic controls. Further analysis of the berries from these transgenic lines confirmed a reduction of ethylene in the berries as compared to control fruit.. These transgenic lines are scheduled for large scale replicated trials in 1999 designed to confirm improved firmness of the transgenic fruit. In addition to the above two transgenic lines, many more new transgenic events will be field evaluated in 1999 by Sweetbriar. Successful development of a commercial transgenic raspberry, which would be owned by Sweetbriar, will require successful completion of the scheduled field trials and filings to obtain the appropriate regulatory clearances. If these conditions are met, Sweetbriar would produce the new raspberries for distribution and marketing by Driscoll Strawberry Associates, the largest distributor of fresh raspberries and strawberries in the U.S. Agritope would receive royalties on wholesale product sales. Separately, Agritope has integrated its ripening control technology into several public domain varieties. Raspberry: Fungal control. Botrytis cinerea is a fungal pathogen that causes both pre-harvest and post-harvest fruit rot of red raspberry, resulting in loss estimated to be greater than 25%. Agritope researchers have transformed plants with a gene that may confer resistance against fungal infection. Transgenic plants are currently undergoing field evaluations in cooperation with Sweetbriar and the USDA. Raspberry: Pathogen resistance. Raspberry bushy dwarf virus ("RBDV") is the most common virus disease of raspberry, affecting yield and fruit quality. The virus occurs throughout the raspberry growing areas of the world and has become an increasingly important problem over the past 10 years. Major effects of RBDV infection are crumbly fruit and reduced yield. Transmission of RBDV is associated with flowering and, therefore, control is very difficult or impossible by chemical means. Agritope has developed a genetic engineering approach to develop RBDV resistance in red raspberry. Transgenic plants are currently undergoing evaluation at the USDA-ARS Horticultural Crops Research facility in Corvallis, Oregon. The evaluation is expected to be completed in early 1999. If preliminary results are promising, Agritope plans to conduct large scale field evaluations in which the transgenic plants will be exposed to natural disease pressure via pollen transmission and evaluated for virus resistance traits in 2000. If the field trials are successful, additional evaluations of fruit and yield characteristics would be conducted in the following years. 7 Vegetable and Flower Crops. Agritope and Vilmorin, Clause & Cie ("Vilmorin"), a majority owned affiliate of Limagrain, entered into a research and development agreement (the "Vilmorin Research Agreement") in December 1997 covering certain vegetable and flower crops. Under the terms of the Vilmorin Research Agreement, Vilmorin will provide certain proprietary seed varieties and germplasm for use by Agritope in research and development projects to be funded by Vilmorin, in which Agritope technology, and possibly Vilmorin technology, may be applied to the various covered crops. The specific research projects to be conducted will be determined by agreement of the parties, taking into account recommendations of Agritope's Project Advisory Committee, two of the four members of which are to be designated by Vilmorin. Unless otherwise agreed, Vilmorin will pay, on a quarterly basis, all Agritope's out-of-pocket expenses, including employee salaries and overhead, for each selected research project. Agritope and Vilmorin have agreed to negotiate in good faith the terms of future commercialization agreements applicable to any commercial-stage products that arise out of such research and development projects. It is the intent of the parties that Agritope will receive royalties on revenues generated through sales of modified crops or modified seeds resulting from the research projects, or that Agritope will receive revenues through participation in programs providing royalties to Agritope and Vilmorin based on savings realized by farmers utilizing the modified products. If the parties are unable to agree on the terms on which a modified crop or seed is to be commercialized, the terms of commercialization will be determined by "baseball" style arbitration, in which the arbitrator chooses all of the terms proposed by one party or the other without modification or compromise. Each of Agritope and Vilmorin will continue to own its existing proprietary technology. The parties will jointly own any new technology developed in the course of the research, other than modified crops or seeds. Each will have a right to commercialize the new technology in designated fields of use, subject to an obligation to pay royalties for such use to the other party. During the term of the agreement, Vilmorin will have a right of first refusal to fund and participate in research projects proposed by Agritope involving the genetic alteration of a covered crop. The agreement provides that Agritope will deal with Vilmorin as a most favored customer in connection with research and commercialization agreements. Unless terminated for default, the agreement will remain in effect until the earlier of (i) expiration of all patents (and absence of trade secrets) for technology used in modified crops and seeds for which the parties have entered into commercialization agreements, and (ii) the date on which Vilmorin ceases to own at least 214,285 shares of Agritope capital stock. In connection with the Vilmorin Research Agreement, Vilmorin purchased 214,285 shares of Agritope Series A Preferred Stock ("Series A Preferred") at a price of $7 per share. Vilmorin has agreed to provide additional funding totaling $1 million either by exercising its option to purchase Series A Preferred or through the financing of research and development projects. As of September 30, 1998, Vilmorin had committed to fund specific projects totaling $400,000, which are planned to be completed by June 30, 1999. Vilmorin is majority owned by Limagrain. Limagrain is in turn owned by Societe Cooperative Agricole de Semences de Limague, a societe organized under the laws of France ("Cooperative"). Cooperative is a French agricultural cooperative and the third largest seed company in the world. Its principal business is the production of seeds for grains, corn, garden vegetables, and oil-producing plants. Other Crops. Agritope is also pursuing research and development programs to incorporate its SAMase technology into other crops where perishability causes significant losses in the production and distribution process. These include strawberries, bananas, peaches, pears and apples. Agritope is working with leading proprietary tree fruit germplasm of peach, apple and pear and maintains thousands of shoots through routine micropropagation techniques. Agritope has developed rapid and efficient shoot regeneration methods in apple and pear. Transformation experiments to incorporate SAMase, the ripening control gene, into apple and pear cultivars are in progress. A patent application has been filed with respect to a novel method of apple transformation discovered during the course of the experimental work. One component of introducing Agritope's ethylene control technology into tree fruit is to target the expression of ethylene control genes to the ripening fruit. Toward this goal, Agritope has several proprietary promoters that have already been proven in tomato and melon. In addition, Agritope has been actively identifying and testing fruit-specific promoters from apple, banana, peach, and pear. Once appropriate promoters are isolated and tested, they are used to direct expression of ethylene control genes in ripening fruit of genetically modified plants. The estimated U.S. wholesale markets in 1996 for these crops ranged from approximately $325 million for pears, to $1.6 billion for apples and $2.4 billion for bananas. 8 COMMERCIALIZATION STRATEGY. Agritope is currently evaluating a number of commercialization strategies in order to realize the value of its technology. The Company intends to generate revenues by licensing rights to its technology in exchange for license fees, royalties and other payments. Agritope intends to focus its development and licensing efforts primarily toward growers and distributors of fruits and vegetables who are likely to derive the most benefit from the reduced costs and spoilage losses that could potentially result from using the Company's technologies. As part of the Vilmorin Research Agreement, Agritope and Vilmorin have agreed to negotiate in good faith the terms of future commercialization agreements covering any products that reach commercial-stage development. Agritope anticipates that it will receive royalties on the sale of any products, including modified crops or seeds, that arise out of research and development projects conducted by Agritope and funded by Vilmorin. G R A N T S A N D C O N T R A C T S U.S. DEPARTMENT OF COMMERCE GRANT. In October 1997, Agritope was awarded a U.S. Department of Commerce, National Institute of Standards and Technology ("NIST"), Advanced Technology Program ("ATP") grant. The award covers a three-year project and totals $990,000. Agritope was awarded the grant for use in the application of its proprietary ripening-control technology to certain tree fruits and bananas. The NIST/ATP grant provides cost-shared funding for research and development projects with potential for important broad-based economic benefits to the U.S. Agritope will bear $1.8 million of the total costs of the program, which are estimated at $2.8 million. The awards are made on the basis of a rigorous competitive review that considers both scientific and technical merit. SBIR PROGRAMS. Agritope actively participates in the SBIR programs sponsored by the USDA. The SBIR programs have two phases. Phase I covers a six-month project period and a total award not to exceed $100,000. Phase II covers a two-year project period and a total award not to exceed $750,000. Agritope was awarded a Phase I grant of $50,000 in 1994 plus a Phase II grant of $198,000 in 1995 for development of diagnostic tests for the detection of grapevine leafroll virus. In 1997, Agritope received a $55,000 Phase I grant for work on geminivirus resistance strategies in tomatoes. A second Phase I geminivirus application is currently undergoing review. COOPERATIVE RESEARCH AND DEVELOPMENT AGREEMENTS. Agritope has entered into two Cooperative Research and Development Agreements ("CRADA's") with the U.S. Department of Agriculture/Agricultural Research Services ("USDA/ARS"). Under the CRADA's, Agritope will collaborate with USDA/ARS laboratories by providing research services or partial funding for research projects. In return, Agritope has been granted a right of first refusal to obtain a license for any resulting inventions. The objective of the first CRADA is to create raspberries that are resistant to RBDV. This research is a collaborative effort with the Northwest Center for Small Fruit Research, located in Corvallis, Oregon. The second CRADA is funded jointly by Agritope and Harris Moran Seed Company. It is aimed at furthering the understanding of the ethylene associated physiological processes in ripening cantaloupe using SAMase-transformed cantaloupe. This research is being carried out in collaboration with the USDA/ARS research station in Weslaco, Texas. OTHER GRANTS AND CONTRACTS. Agritope has also been awarded grant support in the past from the Oregon Strawberry Commission and Oregon Raspberry and Blueberry Commission for antifungal biocontrol research. Agritope also receives funds for research and development programs from its strategic partners, including Vilmorin (See "Agritope Existing Development Programs--Vegetable and Flower Crops"). Agritope intends to continue to participate in the SBIR program, similar grant programs and projects with strategic partners, as it deems appropriate. Agritope regularly makes application for new grants, but there is no assurance that grant support will be continued. V I N I F E R A , I N C. Vinifera was incorporated in 1993 to participate in the grapevine nursery business. Through proprietary processes, Vinifera propagates and grafts grapevine plants for sale to vineyards and to growers of table grapes. All of Agritope's current product sales are attributable to Vinifera. Industry sources have estimated that 44 million grafted wine grapevine plants were produced in California in 1996. Traditionally, grapevine plants for sale to vineyards are produced seasonally using field grown, dormant cuttings that are grafted. In contrast, Vinifera uses year-round greenhouse propagation and a herbaceous grafting method that employs very young, actively growing cuttings. As a result of greenhouse propagation, Vinifera is able to develop in two years a quantity of new plants that is approximately ten times larger than can be produced with traditional techniques. In addition, herbaceous grafting with green cuttings could allow a vineyard to begin commercial production of grapes from a newly planted vineyard a year 9 sooner than would otherwise be possible. This grafting process also produces sturdier unions than dormant grafting, resulting in significantly higher yields of successful grafts, both at the propagation stage and in the survival of actual plantings in the field. Agritope Research and Development provides disease testing services for Vinifera. Vinifera is headquartered in Petaluma, California. Its library of grapevine plants includes 32 different phylloxera-resistant types of rootstock, 88 different wine varietal clones, and ten different table grape varietal clones. In addition, several French and Italian varietals are currently passing through quarantine and, when released, will be available to the U.S. market exclusively through Vinifera. Vinifera believes that this collection of different grapevine clones is one of the largest in the world. Vinifera's U.S. customer base consists of over 200 vineyards in California, Washington and Oregon. P E R S O N N E L At September 30, 1998, Agritope and its subsidiaries had 56 full-time employees, including 23 in research and development and 23 at the Vinifera grapevine plant nursery operation, which also employs seasonal part-time employees as needed. Agritope considers its relations with its employees to be excellent. None of its employees are represented by labor unions. Agritope employs six persons holding Ph.D. degrees with specialties in the following disciplines: applied botany, bacteriology and public health, biological sciences, genetics, plant pathology and plant sciences. From time to time, Agritope also engages the services of scientists as consultants to augment the skills of its scientific staff. S C I E N T I F I C A D V I S O R Y B O A R D Agritope utilizes the services of a Scientific Advisory Board. The Scientific Advisory Board meets periodically to review Agritope's research and development efforts and to apprise Agritope of scientific developments pertinent to Agritope's business. The Agritope Scientific Advisory Board consists of chair Eugene W. Nester, Ph.D., Professor and Chair, Department of Microbiology, University of Washington; Peter R. Bristow, Ph.D., Associate Professor of Plant Pathology, Washington State University; Antoine de Courcel, Scientific Director, Vilmorin, Clause & Cie; and Christopher J. Lamb, Ph.D., Regius Professor of Plant Science, Institute of Cell and Molecular Biology, University of Edinburgh, Scotland. Dr. Nester is a member of the National Academy of Sciences. ITEM 2. PROPERTIES Agritope leases approximately 11,000 square feet of office and laboratory space in Portland, Oregon. The agreement requires monthly rental payments on a triple net lease basis of $10,285 from commencement of the lease term on March 1, 1998 through May 1, 2001, and thereafter of $11,210 until expiration of the lease on February 28, 2003. Agritope relocated its office and research and development operations to the leased facilities on March 15, 1998. Agritope owns a 15-acre farm in Woodburn, Oregon, which it uses for propagation of experimental crops. Greenhouse capacity at the farm currently totals 60,000 square feet. Vinifera leases 250,000 square feet of greenhouse space in Petaluma, California under a lease that expires January 31, 2001. The lease provides an option to purchase the leased premises, exercisable through January 31, 1999, for a price of $1.3 million. Vinifera also leases 1,400 square feet of office space under a lease that expires February 1, 2003. Agritope believes that its present facilities are adequate to meet current requirements. ITEM 3. LEGAL PROCEEDINGS As of the date of this filing, Agritope is not a party to any material pending legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. 10 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Agritope common stock (the "Common Stock") is traded on the SmallCap tier of The Nasdaq Stock Market under the symbol "AGTO." Trading commenced on December 29, 1997. As reported by Nasdaq, the following table sets forth the range of high and low sales prices for the Common Stock since commencement of trading: Year ended September 30, 1998 -------------------------------------------------------- Sales price per share High Low First Quarter .................... 7.50 6.00 (from December 29, 1997) Second Quarter ................... 8.00 4.38 Third Quarter .................... 5.00 3.13 Fourth Quarter ................... 4.25 1.38 At November 30, 1998, the Company had 4,050,150 shares of Common Stock outstanding, held by 865 stockholders of record. Agritope has never declared or paid cash dividends on its common stock. Agritope currently anticipates that it will retain all future earnings for use in the operation and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. 11 ITEM 6. SELECTED FINANCIAL DATA Financial Data The following table sets forth selected historical consolidated income and balance sheet data of Agritope and its subsidiaries. The consolidated balance sheet data at September 30, 1998 and 1997 and the consolidated operating results data for the years ended September 30, 1998, 1997, and 1996 have been derived from audited consolidated financial statements and notes thereto included in this Annual Report. The balance sheet data at September 30, 1996 and 1995 and operating results data for the years ended September 30, 1995 and 1994 are derived from audited consolidated financial statements and notes thereto not included in this Annual Report. The balance sheet data at September 30, 1994 are derived from unaudited consolidated financial statements and notes thereto not included in this Annual Report and, in the opinion of management, include all adjustments necessary for fair presentation. This information should be read in conjunction with the consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(In thousands, except per share data) Year ended September 30 CONSOLIDATED OPERATING RESULTS 1998 1997 1996 1995(1) 1994(1) Revenues................................... $ 2,800 $ 1,551 $ 585 $ 2,110 $ 2,213 Operating costs and expenses............... 9,024 6,089 2,821 9,920 11,703 Other income (expense), net ............... 980 (4,153)(2) (265) (235) (314) Net loss................................... (5,244) (8,691) (2,501) (8,045) (9,804) Net loss per share (basic and diluted) (3). (1.42) (3.23) (.93) (2.99) (3.64) Shares used in per share calculations (3)................... 3,705 2,691 2,691 2,691 2,691
September 30 1998 1997 1996 1995 1994 CONSOLIDATED BALANCE SHEET Unaudited Working capital (deficiency)............ $ 6,884 $ 1,659 $ (3,163) $ 846 $ 418 Total assets............................ 14,390 7,285 5,670 4,067 4,081 Long-term debt.......................... 10 15 - 22 38 Convertible notes, due 1997............. - - 3,620 3,620 4,070 Accumulated deficit..................... (46,419) (41,168) (32,478) (29,976) (21,931) Shareholder's equity (deficit).......... 11,010 4,763 1,008 75 (482)
(1) Data for 1995 and 1994 include revenues of $2.0 million and $2.1 million, and operating losses of $3.8 million and $5.6 million, respectively, attributable to business units which were divested. See Note 3 to consolidated financial statements. (2) Includes non-cash charges of $2.3 million, reflecting the permanent impairment in the value of Agritope's investment in affiliated companies, and $1.2 million for the conversion of Agritope convertible notes into Epitope, Inc. common stock, no par value ("Epitope Stock") at a reduced price. See Notes 3 and 5 to consolidated financial statements. (3) Net loss per share (basic and diluted) is presented on a pro forma basis assuming that the distribution of Agritope common stock pursuant to the spin-off had occurred on October 1, 1994. potentially dilutive securities are excluded from net loss per share calculations as their effect would have been antidulutive. See Note 2 to consolidated financial statements. 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. O V E R V I E W Agritope consists of two units: Agritope Research and Development and Vinifera, Inc. ("Vinifera"). Agritope Research and Development uses biotechnology to develop improved 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. Vinifera's operations are included in results of operations for the fourth quarter of 1996, and for all of 1997 and 1998. The accompanying consolidated financial statements have been prepared to reflect the historical operating results and financial condition of Agritope and its subsidiaries. The operating statements include the cost of certain corporate 12 overhead services which were provided on a centralized basis for the benefit of the medical products business conducted by Epitope and the agricultural biotechnology business conducted by Agritope and its subsidiaries ("Shared Services"). Such expenses were allocated using activity indicators which, in the opinion of management, represent a reasonable measure of the respective business' utilization of or benefit from such Shared Services. Epitope provided such services through December 1, 1997 and, pursuant to a Transition Services and Facilities Agreement, continued to provide office and laboratory space and certain other services after that date until March 15, 1998 when the Company moved to a separate facility. In July 1997, the board of directors of Epitope, Inc. approved a management proposal to spin off Agritope, subject to obtaining financing for Agritope and the satisfaction of certain other conditions. The spin-off was completed on December 30, 1997. To finance its operations as an independent entity, Agritope sold 1,343,704 shares of Agritope common stock, including associated preferred stock purchase rights, to certain foreign investors pursuant to the Regulation S exemptions under the Securities Act of 1933, as amended. The shares were sold at a price of $7 per share for an aggregate price of $9.4 million. Proceeds were received immediately after the spin-off. In connection with a research and development collaboration, Agritope also sold 214,285 shares of its newly designated Series A Preferred Stock to Vilmorin at a price of $7 per share for an aggregate price of $1.5 million. The proceeds of the preferred stock sale were received approximately one week after the completion of the spin-off. Epitope no longer owns or controls any shares of Agritope stock following the spin-off. R E S U L T S O F O P E R A T I O N S Years ended September 30, 1998, 1997 and 1996 REVENUES. Total revenues increased by $1.2 million or 80 percent from 1997 to 1998, and increased by $966,000 or 165 percent from 1996 to 1997. Revenues by component are shown below:
YEAR ENDED SEPTEMBER 30 (IN THOUSANDS) 1998 1997 1996 Product sales Grapevine plant sales.................................... $ 2,575 $ 1,436 $ - Grants and contracts Government research grants............................... 207 30 145 Research projects with strategic partners................ - 53 326 Other.................................................... 18 32 114 ----------- ---- ----- 225 115 585 Total revenue $ 2,800 $ 1,551 $ 585
Grapevine plant sales pertain to Agritope's majority owned subsidiary, Vinifera. Grapevine plant sales increased $1.1 million or 79 percent from 1997 to 1998 due to expansion of Vinifera's customer base. Vinifera was sold in the third quarter of 1995, and a majority interest was reacquired at the end of August 1996. Vinifera had no product sales in September 1996. Vinifera was in the development stage in 1995, commenced commercial stage operations in 1996 and continued its marketing efforts and expansion of its customer base during 1997 and 1998. Vinifera currently has confirmed orders exceeding $1.6 million for delivery in the spring and summer of 1999 as compared to confirmed orders of $1.4 million at the beginning of fiscal 1998. Grant and contract revenues pertain to research projects directed at developing superior new plants through genetic engineering. Revenue from such projects can vary significantly from year to year as new projects are started while other projects may be extended, completed or terminated. In addition, not all research projects conducted by Agritope receive grant or contract funding. Grant and contract revenues in 1996 included three significant contracts with strategic partners for joint research projects. There were no material revenues from strategic partners in 1998 or 1997. Grant and contract revenue also included SBIR government grants totaling $78,000, $30,000, and $145,000 in 1998, 1997 and 1996, respectively. In October 1997, the Company was awarded a three-year matching grant totaling $990,000 under the Advanced Technology Program of the U.S. Department of Commerce National Institute of Standards and Technology ("NIST"), to study the application of Agritope's ripening technology to certain tree fruits and bananas. The NIST grant funds 49% of the Company's direct costs incurred for the study. Grant and contract revenues in 1998 include $129,000 applicable to the study. 13 In 1997, Vilmorin agreed to provide $400,000 to fund the Company's direct and indirect costs of conducting certain specified research projects from July 1, 1998 through June 30, 1999. No revenue was recognized with respect to such projects in 1998. GROSS MARGIN. Vinifera recorded a negative gross margin in 1998. Loss of grafted plants due to abnormal weather conditions caused grafting yield to be significantly lower than planned, especially in the fourth quarter of 1998 resulting in a charge of $974,000 to reduce inventory to net realizable value. Gross margin on product sales was 7.7 percent of sales for 1997. Gross margin in 1997 was adversely affected by production start-up costs incurred during the expansion of production capacity at Vinifera. There were no comparable product sales in 1996. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses in 1998, 1997 and 1996 totaled $2.5 million, $1.7 million and $1.3 million, respectively. Such expenses increased $790,000 from 1997 to 1998. In 1998, the Company initiated work on banana and tree fruit under the NIST grant and also conducted extensive field trials of its extended shelf-life cantaloupes. An increase of $343,000, or 26 percent, from 1996 to 1997 reflects increased efforts to develop and propagate crops containing Agritope's patented ethylene control technology as well as research and development efforts to improve grapevine plant propagation conducted by Vinifera. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses in 1998, 1997 and 1996 were $3.14 million, $3.08 million and $1.48 million, respectively. In 1988, expenses included non-cash charges of $309,000 for amortization of the excess of fair value of stock options at date of grant over the exercise price and $81,000 representing the fair value of stock options issued to consultants. See Note 6 to consolidated financial statements. Expenses in 1997 included $913,000 of costs incurred by Vinifera, which was not part of Agritope during the first eleven months of 1996. The increase in 1997 is also attributable to expenses of $424,000 related to a withdrawn proposal to create two classes of common stock of Epitope. During 1997, Vinifera expanded greenhouse capacity and continued to establish marketing and administrative functions at its new headquarters location in Petaluma, California. Such activities contributed to relatively high selling, general and administrative expenses in comparison to product sales levels. Selling, general and administrative expenses included $228,000, $1.4 million and $1.1 million for the allocation of Shared Services in 1998, 1997 and 1996, respectively. The amount of allocated Shared Services increased by $334,000 or 31 percent from 1996 to 1997 as a result of the reacquisition of Vinifera in August 1996, as well as increased corporate costs at Epitope due to increased administrative personnel. Epitope provided such services through December 1, 1997 and, pursuant to a Transition Services and Facilities Agreement, continued to provide office and laboratory space and certain other services after that date until March 15, 1998 when the Company moved to a separate facility. OTHER INCOME (EXPENSE), NET. Other income (expense), net was affected by three significant non-recurring charges totaling $4.2 million in 1997. During 1997, Agritope recorded a non-cash charge to results of operations of $2.3 million, reflecting the permanent impairment in the value of its investment in affiliated companies (UAF and Petals). Additionally, conversion of $3.4 million principal amount of Agritope convertible notes into Epitope common stock at a reduced conversion price resulted in a charge to results of operations of $1.2 million. Also in 1997, a charge of $744,000 in recognition of the Company's contingent liability as primary lessee on two leases pertaining to Agritope's discontinued wholesale fresh flower packaging and distribution business was recognized. In 1998, the Company sold its minority interest in Vinifera Sudamericana, SA for $70,000 and recognized a loss of $130,000. Interest income of $224,350 was earned in 1998 from investment of proceeds of private placements of capital stock in the last three quarters of 1998. Interest expense decreased by $240,000 or 90 percent from 1996 to 1997 due to the conversion of $3.4 million principal amount of Agritope notes into Epitope common stock in the first quarter of 1997 and payment of the remaining principal amount of $240,000 on June 30, 1997. 14 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 SEPTEMBER 30 1998 1997 (in thousands) Cash and cash equivalents.................... $ 3,904 $ 4 Working capital ............................. 6,884 1,659 At September 30, 1998, Agritope had working capital of $6.9 million as compared to working capital of $1.7 million at September 30, 1997. Proceeds from private placements of equity securities provided increased working capital for 1998. Working capital at Vinifera increased $3.3 million due to increased sales and production at Vinifera and the resultant increase in inventory and accounts receivable. The increase in working capital in 1997 was principally attributable to the conversion of $3.4 million of convertible notes into 250,367 shares of Epitope common stock in the first quarter of 1997. Concurrent with the note conversion, Epitope made a $4.4 million non-cash capital contribution to Agritope. Working capital also increased due to a $1.6 million buildup in Vinifera's inventory of growing grapevine plants. The plants can be maintained in greenhouses or stored outside for several years during which time they continue to grow. Inventory on hand at September 30, 1998 represents grapevine plants expected to be sold in the spring and summer of 1999. Agritope expended $1.3 million in 1998 to furnish and equip its newly occupied facilities and $638,000 for patents and licenses of proprietary technology. Vinifera expended $861,000 to expand production capacity. Expenditures for property and equipment were $1.9 million during 1997, largely as a result of expansion of greenhouse capacity at Vinifera. Expenditures for patents and proprietary technology in 1997 included a one-time cash payment of $590,000 to a co-inventor of Agritope's ethylene control technology who is an officer of Agritope. Agritope has also acquired certain rights to certain proprietary genes for which it made payments of $171,000 in 1997 and $300,000 in 1998. Such amounts are included in "Patents and proprietary technology, net." Agritope's investment in affiliated companies, obtained in connection with the divestiture of its fresh flower packaging and distribution business, was reduced by a non-cash charge of $2.3 million in 1997 reflecting the permanent impairment in the value of these investments. Historically, through September 30, 1997, the primary sources of funds for meeting Agritope's requirements for operations, working capital and business expansion have been $45.4 million in cash from Epitope, $5.4 million principal amount of convertible notes, $1.6 million of investments in Vinifera by minority shareholders, and $1.0 million in funding from strategic partners and other research grants. In 1998, Agritope realized $1.2 million in cash from Epitope prior to the spin-off. Proceeds from private placements yielded $9.8 million for Agritope and minority shareholders of Vinifera invested $1.8 million. Agritope expects to continue to require significant funds to support its operations and research activities. Agritope intends to utilize cash reserves, cash generated from sales of products, and research funding from strategic partners and other research grants to provide the necessary funds. Agritope may also rely on the sale of equity securities to generate additional funds. Agritope presently anticipates that funds on hand as of September 30, 1998, will be sufficient to finance operations as a separate business for the upcoming year, based on currently estimated revenues and expenses. Because this estimate is based on a number of factors, many of which are beyond the Company's control, there can be no assurance that this estimate will prove to be accurate, and to the extent that Agritope's operations do not progress as anticipated, additional capital may be required. Additional capital may not be available on acceptable terms, if at all, and the failure to raise such capital would have a material adverse effect on Agritope's business, financial condition, and results of operations. Agritope has completed a Year 2000 review of its systems and procedures to determine the costs and risks related to the Year 2000 date conversion. As a result of this review, the Company believes that it will not incur material Year 2000 remedial costs and that its operations will not be materially affected by the Year 2000 conversion, and as a consequence it has not established a contingency plan. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information with respect to this Item is contained in the Company's Consolidated Financial Statements included in Item 14 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE (a) Effective February 23, 1998, Agritope dismissed its prior independent accountant, PricewaterhouseCoopers LLP. The decision to change accountants was recommended by Agritope's Audit Committee and was approved by its Board of Directors. PricewaterhouseCoopers LLP reports on Agritope's financial statements for fiscal years 1997 and 1996 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles, except that the PricewaterhouseCoopers LLP report on the financial statements for the year ended September 30, 1997 included an explanatory paragraph regarding a change in the basis of presentation of such financial statements from those previously issued. During the audits for the fiscal years 1997 and 1996 and through the date hereof, there were no disagreement between Agritope and PricewaterhouseCoopers LLP on any matters of auditing scope or procedures, which disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers LLP, would have caused it to make a reference to the subject matter of the disagreements in connection with its reports. Agritope requested that PricewaterhouseCoopers LLP furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the above statements. A copy of such letter, dated February 27, 1998, was filed as Exhibit 16 to a report on Form 8-K dated February 23, 1998 and is incorporated herein by reference. (b) Effective February 23, 1998, Agritope engaged Arthur Andersen LLP ("Arthur Andersen") as its principal accountant. During fiscal years 1997 and 1996 and through February 23, 1998, Agritope did not consult Arthur Andersen regarding any of the matters or events set forth in Item 304 (a) (2) (i) and (ii) of Regulation S-K. PART III The Company has omitted from Part III the information that will appear in the Company's definitive proxy statement for its 1999 annual meeting of stockholders (the "Proxy Statement"), which will be filed within 120 days after the end of the Company's fiscal year pursuant to Regulation 14A. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated by reference to the information under the caption "Election of Directors" and "Executive Officers" in the Proxy Statement ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information under the caption "Executive Compensation" in the Proxy Statement ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information under the caption "Principal Shareholders" in the Proxy Statement ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information under the caption "Certain Transactions" in the Proxy Statement 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) and (a) (2) Financial Statements and Schedules Page Agritope, Inc. and Subsidiaries Reports of Independent Accountants........................................ 18 Consolidated Balance Sheets as of September 30, 1998 and 1997............. 20 Consolidated Statements of Operations for the years ended September 30, 1998, 1997 and 1996....................................................... 21 Consolidated Statements of Changes in Stockholders' Equity for the years ended September 30, 1998, 1997 and 1996................................... 22 Consolidated Statements of Cash Flows for the years ended September 30, 1998, 1997 and 1996....................................................... 23 Notes to Consolidated Financial Statements................................. 24 No schedules are included in the foregoing financial statements because the required information is inapplicable or is presented in the financial statements or related notes thereto. (a) (3) Exhibits See Index to Exhibits following the signature page of this report. (b) Reports on Form 8-K No reports on Form 8-K were filed in the fourth quarter of the fiscal year covered by this report. 17 A G R I T O P E , I N C . A N D S U B S I D I A R I E S R E P O R T OF 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 Stockholders of Agritope, Inc. We have audited the accompanying consolidated balance sheet of Agritope, Inc. (a Delaware corporation) and subsidiaries as of September 30, 1998, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Agritope, Inc. as of September 30, 1998, and the consolidated results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon, October 30, 1998 18 A G R I T O P E , I N C . A N D S U B S I D I A R I E S 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 Stockholders of Agritope, Inc. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows as of and for each of the two years in the period ended September 30, 1997 present fairly, in all material respects, the financial position, results of operations and cash flows of Agritope, Inc. and its subsidiaries as of and for each of the two 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. We have not audited the consolidated financial statements of Agritope, Inc. for any period subsequent to September 30, 1997. PricewaterhouseCoopers LLP Portland, Oregon October 31, 1997 19 A G R I T O P E , I N C . A N D S U B S I D I A R I E S 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 1998 1997 Assets Current assets Cash and cash equivalents (Note 2)................... $ 3,904,087 $ 4,384 Trade accounts receivable, net (Note 2).............. 1,033,860 617,359 Other accounts receivable............................ 124,690 5,554 Inventories (Note 2)................................. 3,289,172 2,081,295 Prepaid expenses..................................... 172,196 276,224 --------------- -------------- Total current assets................................. 8,524,005 2,984,816 Property and equipment, net (Notes 2 and 4).......... 4,100,804 2,749,788 Patents and proprietary technology, net (Note 2)..... 1,736,998 1,276,692 Investment in affiliated companies (Note 3).......... - 246,962 Other assets and deposits ........................... 28,519 26,797 --------------- -------------- $14,390,326 $ 7,285,055 Liabilities and Stockholders' Equity Current liabilities Accounts payable..................................... $ 178,171 $ 100,945 Current portion of installment notes payable......... 4,255 4,255 Current portion of lease liability (Note 9).......... 358,404 341,304 Deposits on customer orders.......................... 599,944 389,931 Salaries, benefits and other accrued liabilities..... 499,313 489,573 ----------- ------------ Total current liabilities............................ 1,640,087 1,326,008 Long-term portion of installment notes payable....... 10,238 14,569 Long-term portion of lease liability (Note 9)........ 115,785 450,805 Minority interest (Note 3)........................... 1,613,977 730,947 Commitments and contingencies (Note 9) Stockholders' equity (Note 6) Preferred stock, par value $.01 10,000,000 shares authorized; 214,285 shares and no shares issued and outstanding, respectively 2,143 - Common stock, par value $ .01 30,000,000 shares authorized; 4,050,150 shares and 2,690,776 shares issued and outstanding, respectively....................................... 40,502 26,908 Additional paid-in capital........................... 57,386,675 45,910,932 Accumulated deficit.................................. (46,419,081) (41,175,114) ------------ ------------ 11,010,239 4,762,726 $ 14,390,326 $ 7,285,055
The accompanying notes are an integral part of these statements. 20 A G R I T O P E , I N C . A N D S U B S I D I A R I E S 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 1998 1997 1996 Revenues Product sales........................................ $ 2,574,976 $ 1,436,498 $ - Grants and contracts (Note 8)........................ 224,688 114,692 585,485 -------------- --------- --------- 2,799,664 1,551,190 585,485 Costs and expenses Product costs........................................ 3,414,293 1,326,163 - Research and development costs (Notes 2 and 8)....... 2,471,374 1,681,646 1,338,703 Selling, general and administrative expenses (Notes 2 and 6).................................... 3,138,437 3,081,074 1,482,694 ------------- ----------- ----------- 9,024,104 6,088,883 2,821,397 Loss from operations................................. (6,224,440) (4,537,693) (2,235,912) ------------- ------------ ------------ Other income (expense), net Interest income...................................... 224,350 - - Interest expense..................................... (1,248) (25,307) (265,356) Valuation loss (Note 3).............................. - (2,258,080) - Debt conversion (Note 5)............................. - (1,216,654) - Other, net (Notes 3 and 9)........................... (125,052) (927,234) - ------------- ---------- -- 98,050 (4,427,275) (265,356) Minority interest in subsidiary net loss............. 882,423 274,369 - ------------ -------- -- Net loss............................................. $ (5,243,967) $ (8,690,599) $ (2,501,268) Net loss per share (basic and diluted) (Note 1)...... $ (1.42) $ (3.23) $ (.93) Weighted average number of shares outstanding.............................. 3,705,490 2,690,770 2,690,770
The accompanying notes are an integral part of these statements. 21 A G R I T O P E , I N C . A N D S U B S I D I A R I E S 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 T O C K H O L D E R S ' E Q U I T Y
Shares Preferred Common Additional Accumulated Preferred Common stock stock Paid-in capital Deficit Balances at September 30, 1995 (Note 1)....... - 2,690,776 $ - $ 26,908 $30,031,356 $(29,983,247) Compensation expense for stock awards (Note 6) - - - - 14,500 - Compensation expense for stock option grants (Note 6).................................... - - - - 229,164 - Cash contribution from Epitope, Inc. (Note 1). - - - - 3,190,194 - Net loss for the year ........................ - - - - - (2,501,268) ------------------------------------------------------------------------------------- Balances at September 30, 1996 (Note 1)....... - 2,690,776$ - $ 26,908 $33,465,214 $(32,484,515) Compensation expense for stock awards (Note 6) - - - - 33,063 - Compensation expense for stock option grants (Note 6).................................... - - - - 20,832 - Capital contributed by Epitope, Inc., upon exchange of convertible notes (Note 5). - - - - 4,529,009 - Equity issuance costs (Note 5)................ - - - - (86,134) - Minority interest investment in subsidiary (Note 6) - - - - 742,752 - Cash contribution from Epitope, Inc. (Note 1). - - - - 7,206,196 - Net loss for the year ........................ - - - - - (8,690,599) ------------------------------------------------------------------------------------ Balances at September 30, 1997 (Note 1)....... - 2,690,776$ - $ 26,908 $45,910,932 $(41,175,114) Compensation expense for stock option grants (Note 6).................................... - - - - 390,420 - Common stock issued as compensation (Note 6).. - 15,670 - 157 40,345 - Common stock issued in private placement (Note 1) - 1,343,704 - 13,437 10,322,333 - Preferred stock issued in private placement (Note 8).................................... 214,285 - 2,143 - 1,497,852 - Equity issuance costs ........................ - - - - (2,023,347) - Cash contribution from Epitope, Inc. (Note 1). - - - - 1,248,140 - Net loss for the year ........................ - - - - - (5,243,967) ------------------------------------------------------------------------------------- Balances at September 30, 1998 ............... 214,285 4,050,150 $ 2,143 $ 40,502 $57,386,675 $(46,419,081)
The accompanying notes are an integral part of these statements. 22 A G R I T O P E , I N C . A N D S U B S I D I A R I E S 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 1998 1997 1996 Cash flows from operating activities Net loss............................................. $ (5,243,967) $ (8,690,599) $ (2,501,268) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization........................ 951,209 566,813 294,045 Loss on sale of property............................. 54 - - Compensation expense for stock awards................ 40,502 33,063 14,500 Compensation expense for stock option grants......... 390,420 20,832 229,164 Minority interest in subsidiary net loss............. (882,423) (274,369) - Valuation loss....................................... - 2,258,080 - Non-cash portion of cost of debt conversion.......... - 1,149,054 - Decrease (increase) in receivables................... (535,637) (325,590) 832,333 (Increase) in inventories............................ (1,207,877) (1,571,550) (509,745) Decrease (increase) in prepaid expenses.............. 104,028 (275,412) 55,252 Decrease (increase) in other assets and deposits..... (1,722) 21,462 (36,219) Increase in accounts payable and accrued liabilities................................ 86,966 1,022,592 27,716 Increase (decrease) in deposits on customer orders... 210,013 (76,986) 466,917 Other................................................ 162,647 - - ------------ -- -- Net cash used in operating activities (5,925,787) (6,142,610) (1,127,305) Cash flows from investing activities Additions to property and equipment.................. (2,126,906) (1,927,209) (886,646) Proceeds from sale of property....................... 11,033 - - Expenditures for patents and proprietary technology......................................... (646,712) (870,910) (411,943) Investment in affiliated companies................... 70,000 (56,419) (473,790) ------------- ---------- ----------- Net cash used in investing activities (2,692,585) (2,854,538) (1,772,379) Cash flows from financing activities Issuance of long-term debt........................... - 20,887 - Principal payments on long-term debt ................ (4,331) (242,063) (39,508) Payments on long-term lease obligation............... (317,920) - - Proceeds from issuance of stock (Note 5)............. 9,812,418 - - Minority interest investment in subsidiary (Note 6).. 1,779,768 1,540,000 215,407 Cash from Epitope, Inc............................... 1,248,140 7,206,196 3,190,194 ------------ ---------- ----------- Net cash provided by financing activities 12,518,075 8,525,020 3,366,093 Net increase (decrease) in cash and cash equivalents. 3,899,703 (472,128) 466,409 Cash and cash equivalents at beginning of year....... 4,384 476,512 10,103 -------------- --------- -------- Cash and cash equivalents at end of year $ 3,904,087 $ 4,384 $ 476,512
The accompanying notes are an integral part of these statements. 23 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 Agritope, Inc. (the "Company" or "Agritope") is a Delaware corporation utilizing biotechnology to develop and market superior new plants and related products. Through its 64 percent owned subsidiary, Vinifera, Inc. ("Vinifera"), Agritope is also engaged in the business of propagating, growing, and distributing of grapevine plants. Agrimax Floral Products, Inc. ("Agrimax") is an inactive subsidiary that holds minority interests in a flower distribution business. See Note 3, Investment in Affiliated Companies for further discussion. Prior to December 30, 1997, Agritope was a wholly owned subsidiary of Epitope, Inc. ("Epitope"), an Oregon corporation engaged in the development and marketing of medical diagnostic products. AGRITOPE SPIN-OFF. In July 1997, the Epitope board of directors approved a management proposal to spin off Agritope, subject to obtaining financing for Agritope and the satisfaction of certain other conditions. In December 1997, Agritope sold 1,343,704 shares of Agritope common stock in a private placement to certain investors for an aggregate price of $9,406,000, immediately after the spin-off. The spin-off was accomplished by a distribution of 2,690,776 shares of Agritope common stock to Epitope shareholders, representing 100% of Epitope's holdings of Agritope common stock. Agritope and Epitope entered into certain agreements governing the ongoing relationship between the companies after the spin-off, including a Separation Agreement, a Tax Allocation Agreement, a Transition Services and Facilities Agreement and an Employee Benefits Agreement. Pursuant to the Employee Benefits Agreement, Agritope established replacement plans that effectively continue to provide benefits available under current Epitope benefit plans. DELAWARE REINCORPORATION; RECAPITALIZATION. In November 1997, in connection with the spin-off of Agritope by Epitope, Agritope agreed to merge with Agritope, Inc., a newly formed Delaware corporation. The purpose of the merger was to change the Company's domicile from Oregon to Delaware and increase the Company's authorized capital stock to 30 million shares of common stock, par value $.01 per share, and 10 million shares of preferred stock, par value $.01 per share. The merger occurred on December 3, 1997. On November 25, 1997, the Agritope board of directors declared a stock dividend of 690,866 shares of Agritope common stock to the sole Agritope stockholder. Subsequently, 2,690,766 shares of Agritope common stock were distributed to the shareholders of Epitope in the spin-off and the remaining shares, representing fractional interest, were redeemed for cash. All of the shares of Agritope common stock that were distributed to Epitope shareholders have been reflected as outstanding for all periods presented in the accompanying financial statements. 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 assets, liabilities, revenues and expenses of Agritope and its majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Minority-owned investments and joint ventures are accounted for using the equity method. Investments of less than 20 percent are carried at cost or estimated net realizable value, whichever is lower. Intercompany balances with Epitope have been reflected as capital contributions (common stock and additional paid-in capital) in the accompanying consolidated financial statements because they were converted into a permanent capital contribution in conjunction with the spin-off. Certain prior year amounts have been reclassified to conform to 1998 presentation. 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 Agritope ("Shared Services"). Such expenses have been allocated to Agritope in the accompanying financial statements using activity indicators which, in the opinion of management, represent a reasonable measure of Agritope's utilization of such Shared Services. These activity indicators, which were reviewed periodically and adjusted to reflect changes in utilization, include number of employees, number of computers, and level of expenditures. Management believes that the amount allocated for these Shared Services is not materially different from the amount which would be incurred by Agritope for such services provided on a stand-alone basis. Allocated Shared Services of $227,990, $1,402,895 and $1,069,249, respectively, for 1998, 1997 and 1996 are included under the caption "Selling, general and administrative expenses" in the accompanying consolidated statements of operations. Epitope discontinued provision of Shared Services in March 1998 when Agritope moved to separate physical facilities. 24 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 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, C O N T I N U E D Cash and Cash Equivalents. For purposes of the consolidated balance sheets and statements of cash flows, all highly liquid investments with maturities at time of purchase of three months or less are considered to be cash equivalents. Inventories. Inventories, consisting principally of growing grapevine plants at Vinifera, are recorded at the lower of average cost or market. Average cost includes all direct and indirect costs attributable to the growing grapevine plants. Inventory is summarized as follows:
September 30 1998 1997 Operating supplies ........................... $ 142,900 $ - Work-in-process ............................... 128,374 1,387,706 Finished goods ................................ 3,017,898 693,589 ------------ --------- $ 3,289,172 $ 2,081,295
Loss of grafted plants due to abnormal weather conditions caused grafting yield to be significantly lower than planned, especially in the fourth quarter of fiscal 1998, resulting in a charge of $974,000 to product costs in order to reduce inventory to net realizable value. 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 useful lives of the related assets (three to seven years). Leasehold improvements are amortized over the shorter of estimated useful lives or the terms of the related leases. When assets are sold or otherwise disposed of, cost and related accumulated depreciation or amortization are removed from the accounts and any resulting gain or loss is included in results of operations. ACCOUNTING FOR LONG-LIVED ASSETS. The Company reviews its long-lived assets for impairment periodically 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." See Note 3, Investment in Affiliated Companies. 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. In August 1996, the Company amended the 1987 agreement pursuant to which it acquired its patented ethylene control technology. A co-inventor of the technology relinquished all rights to future compensation under the agreement in exchange for a one-time cash payment of $365,000, a research grant and a limited non-exclusive license to use the technology for one crop. The amount is included under the caption "Patents and proprietary technology" and is being amortized over 15 years, the remaining life of the related patent. On November 11, 1996, the Company further amended the ethylene control technology agreement. A co-inventor of the technology who is an officer of the Company relinquished all rights to future payments under the agreement in exchange for a one-time cash payment of $590,000. The amount is included under the caption "Patents and proprietary technology" and is being amortized over 15 years, the remaining life of the related patent. Amortization and accumulated amortization are summarized as follows:
1998 1997 1996 Amortization for the year ended September 30,........ $ 186,406 $ 104,461 $ 91,110 Accumulated amortization............................. 419,428 233,022 128,561
25 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 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, C O N T I N U E D 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. The carrying amount for installment notes payable approximates fair value because the related interest rates are comparable to rates currently available to the Company for debt with similar terms and maturities. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which establishes accounting and reporting standards for all derivative financial instruments. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company does not have any derivative financial instruments and, accordingly, the adoption of SFAS 133 will have no impact on the Company's financial position or results of operations. REVENUE RECOGNITION. Product sales are recognized when the related products are shipped. Grant and contract revenues include funds received under research and development agreements with various entities. These grants and contracts generally provide for progress payments as expenses are incurred and certain research milestones are achieved. Revenue related to such grants and contracts is recognized as research milestones are achieved. Accounts receivable are stated net of an allowance for doubtful accounts of $25,057 as of September 30, 1998 and $57 as of September 30, 1997. MAJOR CUSTOMER. For the years ended September 30, 1998 and 1997, respectively, one customer purchased $829,578 and $337,374 of grapevine plants from Vinifera, representing 32.2% and 23.4% of Vinifera's net sales. RESEARCH AND DEVELOPMENT. Research and development expenditures are comprised of those costs associated with Agritope's ongoing research and development activities to develop superior new plants. 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. 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. 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 ("FASB") issued Statement of Financial Accounting 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, "Accounting for Stock Issued to Employees" ("APB 25"), but with additional financial statement disclosure. The Company has adopted two stock-based compensation plans for employees and has elected to apply the existing accounting rules under APB 25. See Note 6. NET LOSS PER SHARE. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This new standard became effective for interim and annual periods ending after December 15, 1997. SFAS 128 requires the reporting of "basic" and "diluted" earnings per share ("EPS") instead of "primary" and "fully diluted" EPS as required under prior accounting principles. Basic EPS eliminates the common stock equivalents considered in calculating primary EPS. Diluted EPS is similar to fully diluted EPS. Basic EPS under SFAS 128 does not differ from the Company's previously reported EPS. The following potentially dilutive securities are excluded from net loss per share calculations as their effect would have been antidilutive:
YEAR ENDED SEPTEMBER 30 1998 1997 1996 Options to purchase common stock.................. 1,255,264 - - Warrants to purchase common stock................. 583,333 - - Preferred stock................................... 214,285 - - ----------- -------- -------- 2,052,882 - -
26 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 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, C O N T I N U E D SUPPLEMENTAL CASH FLOW INFORMATION. Non-cash financing and investing activities not included in the consolidated statements of cash flows are summarized as follows:
YEAR ENDED SEPTEMBER 30 1998 1997 1996 Conversion of notes to equity (Notes 5 and 6)..... $ - $ 3,380,000 - Fair value of warrants issued in connection with spin off and related private placement..... 929,842 - - Minority interest contribution of capital (Note 6) - 742,752 -
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. N O T E 3 I N V E S T M E N T I N A F F I L I A T E D C O M P A N I E S AGRIMAX. Agritope's investment in affiliated companies includes a 9 percent interest in UAF, Limited Partnership ("UAF"), a fresh flower distribution operation in Charlotte, North Carolina, owned by its wholly owned subsidiary, Agrimax In May 1995, Agrimax ceased operations as an independent entity. Agrimax had been engaged in the fresh flower packaging and distribution business. Also in May 1995, the Company surrendered control of its Charlotte facility and contributed inventory and operating supplies to a limited liability company ("LLC") 60 percent owned by Universal American Flowers, Inc. and 40 percent owned by the Company pursuant to an Operating and Transition Agreement (the "Agreement"). Pursuant to the Agreement, on October 27, 1995, the assets and liabilities of LLC and of Universal American Flowers, Inc., together with the Company's equipment and leasehold improvements located at the Charlotte facility, were transferred to a newly formed entity, UAF. UAF also assumed the liability for the lease of the Charlotte facility. In fiscal 1995, the Company removed the assets transferred to LLC from its books and recorded the cost of such assets as "Investment in affiliated companies," less a charge of $500,000, representing the Company's share in the losses of LLC during the intervening period in which a 40 percent interest was held, and estimated costs to discontinue the Agrimax business. Until May 1995, the Agrimax business was included in the Company's financial statements. From May 1995 through October 27, 1995, the Company followed the equity method of accounting for its investment in UAF in accordance with Accounting Principles Board Opinion No. 18 ("APB 18"). Since October 27, 1995, the investment in UAF has been accounted for under the cost method in accordance with APB 18. In 1996, the equity interest of Agrimax in UAF was reduced to 9 percent as the result of a re-capitalization of UAF. In 1996, Agrimax contributed the operating assets of its discontinued St. Paul, Minnesota operations to Petals USA, Inc. ("Petals"), a fresh flower distribution company in which Agritope held a minority interest,, an unrelated company, in exchange for a 19.5 percent equity interest in Petals. No gain or loss was recognized on the transaction with Petals and the investment in Petals was recorded at the net book value of the contributed assets. Based on information that became available on December 26, 1996, including information related to continued operating losses at UAF in the four months ended October 31, 1996, coupled with a shortfall in sales and larger operating loss than expected at Petals in the fourth quarter of calendar 1996, the Company recorded a non-cash charge to results of operations of $1,900,000 during the first quarter of fiscal 1997, reflecting the permanent impairment in the value of its investment in affiliated companies, and reducing the carrying value of the assets to management's estimate of the net realizable value. An additional charge of $358,000 was recorded in the fourth quarter of fiscal 1997 based on information received in October 1997 that the majority owner of Petals intended to either sell the business or cease operations and liquidate assets. In November 1997, Petals ceased operations and liquidated assets. All proceeds from the liquidation were applied to outstanding debts of Petals. 27 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 3 I N V E S T M E N T I N A F F I L I A T E D C O M P A N I E S, C O N T I N U E D The Company's investment in affiliated companies is summarized as follows:
September 30 1998 1997 Investment in UAF............................................. $ - $ - Vinifera Sudamericana, S.A.................................... - 200,000 Other investments............................................. - 46,962 ------------- --------- Investment in affiliated companies............................ $ - $ 246,962
VINIFERA. In June 1995, Agritope agreed to sell its wholly owned grapevine plant propagation subsidiary, Vinifera, to VF Holdings, Inc. ("VF"), an affiliate of a Swiss investment group, pursuant to a stock purchase agreement. VF subsequently failed to make the payments required under the VF Agreement. As part of a settlement of claims based on VF's default, VF retained a 4 percent minority interest in Vinifera and relinquished the remaining interest to Agritope in August 1996. Additional minority investors in Vinifera reduced Agritope's ownership to 76 percent as of September 30, 1996, and to 61 percent as of September 30, 1997. In June 1998, Agritope cancelled certain intercompany loans in exchange for shares of common stock of Vinifera and minority shareholders purchased additional shares of Vinifera common stock, increasing Agritope's ownership interest to 64%. See Note 6. The reacquisition of Vinifera in August 1996 was accounted for under the purchase method and the net purchase price of $916,000 was allocated to tangible net assets. Vinifera's results of operations are included in the accompanying statements of operations since the August 1996 reacquisition. The following summarized, unaudited pro forma results of operations of the Company for the year ended September 30, 1996 are presented as if the reacquisition had occurred on October 1, 1995:
Year Ended September 30, 1996 Agritope Pro forma Pro forma Historical Vinifera Combined Adjustment Revenues Product Sales................. $ $ 833,948 $ 833,948 Grants and Contracts.......... 585,485 - 585,485 ---------- ---------------- ----------- 585,485 833,948 1,419,433 Costs and expenses Product costs................. - 1,373,106 1,373,106 Research and development costs.......... 1,338,703 85,085 1,423,788 Selling general and Administrative expenses..... 1,482,694 837,395 2,320,089 ---------- ---------- ----------- 2,821,397 2,295,586 5,116,983 Loss from operations.......... (2,235,912) (1,461,638) (3,697,550) ------------ ------------ ------------ Other income (expense) net.... (265,356) (2,364) (267,720) ------------- --------------- ------------ Net loss...................... $ (2,501,268) $ (1,464,002) $ (3,965,270) Net loss per share............ $ (.93) $ (.54) $ (1.47)
The pro forma Vinifera adjustments represent the results of operations of Vinifera for the period when Vinifera's accounts were not included in Agritope's consolidated statements of operations (October 1, 1995 through August 27, 1996). 28 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 3 I N V E S T M E N T I N A F F I L I A T E D C O M P A N I E S, C O N T I N U E D In June 1998, Vinifera accepted an offer to sell its minority interest in Vinifera Sudamericana, S.A. to the majority shareholder for $70,000. The resultant non-cash loss on disposition of $130,000 is included in "Other, net" under the caption "Other income (expense), net" in the accompanying consolidated statements of operations for 1998. 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 1998 1997 Land.......................................................... $ 30,020 $ 30,020 Grapevine propagation blocks.................................. 1,602,617 1,089,830 Production equipment.......................................... 127,736 79,289 Buildings and improvements.................................... 2,418,182 2,127,237 Research and development laboratory equipment................. 812,734 353,380 Office furniture and equipment................................ 711,416 191,290 Leasehold improvements........................................ 306,146 23,962 Construction in progress...................................... - 10,000 ----------------- ------- 6,008,851 3,905,008 Less accumulated depreciation and amortization................ (1,908,047) (1,155,220) ------------- ------------ $ 4,100,804 $ 2,749,788
N O T E 5 L O N G - T E R M D E B T 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. Debt issuance costs were included in other assets and were being amortized over the five-year life of the notes. Amortization expense of debt issuance costs for the years ended September 30, 1997 and 1996, respectively, totaled $2,687 and $108,257. Debt issuance costs were fully amortized as of September 30, 1997. 29 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 6 S T O C K H O L D E R S' E Q U I T Y STOCKHOLDER RIGHTS PLAN. In November 1997, Agritope adopted a Stockholders' Rights Plan, which enables holders of Common Stock, under certain circumstances, to purchase fractional shares of a series of preferred stock. Each share of Common Stock includes the right to purchase (the "Right"), if and when the Rights are exercisable, 1/1,000 of a share of Series B Junior Participating Preferred Stock at an exercise price of $25. The exercise price and the number of shares issuable upon exercise of the Rights are subject to adjustment in certain cases to prevent dilution. The Rights are evidenced by the Agritope Common certificates and are not exercisable, or transferable apart from the Agritope Common, until 10 business days after (i) a person acquires 15 percent or more of the Agritope Common; (ii) a person commences a tender offer which would result in the ownership of 15 percent or more of the Agritope Common; or (iii) the Agritope Board declares a person beneficially owning at least 10 percent of the Agritope Common to be an Adverse Person (the "Rights Distribution Date"). In the event any person becomes the beneficial owner of 15 percent or more of the Agritope Common or the Agritope Board determines that a person is an Adverse Person, each of the Rights (other than Rights held by the party triggering the Rights and certain of their transferees, all of which will be voided) becomes a discount right entitling the holder to acquire Agritope Common having a value equal to twice the Right's exercise price. Vilmorin, Clause and Cie ("Vilmorin") will not trigger the Stockholder Rights Plan if it acquires other Agritope securities directly from Agritope or with the prior approval of the Agritope Board. In the event Agritope is acquired in a merger or other business combination transaction (including one in which Agritope is the surviving corporation), each Right will entitle its holder to purchase, at the then current exercise price of the Right, that number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights do not have any voting rights and are redeemable, at the option of Agritope, at a price of $.01 per Right at any time until 10 business days after a person acquires beneficial ownership of at least 15 percent of the Agritope Common. The Rights expire on November 14, 2007. So long as the Rights are not separately transferable, Agritope will issue one Right with each new share of Agritope Common issued. COMMON STOCK. Cash and cash equivalents provided to Agritope by Epitope have been reflected in additional paid-in capital. Also reflected in additional paid-in capital are certain transactions in Epitope common stock. The exchange of shares of Epitope common stock for Agritope convertible debt and the related write-off of debt issuance costs have been reflected as Agritope additional paid-in capital. As employees of a wholly owned subsidiary of Epitope, the employees of Agritope and its subsidiaries participated in stock award, employee stock purchase and other benefit plans of Epitope. Compensation expense recognized for Epitope stock grants and awards to Agritope employees totaling $53,895 in 1997 and $243,664 in 1996, has been recognized as operating expenses and additional paid-in capital of Agritope. In January 1997, a minority shareholder in Vinifera contributed $100,000 to Vinifera in satisfaction of a stock subscription agreement. In June 1997, Agritope sold 770,000 shares of common stock of Vinifera to outside parties for $1,540,000 in cash. In accordance with the terms of the related stock purchase agreements, Agritope contributed the proceeds of these stock sales to Vinifera's capital. These sales of previously issued shares of Vinifera common stock reduced Agritope's percentage ownership of Vinifera voting stock from 76 percent to 61 percent. In June 1998, Vinifera sold 898,269 shares of common stock to certain minority shareholders for $1.8 million. In connection with the terms of the related stock purchase agreements, Agritope canceled $4 million of working capital loans to Vinifera in exchange for 2 million shares of common stock of Vinifera. The transactions increased Agritope's percentage ownership from 61 percent to 64 percent. 30 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 6 S T O C K H O L D E R S' E Q U I T Y, C O N T I N U E D Warrants to Purchase Common Stock. As of September 30, 1998, the following warrants to purchase common stock were outstanding:
Date of Issuance Shares Exercise Price Expiration Date December 30, 1997.......... 500,000 $ 7.00 December 30, 2000 April 30, 1998............. 83,333 7.34 December 30, 2000 -------- 583,333
SERIES A PREFERRED STOCK. Agritope's board of directors has designated 1 million shares of Agritope preferred stock, par value $.01 per share, as Series A Preferred Stock ("Series A Preferred"). The Series A Preferred has preemptive rights and the right to elect a director, but otherwise has rights substantially equivalent to Agritope common stock and is convertible at any time into shares of Agritope common stock on a share-for-share basis, subject to adjustment upon the occurrence of certain events. In connection with a research agreement, Vilmorin purchased 214,285 shares of Series A Preferred at a price of $7 per share. See Note 8. STOCK AWARD PLAN. In November 1997, the Agritope, Inc. 1997 Stock Award Plan (the "Award Plan") was adopted by Agritope's board of directors and approved by Epitope as Agritope's sole stockholder. The Award Plan provides for stock-based awards to employees, outside directors, members of scientific advisory boards and consultants. Awards that may be granted under the Award Plan include incentive stock options, nonqualified stock options, stock appreciation rights, restricted awards, performance awards and other stock-based awards. The Award Plan provides for the issuance of a total of up to 2,000,000 shares of Agritope common stock, subject to adjustment for changes in capitalization. Options for 751,236 shares were available for future grants under the Award Plan as of September 30, 1998. The following table summarizes Award Plan activity:
Shares Weighted Average Exercise Price Balance, September 30, 1997........ - $ - Granted............................ 1,422,664 5.51 Exercised.......................... - - Canceled........................... (167,400) 5.31 ------------ ---- Balance, September 30, 1998........ 1,255,264 $ 5.54 Exercisable........................ 65,000 $ 5.07 Weighted average fair value of options granted........................... $ 3.68
The amounts granted above include options covering 65,000 shares granted to two consultants at exercise prices of $5.25 and $5.31. With respect to such options, Agritope recognized compensation expense of $81,000 in 1998 in accordance with SFAS 123, representing the fair value of the options using the Black-Scholes method of valuation. With respect to options granted 1998 to participants other than consultants, Agritope will recognize compensation expense of $1,902,065, representing discounts from market prices on date of grant, which will be amortized over the four-year vesting period of the options, in accordance with APB 25. Amortization in 1998 amounted to $309,420. 31 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 6 S T O C K H O L D E R S' E Q U I T Y, C O N T I N U E D The following table summarizes information about stock options outstanding as of September 30, 1998:
Options Outstanding Options Exercisable Exercise Price Outstanding Weighted Average Weighted Average Exercisable Weighted Average Shares Remaining Exercise Price Options Exercise Price Contract Life (Years) $5.00............. 50,000 2.36 $ 7.00 50,000 $ 5.00 $5.25 to $5.31.... 998,264 9.18 5.25 15,000 5.31 $7.00............. 207,000 9.17 5.00 - - --------- ----------- 1,255,264 8.91 $ 5.54 65,000 5.07
As required by SFAS 123, the Company has computed, for pro forma disclosure purposes, the value of options granted and amortized over the vesting periods using the Black-Scholes option pricing model. The weighted average assumptions used for stock option grants in 1998, the first year of the plan, were as follows: risk-free interest rate, 5%; expected dividend yield, none; expected life 4 years; expected volatility, 55%. If the Company had accounted for the Award Plan in accordance with SFAS 123, the Company's net loss and net loss per share would have increased as follows:
FOR THE YEAR ENDED SEPTEMBER 30 1998 1997 1996 Net loss: As reported.................. $ (5,243,967) $ (8,690,599) $ (2,501,268) Pro forma.................... $ (6,165,274) $ (8,690,599) $ (2,501,268) Net loss per share: As reported.................. $ (1.42) $ (3.23) $ ( .93) Pro forma.................... $ (1.66) $ (3.23) $ ( .93)
EMPLOYEE STOCK PURCHASE PLAN. Also in November 1997, Agritope's board of directors and Epitope, as Agritope's sole stockholder, approved the Agritope, Inc. 1997 Employee Stock Purchase Plan (the "Purchase Plan"), covering up to 250,000 shares of Agritope common stock which Agritope employees may subscribe to purchase during offering periods to be established from time to time. The Compensation Committee of Agritope'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. No more than three offering periods (other than Special Offering Subscriptions as defined in the Purchase Plan) may be set during each fiscal year. The purchase price for stock purchased under the Purchase Plan is the lesser of 85 percent of the fair market value of a share on the last trading day before the offering date established for the offering period and 85 percent of the fair market value of a share on the date the purchase period ends (or any earlier purchase date provided for in the Purchase Plan). No offerings were made in the year ended September 30, 1998. 32 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 7 I N C O M E T A X E S As of September 30, 1998, Agritope had net operating loss carryforwards of approximately $37.7 million and $24.9 million, respectively, to offset federal and Oregon state taxable income. These net operating loss carryforwards will expire if not used by Agritope, as follows:
Year of Expiration Federal Oregon 2004 .................. $ 111,000 $ 111,000 2005 .................. 317,000 317,000 2006 .................. 941,000 941,000 2007 .................. 2,620,000 2,620,000 2008 .................. 6,733,000 4,847,000 2009 .................. 8,327,000 2,179,000 2010 .................. 8,477,000 3,765,000 2011 .................. 2,249,000 2,168,000 2012 .................. 4,279,000 4,279,000 2018 .................. 3,667,000 3,667,000 ------------ ------------ $ 37,721,000 $ 24,894,000 Significant components of Agritope's deferred tax asset were as follows: SEPTEMBER 30 1998 1997 Net operating loss carryforwards.... $ 14,636,000 $ 12,215,000 Deferred compensation............... 631,000 513,000 Research and experimentation credit carryforwards....................... 522,000 418,000 Accrued expenses.................... 233,000 805,000 Other ........................... 630,000 622,000 ------------- ------------ Gross deferred tax assets........... 16,652,000 14,573,000 Valuation allowance................. (16,652,000) (14,573,000) ---------------- --------------- Net deferred tax asset..............$ - $ -
No benefit for Agritope's deferred tax assets has been recognized in the accompanying financial statements as they do not satisfy the recognition criteria set forth in SFAS 109. The valuation allowance increased by $2.1 million in 1998. The research and experimentation tax credit carryforwards will generally expire from 2004 through 2013 if not used by Agritope. Net operating loss and tax credit carryforwards incurred by Agritope through the date of the spin-off (see Note 1, The Company--Agritope Spin-off) continued as carryforwards of Agritope after the date of distribution. The issuance of voting stock following the spin-off may result in a change of ownership under federal tax rules and regulations. Upon occurrence of such a change in ownership, utilization of existing tax loss and tax credit carryforwards would be subject to cumulative annual limitations. The expected federal statutory tax benefit of $1.3 million for the year ended September 30, 1998 is increased by approximately $151,000 for the effect of state and local taxes (net of federal impact), and decreased by approximately $2.1 million for the effect of the increase in valuation allowance, and by $107,000 for permanent differences consisting primarily of deferred compensation. The 1998 consolidated financial statements include the financial results of Vinifera, a 64 percent owned subsidiary (see Note 3). However, the tax disclosures above do not include the deferred tax assets and related valuation allowance for Vinifera's carryforwards since Vinifera is not included in the consolidated group for tax purposes. Vinifera files its tax return separately on a stand-alone basis. 33 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 8 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 On December 5, 1997, Agritope and Vilmorin entered into a research and development agreement covering certain vegetable and flower crops. Under the terms of the research agreement, Vilmorin will provide certain proprietary seed varieties and germplasm for use by Agritope in research and development projects to be funded by Vilmorin, in which Agritope technology, and possibly Vilmorin technology, will be applied to the various covered crops. The specific research projects to be conducted will be determined by agreement of the parties. Unless otherwise agreed, Vilmorin will pay, on a quarterly basis, all of Agritope's out-of-pocket expenses, including employee salaries and overhead, for each selected research project. Agritope and Vilmorin have agreed to negotiate in good faith the terms of future commercialization agreements applicable to any commercial-stage products that arise out of Vilmorin-funded research. If the parties are unable to agree, commercialization terms will be determined by binding arbitration. Vilmorin has agreed to provide additional funding totaling $1 million either by exercising its option to purchase Series A Preferred or through the financing of research and development projects. As of September 30, 1998, Vilmorin had committed $400,000 to fund specified projects which are planned to be completed by June 1999. No revenues were recognized with respect to such projects in 1998. Agritope performed research work in 1998, 1997, 1996 and 1995 with respect to grapevine disease diagnostics funded by a grant from the U.S. Department of Agriculture under the Small Business Innovation Research Program and in 1996 and 1995 with respect to raspberries, which was partially funded by Sweetbriar Development, Inc. under a License Agreement dated October 18, 1994. Agritope has also received grant support from the U.S. Department of Agriculture, Oregon Strawberry Commission, and Oregon Raspberry & Blackberry Commission for antifungal biocontrol research and from several strategic partners. In October 1997, Agritope was awarded a U.S. Department of Commerce matching grant totaling $990,022 through the Advanced Technology Program of the National Institute of Standards and Technology (NIST) and covering a three-year period. Agritope was awarded the grant for use in the application of its proprietary ripening control technology to certain tree fruits and bananas. Under terms of the grant, the NIST reimburses Agritope for 49% of direct costs incurred for the projects. As of September 30, 1998, $760,763, was available for reimbursement under the grant. Revenues from research and development arrangements are included in the accompanying consolidated statements of operations under the caption "Grants and contracts." Expenses related to such arrangements are included under the caption "Research and development costs." The activity related to these arrangements is summarized as follows:
YEAR ENDED SEPTEMBER 30 1998 1997 1996 Government research grants.................... $ 206,974 $ 30,228 $ 144,987 Research projects with strategic partners..... - 52,770 326,462 Other......................................... 17,714 31,694 114,036 --------------- ----------- ----------- $ 224,688 $ 114,692 $ 585,485 Project related expenses...................... $ 371,184 $ 272,309 $ 461,460
34 A G R I T O P E , I N C . A N D S U B S I D I A R I E S N O T E S TO 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 9 C O M M I T M E N T S A N D C O N T I N G E N C I E S Agritope leases office space and Vinifera leases office and greenhouse facilities under operating lease agreements, which require minimum annual payments as follows: YEAR ENDING SEPTEMBER 30 1999 ................................................ $ 338,682 2000 ................................................ 322,182 2001 ................................................ 223,722 2002 ................................................ 181,122 2003 ................................................ 78,917 --------- $1,144,625 Rent expense was $556,717, $326,388, $218,100 for 1998, 1997 and 1996, respectively. Agritope is also contingently liable for a lease that has been assigned to UAF and the lease of property that has been subleased to Petals which require payments totaling $347,104 and $55,701 for the years ended September 30, 1999 and 2000, respectively. During 1997, the Company accrued its contingent obligation under these leases as both UAF and Petals have defaulted on the related subleases. The corresponding charge of $744,109 is included in "Other, net" under the caption "Other income (expense), net" in the accompanying consolidated statements of operations for 1997. N O T E 10 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 NS EMPLOYEE STOCK OWNERSHIP PLAN. Agritope's board of directors adopted the Agritope, Inc. Employee Stock Ownership Plan ("ESOP") in November 1997. After the spin-off, all employees, except excluded classes, of Agritope and those of its affiliates that elect to participate, were eligible to participate in the ESOP. The employers' contribution to the ESOP each year, if any, will be determined by the Agritope board of directors, and may be made either in Agritope common stock or in cash. Contributions will be allocated to participants in proportion to their compensation. Contributions vest over a six - -year period, or upon the participant's earlier death, disability, or attainment of age 65. To date, no contributions have been declared. 401(K) PROFIT SHARING PLAN. Agritope established the Agritope, Inc. 401(k) Profit Sharing Plan (the "401(k) Plan") in November 1997. All employees (including officers), other than excluded classes, are eligible to participate. Participants may contribute up to 17 percent of their cash compensation on a before-tax basis, subject to an annual maximum amount that is adjusted for the cost of living ($10,000 for 1998). The first 5 percent of a participant's compensation is eligible for a discretionary, pro-rata employer matching contribution which will be invested in Agritope common stock. In 1998, Agritope made contributions of $40,502 to the 401(k) Plan. The 401(K) plan holds 14,604 shares of Agritope common stock as of September 30, 1998. EPITOPE 401(K) PROFIT SHARING PLAN. Epitope established a profit sharing and deferred salary savings plan in 1986 and restated the plan in 1991. All Agritope employees were eligible to participate in the plan prior to the date of the spin off. During 1998, 1997 and 1996, respectively, Agritope was charged $8,196, $33,063 and $14,500 by Epitope for its share of the matching contribution under the plan. 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. AGRITOPE, INC. By /S/ GILBERT N. MILLER --------------------- Gilbert N. Miller Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. December 23, 1998 /S/ ADOLPH J. FERRO - ----------------- -------------------------------------------- Date Adolph J. Ferro Chairman, President, Chief Executive Officer (Principal Executive Officer) December 23, 1998 /S/ GILBERT N. MILLER - ----------------- -------------------------------------------- Date Gilbert N. Miller Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer) December 23, 1998 W. CHARLES. ARMSTRONG * - ----------------- -------------------------------------------- Date W. Charles Armstrong Director December 23, 1998 ROGER L. PRINGLE* - ----------------- -------------------------------------------- Date Roger L. Pringle Director December 23, 1998 MICHEL de BEAUMONT* - ----------------- -------------------------------------------- Date Michel de Beaumont Director December 23, 1998 NANCY L. BUC* - ----------------- -------------------------------------------- Date Nancy L. Buc Director December 23, 1998 PIERRE LEFEBVRE* - ----------------- -------------------------------------------- Date Pierre Lefebvre Director *By /S/ GILBERT N. MILLER --------------------- Gilbert N. Miller (Attorney-in-Fact) 36 EXHIBIT INDEX NUMBER DESCRIPTION 2.* Separation Agreement between Epitope, Inc. ("Epitope"), and Agritope, Inc. ("Agritope"), dated as of December 1, 1997. 3.1* Certificate of Incorporation of Agritope. 3.2* Bylaws of Agritope. 3.3* Certificate of Designation, Preferences and Rights of the Series A Preferred Stock. 4.1* Form of Common Stock Certificate. 4.2* Form of Rights Agreement between Agritope and ChaseMellon Shareholder Services, L.L.C., as Rights Agent, which includes as Exhibit A the Designation of Terms of the Series B Junior Participating Preferred Stock and as Exhibit B the form of Rights Certificate, as amended. 4.3* Form of stock purchase agreement in connection with the Regulation S Sale. 4.4* Preferred Stock Purchase Agreement between Agritope and Vilmorin dated December 5, 1997. 10.1* Transition Services and Facilities Agreement between Epitope and Agritope, dated as of December 1, 1997. 10.2* Tax Allocation Agreement between Epitope and Agritope, dated as of December 1, 1997. 10.3* Amended and Restated Employee Benefits Agreement between Epitope and Agritope, dated as of December 19, 1997.** 10.4* Agritope, Inc. 1997 Stock Award Plan.** 10.5* Agritope, Inc. 1997 Employee Stock Purchase Plan.** 10.6* Form of Employment Agreement between Agritope and Adolph J. Ferro, Ph.D.** 10.7* Form of Employment Agreement between Agritope and Gilbert N. Miller.** 10.8 Form of Employment Agreement between Agritope and D. Ry Wagner.** 10.9* Form of Employment Agreement between Agritope and Matthew G. Kramer.** 10.10* Employment Agreement between Vinifera, Inc. and Joseph A. Bouckaert.** 10.11* Form of Indemnification Agreement for directors. 10.12* Form of Indemnification Agreement for officers. 10.13* Lease of Land and Certain Improvements located at 4288 Bodega Avenue entered into by and between Gianni Neve and Maria Neve, Landlord, and Vinifera, Inc., Tenant, dated as of February 1, 1996. 10.14* Option to License and Research Support Agreement between the Salk Institute for Biological Studies and Epitope dated February 25, 1997, including Amendment dated July 25, 1997, and Assignment between Agritope and Epitope. 10.15* Superior Tomato Associates, L.L.C. Operating Agreement dated February 19, 1996, including Assignment and Assumption Agreement between the Company and Andrew and Williamson Sales, Co. 10.16* Form of Restated Placement Agent Agreement between American Equities Overseas Inc., and Agritope. 10.17 Form of Warrant Agreement to be issued to Vector Securities in partial consideration for services in connection with the Distribution. 10.18* Form of Warrant Agreement issued in connection with the Regulation S Sale. 10.19* Research and Development Agreement between Agritope and Vilmorin & Cie, dated as of December 5, 1997. 10.20* Assignment and Modification of Lease dated November 7, 1997 among Pacific Realty Associates, L.P. ("Pacific"), American Show Management, Inc. ("ASM"), and Agritope, Lease Amendment dated June 3, 1996, between Pacific and ASM, and Lease dated October 4, 1995, between Pacific and ASM. 37 EXHIBIT INDEX, continued Number Description 21.1 List of Subsidiaries 23.1 Consent of Arthur Andersen LLP. 23.2 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney for W. Charles Armstrong 24.2 Power fo Attorney for Roger L. Pringle 24.3 Power fo Attorney for Michel de Beaumont 24.4 Power fo Attorney for Nancy L. Buc 24.5 Power fo Attorney for Pierre LeFebvre 27 Financial Data Schedule. 99 Certain Factors to Consider in Connection with Forward-Looking Statements - ----------------- Other exhibits listed in Item 601 of Regulation S-K are not applicable. * Incorporated by reference to Registrant's Registration Statement on Form S-1 (No. 333-34597). ** Compensatory plans or agreements 38 EX-10.8 2 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of December 15, 1998, by and between D. Ry Wagner ("Employee") and Agritope, Inc., a Delaware corporation (the "Company"). 1. Services. -------- 1.1 EMPLOYMENT. The Company agrees to employ Employee as the Vice President - Research of the Company, and Employee hereby accepts such employment in accordance with the terms and conditions of this Agreement. Employment shall commence on the date of this Agreement and 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 set forth on Schedule 1.2 to this Agreement, and (c) as determined by the Board of Directors from time to time. Subject to the provisions of Section 5.2.1, 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 Company's Board of Directors. Employee shall devote his full business time, attention and best efforts to the affairs of the Company and its subsidiaries during the term of this Agreement. 1.3 OUTSIDE ACTIVITIES. Employee may engage in other activities, such as activities involving charitable, educational, religious and similar types of organizations (all of which are deemed to benefit Employer), speaking engagements, and similar type activities, and may serve on the board of directors of other corporations approved by the Board of Directors of Company, in each case to the extent that such other activities do not materially detract from or limit the performance of his duties under this Agreement, or inhibit or conflict in any material way with the business of the Company and its subsidiaries. 1.4 DIRECTION OF SERVICES. Employee shall at all times discharge his duties in consultation with and under the supervision and direction of the Company's Board of Directors. 2. Compensation. ------------ 2.1 SALARY. As compensation for services under this Agreement, the Company shall pay to Employee a regular salary to be established each year by the Compensation Committee of the Board of Directors, if there is such a committee, or if not, then by the Board of Directors. Effective January 1 of each year that this Agreement is in effect, such salary may be adjusted annually unless the Board of Directors in its discretion determines not to do so. Payment shall be made on a monthly basis, less all amounts required by law to be withheld or deducted, at such times as shall be determined by the Board of Directors. Page 1 - EMPLOYMENT AGREEMENT--D. RY WAGNER 2.2 ADDITIONAL EMPLOYEE BENEFITS. Employee shall also have the right to receive or participate in (a) any additional benefits, including, but not limited to, vacation and sick leave policies, insurance programs, profit sharing or pension plans, and medical reimbursement plans, which may from time to time be made available by the Company to its employees and, (b) subject to meeting eligibility requirements, all incentive compensation plans of the Company. The Company shall reimburse Employee for all reasonable and necessary expenses incurred in carrying out his duties under this Agreement, and substantiated by Employee. 2.3 EXTRAORDINARY COMPENSATION. Employee shall have the right, in addition to all other compensation provided for in this Section 2, to additional extraordinary compensation in accordance with the following terms: 2.3.1 TERMINATION. In the event of termination of employment of Employee pursuant to Section 5.2.1, Employee shall continue to be paid the salary provided in Section 2.1 for 12 months in the manner and at the times at which regular compensation was paid to Employee during the term of his employment under the Agreement. 2.3.2 TERMINATION AFTER CHANGE IN CONTROL. In the event that the termination of the employment of Employee pursuant to Section 5.2.1 either (a) occurs within 12 months following a change in control, within the meaning of the Securities Exchange Act of 1934, or sale of substantially all of the assets of the Company, or (b) is contingent upon such a change in control or sale of assets, Employee shall continue to be paid the salary provided in Section 2.1 for 24 months, provided, however, that the present value of the stream of payments to be made to Employee shall not exceed 295 percent of Employee's Annualized Includable Compensation (in which event the payments shall be reduced pro rata such that the present value thereof does not exceed such amount). 2.3.3 DEFINITIONS. The term Annualized Includable Compensation shall mean the average annual compensation payable by the Company that was includable in the gross income of Employee for the taxable years in the Base Period. The term Base Period shall mean the period consisting of the most recent five taxable years ending before the date on which the change in ownership or control occurs. Present value shall be determined by using a discount rate equal to 120 percent of the applicable Federal Rate (determined under Section 1274(d) of the Internal Revenue Code of 1986, as amended) compounded semi-annually. 2.3.4 CHANGE IN LAW. The parties agree that in the event Section 280G or Section 4999 of the Internal Revenue Code is amended after the date hereof with the effect that any of the compensation payable to Employee by the Company pursuant to the foregoing provisions either (i) is not deductible for tax purposes from the gross income of the Company, or (ii) subjects Employee to a federal excise tax thereon, then, unless the parties otherwise agree, the foregoing provisions may be modified at the discretion of the Board of Directors in order to comply with the amended provisions of the Internal Revenue Code in order that, to the greatest extent possible, such compensation shall be so deductible by the Company and Employee shall not be subject to an excise tax thereon. Page 2 - EMPLOYMENT AGREEMENT--D. RY WAGNER 2.4 Fees. ---- 2.4.1 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 or its subsidiaries shall belong to the Company or such subsidiary. Employee shall pay or deliver such compensation to the Company or the subsidiary promptly upon receipt. 2.4.2 For the purposes of Section 2.4, "compensation" shall include, but is not limited to, all professional and nonprofessional fees, lecture fees, expert testimony fees, publishing fees, license 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 or its subsidiaries are involved and any subject matter that is directly or indirectly researched, tested, developed, promoted or marketed by the Company or its subsidiaries. 3. Confidential Information. ------------------------ 3.1 ACCESS TO INFORMATION. Employee acknowledges that in the course of his employment he will have access to proprietary information, trade secrets, and other 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. As used in this Agreement, the term "Confidential Information" means: any and all information of a proprietary or secret nature of the Company and its subsidiaries which is or may be either applicable to or related in any way to (i) their present or future businesses, (ii) their research and development or investigations, or (iii) the business of any of their licensees, licensors or customers. The term "Confidential Information" includes, without limitation, trade secrets, processes, data, know-how, improvements, inventions, techniques, marketing plans, research and development contracts and grants, strategies and information concerning customers or vendors, customer lists and customer leads, new project ideas and leads, all non-public financial information, and all information which is maintained in confidence or is designated as confidential by the Company or its subsidiaries for the protection of their businesses. 3.2 OWNERSHIP. Employee acknowledges that all Confidential Information shall continue to be the exclusive property of the Company or its subsidiaries, 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. Page 3 - EMPLOYMENT AGREEMENT--D. RY WAGNER 3.3 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 other than by his act or failure to prevent accidental or negligent loss or release to any unauthorized person of the Confidential Information. 3.4 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 Confidential Information; Employee will thereafter retain no excerpts, notes, photographs, reproductions or copies thereof. 3.5 WORK MADE FOR HIRE. Employee agrees that all creative work, including without limitation designs, drawings, specifications, techniques, models and processes, prepared or originated by Employee for the Company or its subsidiaries, or during or within the scope of employment by the Company, which may be subject to protection under federal copyright law, constitutes work made for hire, all rights to which are owned by the Company; and, in any event, Employee assigns to the Company all rights, title, and interest, whether by way of copyright, trade secret, or otherwise, in all such work, whether or not subject to protection by copyright or similar laws. 3.6 DURATION. The obligations set forth in this Section 3 will continue beyond the term of employment of Employee by the Company and for so long as Employee possesses Confidential Information. 4. Noncompetition. -------------- 4.1 COVENANT. Subject to the provisions of Section 4.3, 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: 4.1.1 Engage or prepare to engage in any business which competes with the Company or its subsidiaries; 4.1.2 Induce or attempt to induce any person who is an employee of the Company or its subsidiaries during the term of this covenant to leave the employ of the Company or its subsidiaries; or 4.1.3 Solicit, divert or accept orders for products or services that are substantially competitive with the products or services sold by the Company or its subsidiaries from any customer of the Company or its subsidiaries. Page 4 - EMPLOYMENT AGREEMENT--D. RY WAGNER 4.2 ENFORCEMENT. Employee acknowledges and agrees that the time, scope and other provisions of this Section 4 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 4 is unenforceable for any reason, the maximum restrictions reasonable under the circumstances, as determined by such court, will be substituted for any restrictions held unenforceable. 4.3 RELEASE FROM OBLIGATION. In the event that Employee shall be entitled to extraordinary compensation pursuant to the provisions of Section 2.3, 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 4.1.1 and 4.1.3. Such waiver shall be in writing, shall state that it is in consideration for the release of Employee from the obligations of Sections 4.1.1 and 4.1.3, and shall be effective when delivered to the Company. In the event of such a waiver, the amounts payable pursuant to the provisions of Section 2.3 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 the Company. For example, if such waiver is delivered to the Company six months after the commencement of the one year period set forth in this Section, Employee shall be paid one-half of the amounts otherwise payable pursuant to the provisions of Section 2.3; in the event that the Employee shall have received more than such prorata share of such compensation, it shall be a condition of the Employee's rights under this Section that he shall have returned to the Company any amounts in excess of such prorata share with the delivery of the waiver notice to the Company. 5. Termination. ----------- 5.1 VOLUNTARY RESIGNATION. Employee may terminate his employment under this Agreement by 90 days' written notice to the Company. 5.2 Termination by the Company. -------------------------- 5.2.1 The Company may terminate Employee's employment under this Agreement without cause by 90 days' written notice to the Employee. If the Company shall substantially diminish Employee's salary, duties or title, or shall relocate the principal place where Employee's duties are performed to a place outside of the Portland metropolitan area, then Employee may elect (but shall not be required to do so) to treat such event as a termination without cause. 5.2.2 The Company may terminate Employee's employment under this Agreement by 30 days' written notice given at any time within six months after the Company determines that Employee (a) has committed a material breach of his obligations under this Agreement, and failed to cure such breach promptly after receipt of written notice thereof from the Board of Directors of the Company, (b) has willfully and continuously failed or refused to comply with the material policies, standards and regulations of the Company, (c) has been guilty of fraud, dishonesty or other acts of misconduct in rendering services on behalf of the Company, or (d) has failed to otherwise comply with the standards of behavior which an employer reasonably has the right to expect of an employee. Page 5 - EMPLOYMENT AGREEMENT--D. RY WAGNER 5.2.3 In the event that the Board of Directors shall reasonably determine that Employee has become physically or mentally disabled such that Employee shall be unable to render services to the Company to the same nature and extent as such services were rendered immediately prior to the disability, the Board of Directors may terminate Employee's employment under this Agreement by 60 days' written notice effective any time after the date 13 weeks following the determination of disability. 5.3 Compensation Upon Termination. ----------------------------- 5.3.1 In the event of a termination under Section 5.1 or 5.2.2, Employee shall not be entitled to receive any compensation otherwise payable pursuant to Sections 2.2 or 2.3. Employee will be entitled to receive only: (i) salary payable under Section 2.1 through the day on which Employee's employment is terminated, together with salary, compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Employee; and (ii) such other benefits, if any, as shall be determined to be applicable under the circumstances and in accordance with the Company's plans and practices in effect on the date of termination. 5.3.2 In the event of a termination under Section 5.2.1, Employee shall be entitled to receive extraordinary compensation payable pursuant to Section 2.3, if applicable. Employee will also be entitled to receive: (i) salary payable under Section 2.1 through the end of the month on which Employee's employment is terminated, together with salary, compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Employee; (ii) maintenance in effect for the continued benefit of Employee and his dependents, at the expense of the Company, of all insured and self-insured medical and dental benefit plans in which Employee was participating immediately prior to termination, provided continued participation is possible under the general terms and conditions of such plans, until the earlier of the end of the salary period provided for in Section 2.3.2 or the date on which Employee obtains comparable insurance coverage from a new employer; and (iii) such other benefits, if any, as shall be determined to be applicable under the circumstances and in accordance with the Company's plans and practices in effect on the date of termination. 5.3.3 In the event of a termination under Section 5.2.3, or as a result of Employee's retirement or death, Employee (or Employee's estate) will be entitled to receive: (i) salary payable under Section 2.1 through the end of the month on which Employee's employment is terminated, together with salary, compensation or benefits which have been earned or become payable as of the date of termination but which have not yet been paid to Employee; (ii) such other benefits, if any, as shall be determined to be applicable under the circumstances and in accordance with the Company's plans and practices in effect on the date of termination; and (iii) such other awards or bonuses as the Board of Directors in its sole discretion may determine. Page 6 - EMPLOYMENT AGREEMENT--D. RY WAGNER 6. 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 this Agreement will cause irreparable harm to the Company and agrees to the entry of a temporary restraining order and preliminary 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. 7. Severability of Provisions. -------------------------- The provisions of this Agreement are severable, and if any provision hereof is held 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. 8. Attorney Fees. ------------- In the event a suit or action is filed to enforce this Agreement or with respect to 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's fees at the pre-trial stage, at trial or on appeal. 9. 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. Any waiver of any breach of any 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. Page 7 - EMPLOYMENT AGREEMENT--D. RY WAGNER 10. Mediation and Arbitration. ------------------------- 10.1 DISPUTES. Except as provided in Sections 3 and 4, the Company and Employee agree to comply with the following two-step dispute resolution process with regard to any controversy or claim arising out of or relating to this Agreement or their employment relationship ("Dispute"). 10.2 MEDIATION. In the event of a Dispute the Company and Employee agree to submit it to mediation pursuant to the mediation services of Arbitration Service of Portland, Inc. ("ASP"). The mediation shall be conducted in Portland, Oregon, under the rules of ASP. The mediation will be conducted as promptly as possible, and in no event later than 90 days from the date when one party notifies the other of its intent to submit the Dispute to mediation or the termination of Employee's employment, whichever is later. The Company will pay the mediator's fees and other administrative costs of the mediation process. The parties shall bear their own attorneys' fees and other costs. 10.3 ARBITRATION. In the event the Dispute is not successfully resolved through mediation, the parties agree that it shall be settled by arbitration administered through the arbitration services of ASP in accordance with its rules. Judgment on the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The arbitrators shall have the authority to award such remedies or relief that a court of the State of Oregon could order or grant in an action governed by Oregon law, including, without limitation, specific performance of any obligation created under this Agreement, the issuance of an injunction, or the imposition of sanctions for abuse or frustration of the arbitration process, but shall not be empowered to award punitive damages. The arbitration proceedings shall be conducted in Portland, Oregon. 11. Notices. ------- All notices or other communications hereunder shall be deemed to have been duly given and made if in writing and if served by personal delivery upon the party for whom it is intended, if delivered by registered or certified mail, return receipt requested, or by a national courier service, or if sent by facsimile, provided that the facsimile is promptly confirmed by Page 8 - EMPLOYMENT AGREEMENT--D. RY WAGNER telephone confirmation thereof, to the person at the address set forth below, or such other address as may be designated in writing hereunder, in the same manner, by such person: To Employee: D. Ry Wagner 16160 SW Upper Boones Ferry Road Portland, Oregon 97224-7744 Telephone: (503) 670-7702 Facsimile: (503) 670-7703 To Company: Agritope, Inc. 16160 SW Upper Boones Ferry Road Portland, Oregon 97224-7744 Telephone: (503) 670-7702 Facsimile: (503) 670-7703 Attention: Chief Executive Officer With a copy to: Tonkon Torp LLP 888 SW Fifth Avenue, Suite 1600 Portland, OR 97204 Telephone: (503) 802-2004 Facsimile: (503) 972-3704 Attention: Brian G. Booth 12. Withholding. ----------- All payments to be made to Employee under this Agreement will be subject to required withholding taxes and other deductions. 13. Successors; Binding Agreement. ----------------------------- 13.1 Any Successor (as hereinafter defined) to Company shall be bound by this Agreement. At Employee's request, Company will seek to have any Successor assent to the fulfillment by Company of its obligations under this Agreement. For purposes of this Agreement, "Successor" shall mean any person that succeeds to, or has the practical ability to control (either immediately or with the passage of time), Company's business directly, by merger or consolidation, or indirectly, by purchase of the Employer's voting securities, all or substantially all of its assets or otherwise. Page 9 - EMPLOYMENT AGREEMENT--D. RY WAGNER 13.2 For purposes of this Agreement, "Company" shall include any corporation or other entity which is the surviving or continuing entity in respect of any amalgamation, merger, consolidation, dissolution, asset or stock acquisition or other form of business combination. 14. Miscellaneous. ------------- 14.1 Except to the extent that the terms of this Agreement confer benefits that are more favorable to Employee than are available under any other employee benefit or executive compensation plan of Company in which Employee is a participant, Employee's rights under any such employee benefit or executive compensation plan shall be determined in accordance with the terms of such plan (as it may be modified or added to by Company from time to time). 14.2 This Agreement constitutes the entire understanding between Company and Employee relating to the employment of Employee by Company and its subsidiaries and supersedes and cancels all prior agreements and understandings with respect to the subject matter of this Agreement. Employee shall not be entitled to any payment or benefit under this Agreement which duplicates a payment or benefit received or receivable by Employee under such prior agreements and understandings. 14.3 This Agreement may be amended but only by a subsequent written agreement of the parties. 14.4 This Agreement shall be binding upon and shall inure to the benefit of Employee, his heirs, executors, administrators and beneficiaries, and shall be binding upon and inure to the benefit of Company and its successors and assigns. 14.5 This Agreement shall be construed in accordance with the laws of the state of Oregon, without regard to any conflicts of laws rules thereof. 14.6 All captions used herein are intended solely for convenience of reference and shall in no way limit any of the provisions of this Agreement. Page 10 - EMPLOYMENT AGREEMENT--D. RY WAGNER IN WITNESS HEREOF, the parties have executed this Employment Agreement as of the date first hereinabove written. EMPLOYEE AGRITOPE, INC. By - ----------------- -------------------------- D. Ry Wagner President and Chief Executive Officer Page 11 - EMPLOYMENT AGREEMENT--D. RY WAGNER Schedule 1.2 Schedule 1.2 to Employment Agreement--D. Ry. Wagner Specific Duties of Employee --------------------------- Duties of Employee as --------------------- Vice President - Research ------------------------- Responsible for research activities of the Company. Duties include supervising and planning all research activities, preparation of grant applications and administration of grants, publication of scientific results, liaison with scientific community, serve as the Company's representative on scientific advisory board, liaison with respect to research activities of strategic partners and licensees, and participation in negotiation of licenses and strategic partner agreements. Schedule 1.2 EX-10.17 3 WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the "1933 ACT"), AND MAY NOT BE TRANSFERRED, SOLD OR OTHERWISE DISPOSED OF UNLESS THE TRANSACTION IS REGISTERED UNDER THE 1933 ACT AND APPLICABLE STATE LAW OR AN EXEMPTION FROM REGISTRATION REQUIREMENTS IS AVAILABLE. AGRITOPE, INC. Warrant for the Purchase of Shares of Common Stock -------------------------------------------------- April 30, 1998 No. 011 83,333 Shares FOR VALUE RECEIVED, AGRITOPE, INC., a Delaware corporation (the "Company"), hereby certifies that VECTOR SECURITIES INTERNATIONAL, INC., or permitted assigns thereof ("Vector"), is entitled to purchase from the Company, at any time or from time to time prior to 5:00 p.m., New York City time, on December 30, 2000 (the "Expiration Date"), 83,333 fully paid and nonassessable shares of the common stock, $.01 par value, of the Company, including associated preferred stock purchase rights ("Common Stock"), upon payment of the purchase price of $7.343 per share, subject to adjustment pursuant to the terms hereof. Hereinafter (i) the shares of Common Stock purchasable hereunder or under any other Warrant (as hereinafter defined) are referred to as the "Warrant Shares," (ii) the aggregate purchase price payable hereunder for the Warrant Shares is referred to as the "Aggregate Warrant Price," (iii) the price payable hereunder for each of the Warrant Shares is referred to as the "Per Share Warrant Price," (iv) this Warrant and all warrants hereafter issued in exchange or substitution for this Warrant or such other warrants are referred to as the "Warrants" and (v) the holder of this Warrant is referred to as the "Holder" and the holders of this Warrant and all other Warrants are referred to as the "Holders." 1. Exercise of Warrant ------------------- This Warrant may be exercised, in whole at any time or in part from time to time, prior to the Expiration Date by the Holder by the surrender of this Warrant to the Company (with the subscription form at the end hereof duly executed) at the address set forth in Section 10 hereof, together with proper payment of the Aggregate Warrant Price, or the proportionate part thereof if this Warrant is exercised in part, and any applicable taxes. Payment for Warrant Shares shall be made by cashier's check or by wire transfer of funds. This Warrant may be exercised in part, and the Holder is entitled to receive a new Warrant covering the Warrant Shares for which this Warrant has not been exercised. Upon such surrender of this Warrant, the Company will (a) issue a certificate in the name of the Holder for the number of whole shares of the Common Stock to which the Holder shall be entitled and, if this Warrant is exercised in whole, in lieu of any fractional share of the Common Stock to which the Holder shall be entitled, pay to the Holder cash in an amount equal to the fair value of such fractional share (determined in such reasonable manner as the Board of Directors of the Company shall determine), and (b) deliver the other securities and properties receivable upon the exercise of this Warrant, or the proportionate part thereof if this Warrant is exercised in part, pursuant to the provisions of this Warrant. The Company shall not be required to issue or deliver any certificate for shares of Common Stock or other securities upon the exercise of Warrants evidenced by this Warrant until any applicable transfer tax and any other taxes or governmental charges that the Company may be required by law to collect in respect of such exercise shall have been paid, such tax being payable by the Holder of this Warrant at the time of surrender for exercise. Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the business day on which this Warrant shall have been surrendered to the Company as provided in this Section 1, and at such time, the person or persons in whose name or names any certificate or certificates for shares of Common Stock shall be issuable upon such exercise shall be deemed to have become the holder or holders of record thereof. 2. Reservation of Warrant Shares; Listing; Preservation of Rights -------------------------------------------------------------- (a) The Company agrees that, prior to the expiration of this Warrant, the Company will at all times (i) have authorized and in reserve, and will keep available, solely for issuance or delivery upon the exercise of this Warrant, the shares of the Common Stock and other securities and properties as from time to time shall be receivable upon the exercise of this Warrant, free and clear of all restrictions on sale or transfer and free and clear of all preemptive or similar contractual rights and (ii) use its best efforts to keep the Warrant Shares authorized for quotation on The Nasdaq Stock Market, or on such other national securities exchange or market upon which the Common Stock is then listed. (b) The Company will not, by amendment of its certificate of incorporation or through any consolidation, merger, reorganization, transfer of assets, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant or the rights represented hereby. 3. Protection Against Certain Dilution ----------------------------------- (a) In case the Company shall hereafter (i) declare a dividend or make a distribution on its capital stock in shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares, (iii) combine its outstanding shares of Common Stock into a smaller number of shares or (iv) issue by reclassification of its Common Stock any shares of capital stock of the Company, the Per Share Warrant Price and the number and kind of shares of Common Stock receivable upon exercise of this Warrant in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder of any Warrant upon the exercise hereof shall be entitled to receive the number and kind of shares of Common Stock or other capital stock of the Company which the Holder would have received had it exercised such Warrant immediately prior thereto. An adjustment made pursuant to this Section 3(a) shall become effective immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If as a result of an adjustment made pursuant to this Section 3(a), the Holder of any Warrant thereafter surrendered for exercise shall become entitled to receive shares of two or more classes of capital stock or shares of Common Stock and other capital stock of the Company, the Board of Directors (whose determination shall be conclusive and shall be described in a written notice to the Holder of any Warrant promptly after such adjustment) shall determine the allocation of the adjusted Per Share Warrant Price between or among shares of such classes of capital stock or shares of Common Stock and other capital stock. (b) In case the Company after the date hereof (a) shall consolidate with or merge into any other entity and shall not be the continuing or surviving corporation of such consolidation or merger, or (b) shall permit any other entity to consolidate with or merge into the Company and the Company shall be the continuing or surviving entity but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other entity or cash or any other property, or (c) shall transfer all or substantially all of its properties or assets to any other entity, or (d) shall effect a capital reorganization or reclassification of the Common Stock or other securities of the Company ((a) - (d) being collectively referred to as "Transactions"), the Holder of this Warrant shall have the right thereafter to exercise such Warrant for the kind and amount of securities, cash or other property which the Holder would have received or have been entitled to receive immediately after such Transaction had this Warrant been exercised immediately prior to the effective date of such Transaction and in any such case, if necessary, appropriate adjustment shall be made in the application of the provisions set forth in this Section 3 with respect to the rights and interests thereafter of the Holder of this Warrant to the end that the provisions set forth in this Section 3 shall thereafter correspondingly be made applicable, as nearly as may be reasonable, in relation to any shares of stock or other securities or in relation to any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant. The above provisions of this Section 3(b) shall similarly apply to successive Transactions. The issuer of any shares of stock or other securities or property thereafter deliverable on the exercise of this Warrant shall be responsible for all of the agreements and obligations of the Company hereunder. Notice of any such transaction shall be given to the Holders not less than 30 days prior to said event; provided, however, that issuance of a press release shall constitute such notice. (c) Nothing in this Warrant Agreement shall be interpreted to require adjustment in the Per Share Warrant Price upon issuance of shares under or grant by the Company of options to employees or directors under any stock option plan or arrangement of the Company approved by the shareholders of the Company, or the issuance of any and all shares of Common Stock upon exercise of such options or upon the issuance of shares under any options, warrants, or convertible securities. (d) No adjustment in the Per Share Warrant Price shall be required unless such adjustment would require an increase or decrease of at least 1% of the then existing Per Share Warrant Price; provided, however, that any adjustments which by reason of this Section 3(d) are not required to be made shall be carried forward and taken into account in any subsequent adjustment; provided further, however, that adjustments shall be required and made in accordance with the provisions of this Section 3 (other than this Section 3(d)) not later than such time as may be required in order to preserve the tax-free nature of a distribution to the Holder of this Warrant or Common Stock issuable upon exercise hereof. All calculations under this Section 3 shall be made to the nearest cent or to the nearest share, as the case may be. Anything in this Section 3 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Per Share Warrant Price, in addition to those required by this Section 3, as it in its discretion shall deem to be advisable in order that any stock dividend, subdivision of shares or distribution of rights to purchase stock or securities convertible or exchangeable for stock hereafter made by the Company to its shareholders shall not be taxable. (e) Whenever the Per Share Warrant Price is adjusted as provided in this Section 3 and upon any modification of the rights of a Holder of Warrants in accordance with this Section 3, the Company shall prepare and retain on file a statement setting forth the Per Share Warrant Price and the number of Warrant Shares after such adjustment or the effect of such modification, a brief statement of the facts requiring such adjustment or modification and the manner of computing the same and cause a copy of such statement to be mailed to the Holders of the Warrants. (f) The Company will use reasonable efforts to notify the Holders at least twenty (20) days prior to (i) any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or any right to subscribe for or purchase any shares of stock or any other securities or (ii) any voluntary or involuntary dissolution, liquidation or winding-up of the Company. Any such notice shall include the date or expected date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right, and the date or expected date on which any dissolution, liquidation or winding-up is to take place and the time, if any such time is to be fixed, as of which the holders of record of Common Stock shall be entitled to exchange their shares of Common Stock for the securities or other property deliverable upon such reorganization, dissolution, liquidation or winding-up. 4. Rights of Holder as Shareholder ------------------------------- No holder of this Warrant shall, as such, be entitled to vote, receive dividends, or otherwise be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the holder of this Warrant, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof or to give or withhold consent to any corporate action (whether upon any matter submitted to shareholders at any meeting thereof or otherwise) including, without limitation, giving or withholding consent to any merger, recapitalization, issuance of stock, reclassification of stock, exchange of stock, consolidation or conveyance, or to receive notice of meetings or other actions affecting shareholders or to receive dividends or subscription rights or other distributions. 5. Fully Paid Stock ---------------- The Company will take all such actions as may be necessary to assure that the shares of the Common Stock represented by each and every certificate for Warrant Shares delivered on the exercise of this Warrant shall, at the time of such delivery, be validly issued and outstanding, fully paid and nonassessable, and not subject to preemptive rights, and the Company will take all such actions as may be necessary to assure that the par value or stated value, if any, per share of the Common Stock is at all times equal to or less than the then Per Share Warrant Price. 6. Registration under Securities Act of 1933 ----------------------------------------- (a) Demand Registration. At any time prior to December 30, 2002, upon the -------------------- request of holders of Warrants or Warrant Shares representing a majority of the Warrant Shares issuable upon exercise of this Warrant, the Company agrees that the Company will on two occasions file, under the 1933 Act a registration statement on Form S-3 or a successor form, if available, covering resale of the Registrable Securities (as defined below) issuable upon the exercise of this Warrant (the "Registration Statement"). If Form S-3 is not available to the Company at the time a request for registration is made pursuant to this Section 6(a), the Company will, on one occasion, effect such registration on Form S-1 or other applicable form. The Company will use its best efforts to cause the Registration Statement to become effective as of the soonest practicable date following the date of filing and the Company will (i) take all other reasonable action necessary under any federal law or regulation or under the laws of the state of New York to permit all Registrable Securities to be sold or otherwise disposed of in such jurisdictions, (ii) prepare and file with the Securities and Exchange Commission such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earlier to occur of (x) the sale of all of the Registrable Securities purchasable hereunder and (y) 12 consecutive months after the effective date of such registration statement, and (iii) maintain compliance with the federal securities laws and regulations. For purposes of this Section 6, "Registrable Securities" means (a) any Common Stock or other securities issued or issuable upon exercise of this Warrant and (b) any securities issued or issuable with respect to any securities referred to in the foregoing clause by way of share dividend or share split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise. As to any particular Registrable Securities, once issued, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the 1933 Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the 1933 Act, or (c) they shall have ceased to be outstanding. (b) Limits on Registration Rights. Notwithstanding any other provision of ------------------------------ this Section 6, the Company shall not be obligated to register any Warrant Shares if it furnishes the Holder or Holders a written opinion of counsel to the Company that such Holder or Holders will be able to sell all the Warrant Shares that such Holder or Holders in good faith wish(es) to sell during any three-month period pursuant to Rule 144 (or a comparable successor rule adopted by the Securities and Exchange Commission). (c) Furnishing of Prospectus. The Company shall, upon the filing of the ------------------------ Registration Statement furnish to each Holder of any Registrable Securities (and to each underwriter, if any, of such Registrable Securities) such number of copies of prospectuses and preliminary prospectuses in conformity with the requirements of the 1933 Act and such other documents as such Holder may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Registrable Securities; provided, however, that the obligation of the Company to deliver copies of prospectuses or preliminary prospectuses to Holder shall be subject to the receipt by the Company of reasonable assurances from the Holder that the Holder will comply with the applicable provisions of the 1933 Act and of such other securities or blue sky laws as may be applicable in connection with any use of such prospectuses or preliminary prospectuses. (d) No Demand in Event of Withdrawal of Notice. No right of the Holders -------------------------------------------- under Section 6(a) shall be deemed to have been exercised if with respect to such right: (i) the requisite notice given by Holders pursuant to Section 6(a) is withdrawn prior to the date of filing of a registration statement or if a registration statement filed by the Company under the 1933 Act pursuant to Section 6(a) is withdrawn prior to its effective date, in either case, by written notice to the Company from Holders to be included or which are included in such registration statement stating that such Holders have elected not to proceed with the offering contemplated by such registration statement because (x) a development in the Company's affairs has occurred or has become known to such Holders subsequent to the date of the notice by the Holders to the Company requesting registration of the Registrable Securities or the filing of such registration statement which, in the judgment of such Holders or the managing underwriter of the proposed public offering, materially and adversely affects the market price of such Registrable Securities or the distribution of such Registrable Securities or (y) a registration statement filed by the Company pursuant to Section 6(a), in the reasonable opinion of counsel for such Holders or the managing underwriter of the proposed public offering, contains an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which made (other than any such statement or omission relating to such Holders and based on information supplied or failed to be supplied by such Holders) and the Company has not, promptly after written notice thereof, corrected such statement or omission in an amendment to such registration statement filed; or (ii) a registration statement pursuant to Section 6(a) shall have become effective under the 1933 Act and less than eighty-five percent (85%) of the Registrable Securities included therein shall have been sold as a result of any stop order, injunction or other order or requirement of the Securities and Exchange Commission or other governmental agency or court. (e) Expenses of Offering. The Company shall pay all expenses incurred in -------------------- connection with any registration or other action pursuant to the provisions of this Section 6, other than underwriting discounts and commissions, any legal, accounting, or consulting fees incurred by Holders and taxes relating to the Registrable Securities. (f) No Exercise Requirement. Nothing contained in this Agreement shall be ------------------------ construed as requiring a Holder to exercise its Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (g) Notification by Company. The Company shall use reasonable efforts to ------------------------ notify each Holder of Registrable Securities covered by the Registration Statement, at any time when a prospectus relating thereto is required to be delivered under the 1933 Act, upon the Company's discovery that, or upon the happening of any event as a result of which, the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made, and at the request of any such Holder promptly prepare and furnish to such Holder and each underwriter, if any, a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. The Holders shall not effect sales of Warrant Shares after receipt of such notice from the Company until an amendment becomes effective or the supplement has been filed. The Company's obligations under this Section 6(g) shall expire at such time as the Company is no longer required to maintain the effectiveness of the Registration Statement. (h) Compliance with SEC Rules and Regulations. The Company shall otherwise ----------------------------------------- use its best efforts to comply with all applicable rules and regulations of the Securities and Exchange Commission and will furnish to each Holder of Registrable Securities included in any registration statement at least five (5) business days prior to the filing thereof a copy of any amendment or supplement to such registration statement or prospectus and shall not file any amendment or supplement thereof to which any such Holder shall have reasonably objected on the grounds that such amendment or supplement does not comply in all material respects with the requirements of the 1933 Act or the rules or regulations thereunder. (i) Deferral Period. If, because of a proposed material acquisition or ---------------- any other material event, (i) the Company would, in the reasonable opinion of its counsel, be required to disclose material information which, in the good faith judgment of the Company, would not be in the best interests of the Company and its shareholders to disclose at that time or (ii) the filing or effectiveness of a Registration Statement or of a supplement or amendment to the prospectus pursuant to this Section 6 would impede, delay or interfere with any material financing, offer or sale of securities, acquisition, corporate reorganization or other transaction involving the Company or any affiliate of the Company, the Company may defer such filing or effectiveness for a specified period of up to 90 days after such filing or effectiveness would otherwise ordinarily have occurred. The Company may only request deferral pursuant to this section twice during any calendar year. (j) Holdback Agreement. The Holder, if requested by the Company and an ------------------- underwriter of the Company's securities, shall agree not to sell or otherwise transfer or dispose of any Warrant or Warrant Shares for a specified period of time not to exceed 90 days after any underwritten registration statement pursuant to which the Company proposes to sell its securities to the public generally has become effective; provided, however, that all executive officers and directors of the Company enter into similar agreements. In the event the Company should make such a request, the 12-month period mentioned in 6(a) shall be extended by a number of days equal to the actual duration of the holdback period. 7. Indemnification --------------- (a) Indemnification by the Company. The Company shall indemnify and hold ------------------------------- harmless each Holder, each of its officers and directors, its legal counsel, and each person, if any, who controls the Holder within the meaning of the 1933 Act against any losses, claims, damages, liabilities (joint or several), or expenses to which they may become subject under the 1933 Act, the Securities Exchange Act of 1934, as amended (the "1934 Act"), or other federal or state law, insofar as such losses, claims, damages, expenses, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the 1933 Act, the 1934 Act, any state securities law, or any rule or regulation promulgated under the 1933 Act, the 1934 Act, or any state securities law. The Company shall reimburse each Holder and its officers, directors, legal counsel or controlling persons for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability, or action. This indemnity agreement shall not apply to amounts paid in settlement of any loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable to the Holder in any case for any loss, claim, damage, liability, or action (A) to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by or on behalf of the Holder or such controlling person or (B) in the case of a sale directly by the Holder (including a sale of such Warrant Shares through any underwriter retained by the Holder or Holders to engage in a distribution solely on behalf of the Holder or the Holders), if such untrue statement or alleged untrue statement or omission or alleged omission was contained in a preliminary prospectus and corrected in a final or amended prospectus, and the Holder failed to deliver a copy of the final or amended prospectus at or prior to the confirmation of the sale of the Warrant Shares to the person asserting any such loss, claim, damage or liability in any case where such delivery is required by the 1933 Act. (b) Indemnification by Holders of Warrant Shares. Each Holder shall ------------------------------------------------- severally but not jointly indemnify and hold harmless the Company, each of its officers and directors, its legal counsel, and each person, if any, who controls the Company within the meaning of the 1933 Act, against any losses, claims, damages, liabilities (joint or several), or expenses to which the Company or any such director, officer, legal counsel, or controlling person may become subject, under the 1933 Act, the 1934 Act, or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by or on behalf of such Holder expressly for use in connection with such registration; and such Holder shall reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, or controlling person in connection with investigating or defending any such loss, claim, damage, liability, or action; provided, however, that the indemnity agreement contained in this Section 7 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of such Holder, which consent shall not be unreasonably withheld; and provided, further, that the indemnification obligation of such Holder shall be limited to the aggregate public offering price of the Warrant Shares sold by such Holder pursuant to such registration. (c) Notice, Defense and Counsel. Promptly after receipt by an indemnified --------------------------- party under this Section 7 of notice of the commencement of any action (including any governmental action), such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 7, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires to assume and control the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 7 to the extent of such prejudice, but the omission so to deliver written notice to the indemnifying party shall not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 7. 8. Loss etc. of Warrant -------------------- Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, and of indemnity reasonably satisfactory to the Company, if lost, stolen or destroyed, and upon surrender and cancellation of this Warrant, if mutilated, the Company shall execute and deliver to the Holder a new Warrant of like date, tenor and denomination. 9. Amendment --------- These Warrants may be amended only by written mutual agreement of the Company and the Holders of a majority of the then outstanding Warrants. 10. Communication ------------- No notice or other communication under this Warrant shall be effective unless, but any notice or other communication shall be effective and shall be deemed to have been given if, the same is in writing and is mailed by first-class mail, postage prepaid, addressed as set forth below: If to the Company: Agritope, Inc ----------------- 16160 S.W. Upper Boones Ferry Road Portland, Oregon 97224-7744 Attention: Gilbert N. Miller Executive Vice President and Chief Financial Officer or such other address as the Company has designated in writing to the Holder. If to the Holder: Vector Securities International, Inc. ---------------- 1751 Lake Cook Road Deerfield, Illinois 60013 Attention: Chairman and Chief Executive Officer or such other address as the Holder has designated in writing to the Company. 11. Headings -------- The headings of this Warrant have been inserted as a matter of convenience and shall not affect the construction hereof. 12. Applicable Law -------------- This Warrant shall be governed by and construed in accordance with the laws of the State of Oregon without giving effect to the principles of conflicts of laws thereof. 13. Assignment ---------- The Holder may assign or transfer this Warrant in whole or in part by completing and delivering to the Company the applicable document of assignment, duly executed, in the form attached hereto. Upon any such assignment or transfer, the term "Holder" shall be deemed to include any such assignee or transferee of the original Holder. 14. Severability ------------ If one or more provisions of this Warrant are held to be enforceable under applicable law, such provision shall be excluded from this Warrant and the balance of the warrant shall be interpreted as if such provisions were so excluded and the balance shall be enforceable in accordance with its terms. IN WITNESS WHEREOF, Agritope, Inc. has caused this Warrant to be signed by its President and Chief Executive Officer on the date stated above. /S/ Adolph J. Ferro, Ph.D. -------------------------------------------- Name: Adolph J. Ferro, Ph.D. Title: President and Chief Executive Officer ATTEST: /S/ Gilbert N. Miller - ------------------------------------------- Gilbert N. Miller, Executive Vice President, Chief Financial Officer and Secretary SUBSCRIPTION ------------ The undersigned, , pursuant to the provisions of the -------------------- foregoing Warrant, hereby agrees to subscribe for and purchase shares of ----- the Common Stock of Agritope, Inc. covered by said Warrant, and makes payment therefor at the price per share provided by said Warrant. Dated: Signature: --------------------------- ---------------------------- Address: ------------------------------ ASSIGNMENT ---------- FOR VALUE RECEIVED hereby sells, assigns and transfers unto -------------------- the foregoing Warrant and all rights evidenced thereby, and - -------------------- does irrevocably constitute and appoint , attorney, to ------------------- transfer said Warrant on the books of Agritope, Inc. Dated: Signature: --------------------------- ---------------------------- Address: ------------------------------ PARTIAL ASSIGNMENT ------------------ FOR VALUE RECEIVED hereby assigns and transfers unto -------------------- the right to purchase shares of the Common Stock of - -------------------- ----- Agritope, Inc. by the foregoing Warrant and a proportionate part of said Warrant and the rights evidenced hereby, and does irrevocably constitute and appoint , attorney, to transfer that part of said Warrant on the books - ---------------- of Agritope, Inc. Dated: Signature: --------------------------- ---------------------------- Address: ------------------------------ EX-21.1 4 LIST OF SUBSIDIARIES Vinifera, Inc., an Oregon corporation, Agrimax Floral Products, Inc., a Minnesota corporation Superior Tomato Associates, L.L.C., a Delaware limited liability company (66 2/3 percent interest owned) EX-23.1 5 CONSENT OF ARTHUR ANDERSON CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the company's previously filed Registration Statements (Form S-8, No. 333-46371). /S/ Arthur Anderson LLP Portland, Oregon December 18, 1998 EX-23.2 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Registration Statement on Form S-8 (No. 333-46371) of Agritope, Inc. of our report dated October 31, 1997, appearing on page 19 of this Form 10-K. /S/ PriceWaterhouseCoopers LLP Portland, Oregon December 18, 1998 EX-24.1 7 POWER OF ATTORNEY FOR W. CHARLES ARMSTRONG POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Adolph J. Ferro and Gilbert N. Miller, signing singly, the undersigned's true and lawful attorney-in-fact to: 1. Execute for and on behalf of the undersigned, in the undersigned's capacity as a director of Agritope, Inc., a Delaware Corporation (the "Company"), Forms 10-K, 10-Q or 8-K, and any amendments thereto, in accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 2. Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms and amendments with the United States Securities and Exchange Commission and the Nasdaq Stock Market, Inc. or similar authority. 3. Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K, and amendments thereto, on behalf of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 19th day of December, 1998. /S/ W. Charles Armstrong ----------------------------------- EX-24.1 8 POWER OF ATTORNEY FOR W. CHARLES ARMSTRONG POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Adolph J. Ferro and Gilbert N. Miller, signing singly, the undersigned's true and lawful attorney-in-fact to: 1. Execute for and on behalf of the undersigned, in the undersigned's capacity as a director of Agritope, Inc., a Delaware Corporation (the "Company"), Forms 10-K, 10-Q or 8-K, and any amendments thereto, in accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 2. Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms and amendments with the United States Securities and Exchange Commission and the Nasdaq Stock Market, Inc. or similar authority. 3. Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K, and amendments thereto, on behalf of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 21st day of December, 1998. /S/ Roger L. Pringle ----------------------------------- EX-24.1 9 POWER OF ATTORNEY FOR W. CHARLES ARMSTRONG POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Adolph J. Ferro and Gilbert N. Miller, signing singly, the undersigned's true and lawful attorney-in-fact to: 1. Execute for and on behalf of the undersigned, in the undersigned's capacity as a director of Agritope, Inc., a Delaware Corporation (the "Company"), Forms 10-K, 10-Q or 8-K, and any amendments thereto, in accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 2. Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms and amendments with the United States Securities and Exchange Commission and the Nasdaq Stock Market, Inc. or similar authority. 3. Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K, and amendments thereto, on behalf of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 23rd day of December, 1998. /S/ Michel de Beaumont ----------------------------------- EX-24.1 10 POWER OF ATTORNEY FOR W. CHARLES ARMSTRONG POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Adolph J. Ferro and Gilbert N. Miller, signing singly, the undersigned's true and lawful attorney-in-fact to: 1. Execute for and on behalf of the undersigned, in the undersigned's capacity as a director of Agritope, Inc., a Delaware Corporation (the "Company"), Forms 10-K, 10-Q or 8-K, and any amendments thereto, in accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 2. Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms and amendments with the United States Securities and Exchange Commission and the Nasdaq Stock Market, Inc. or similar authority. 3. Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K, and amendments thereto, on behalf of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 23rd day of December, 1998. /S/ Nancy L. Buc ----------------------------------- EX-24.1 11 POWER OF ATTORNEY FOR W. CHARLES ARMSTRONG POWER OF ATTORNEY Know all by these presents, that the undersigned hereby constitutes and appoints each of Adolph J. Ferro and Gilbert N. Miller, signing singly, the undersigned's true and lawful attorney-in-fact to: 1. Execute for and on behalf of the undersigned, in the undersigned's capacity as a director of Agritope, Inc., a Delaware Corporation (the "Company"), Forms 10-K, 10-Q or 8-K, and any amendments thereto, in accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder. 2. Do and perform any and all acts for and on behalf of the undersigned which may be necessary or desirable to complete and execute any such Form 10-K, 10-Q or 8-K, and any amendments thereto, and timely file such forms and amendments with the United States Securities and Exchange Commission and the Nasdaq Stock Market, Inc. or similar authority. 3. Take any other action of any type whatsoever in connection with the foregoing which, in the opinion of such attorney-in-fact, may be of benefit to, in the best interest of, or legally required by, the undersigned, it being understood that the documents executed by such attorney-in-fact on behalf of the undersigned pursuant to this Power of Attorney shall be in such form and shall contain such terms and conditions as such attorney-in-fact may approve in such attorney-in-fact's discretion. This Power of Attorney shall remain in full force and effect until the undersigned is no longer required to sign Forms 10-K, 10-Q and 8-K, and amendments thereto, on behalf of the Company, unless earlier revoked by the undersigned in a signed writing delivered to the foregoing attorneys-in-fact. IN WITNESS WHEREOF, the undersigned has caused this Power of Attorney to be executed as of this 22nd day of December, 1998. /S/ Pierre LeFebvre ----------------------------------- EX-27 12 FDS FOR ARTICLE 5 OF REGULATION S-X
5 This schedule contains summary financial information extracted from the condensed consolidated financial statements included herein and is qualified in its entirety by reference to such financial statements. 1 12-MOS SEP-30-1998 SEP-30-1998 3,904,087 0 1,183,607 25,057 3,289,172 8,524,005 6,008,851 (1,908,047) 14,390,326 1,640,087 0 0 2,143 40,502 10,967,594 14,390,326 2,574,976 2,799,664 3,414,293 3,414,293 5,609,811 25,000 1,248 (5,243,967) 0 (5,243,967) 0 0 0 (5,243,967) (1.42) 0
EX-99 13 CERTAIN FACTORS TO CONSIDER Certain Factors to Consider in Connection with Forward-Looking Statements December 1998 From time to time, Agritope, Inc. ("Agritope" or the "Company"), through its management, may make forward-looking public statements with respect to the Company regarding, among other things, expected future revenues or earnings, projections, plans, future performance, product development and commercialization, and other estimates relating to the Company's future operations. Forward-looking statements may be included in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in press releases or in oral statements made with the approval of an authorized executive officer of Agritope. The words or phrases "will likely result," "are expected to," "intends," "is anticipated," "estimates," "projects" or similar expressions are intended to identify "forward-looking statements" within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act of 1933, as amended, as enacted by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to a number of risks and uncertainties. The Company cautions you not to place undue reliance on its forward-looking statements, which speak only as of the date on which they are made. Agritope's actual results may differ materially from those described in the forward-looking statements as a result of various factors, including those listed below. The Company does not intend to update its forward-looking statements. Pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Agritope hereby files the following cautionary statements identifying certain factors that could cause its actual results to differ materially from those described in its forward-looking statements. LIMITED INDEPENDENT OPERATING HISTORY; HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. From 1987 to December 1997, the Company operated as a wholly owned subsidiary of Epitope, Inc. ("Epitope"). In December 1997, Epitope distributed all of the outstanding capital stock of the Company to Epitope shareholders as a dividend (the "Spin Off"). Accordingly, Agritope has a limited operating history as an independent company. Agritope has experienced significant operating losses since its incorporation (and since the Spin Off). As of September 30, 1998, it had an accumulated deficit of $46.4 million. Agritope may continue to experience significant operating losses as it continues its research and development programs. Agritope's ability to increase revenues and achieve profitability and positive cash flows from operations will depend in part on successful completion of the development and commercialization of its genetically engineered products. Agritope has not, at this time, achieved commercialization of any of its products other than grapevines sold by its majority owned subsidiary, Vinifera, Inc. There can be no assurance that Agritope's development efforts will result in commercially viable genetically engineered products, that Agritope's products will obtain required regulatory clearances or approvals or that any such products will achieve a significant level of market acceptance. As a result, there can be no assurance that Agritope will ever achieve profitability. FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING. The Company believes that its funds on hand will be sufficient to finance its operations for its 1999 fiscal year. However, because the Company's belief is based on a number of factors, many of which are beyond its control, it cannot be certain that its belief will prove accurate. The actual future liquidity and capital requirements of Agritope will depend on numerous factors, including: the costs and success of its development efforts; the costs and timing of its establishment of sales and marketing activities; the success of its current strategic collaborations; its success in securing additional strategic partners; the extent to which its existing and new products gain market acceptance; competing technological and market developments; its product sales and royalties; the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent claims and other intellectual property rights; and the availability of third party funding for its research projects. In any event, Agritope may seek or be required to raise substantial additional funds through public or private financings, collaborative relationships or other arrangements. There can be no assurance that financing will be available to the Company on satisfactory terms, if at all. Any additional equity financing may be dilutive to Agritope's stockholders, and debt financing, if available, may involve significant interest expense and restrictive covenants. In addition, subsequent changes in ownership due to future equity sales could adversely affect Agritope's ability to utilize existing net operating losses. Collaborative arrangements, if necessary to raise additional funds, may require that Agritope relinquish its rights to certain of its technologies, products or marketing territories. The failure of Agritope to raise any required capital likely would cause it to scale back, delay or eliminate certain of its programs and have a material adverse effect on its business, financial condition and results of operations. COMPETITION AND TECHNOLOGICAL CHANGE. The plant biotechnology industry is highly competitive. Competitors include independent companies that specialize in biotechnology; chemical, pharmaceutical and food companies that have biotechnology laboratories; universities; and public and private research organizations. Agritope believes that many companies, including companies with significantly greater financial resources such as Monsanto Company, DNAP Holding and Zeneca Plant Sciences, are engaged in the development of mechanisms to control the ripening and senescence of fruit and vegetable products. Technological advances by others could render Agritope's products less competitive. The Company believes that, despite barriers to new competitors such as its interest in various patents and substantial research and development lead-time, competition will intensify, particularly from agricultural biotechnology firms and major agrochemical, seed and food companies with biotechnology laboratories. There can be no assurance that such competition will not have an adverse effect on Agritope's business, financial condition and results of operations. GOVERNMENT REGULATION. Regulation by U.S. federal, state and local and by foreign governments will be a significant factor in the future production and marketing of Agritope's genetically engineered fruit and vegetable products. The extent of regulation depends on the intended uses of the products, how they are derived, and how applicable statutes and regulations are interpreted to apply to new genetic technologies and the products thereof. The U.S. federal government has implemented a coordinated policy for the regulation of biotechnology research and products. The U.S. Department of Agriculture ("USDA") has primary federal authority for the regulation of specific research, product development and commercial applications of certain genetically engineered plants and plant products. The U.S Food and Drug Administration ("FDA") has principal jurisdiction over plant products that are used for human or animal food. The U.S. Environmental Protection Agency ("EPA") has jurisdiction over the field testing and commercial application of plants genetically engineered to contain pesticides. Other U.S. federal agencies have jurisdiction over certain other classes of products or laboratory research. The USDA regulates the growing and transportation of most genetically engineered plants and plant products. In May 1992, the FDA announced its policy on foods developed through genetic engineering (the "FDA Policy"). The FDA Policy provides that the FDA will apply the same regulatory standards to foods developed through genetic engineering as applied to foods developed through traditional plant breeding. Under the FDA Policy, the FDA will not ordinarily require premarket review of genetically engineered plant varieties of traditional foods unless their characteristics raise significant safety questions, such as elevated levels of toxicants or the presence of allergens or food additives. Currently, the FDA Policy does not require that genetically engineered products be labeled as such, provided that such products are as safe and have the same nutritional characteristics as conventionally developed products. However, there can be no assurance that the FDA will not reconsider its position, or that local, state or foreign authorities will not enact labeling requirements, any of which could have a material adverse effect on the marketing of products derived using the tools and techniques of genetic engineering. The FDA is considering modifying its policy on foods developed through genetic engineering to include a Premarket Notification ("PMN") procedure. This policy modification could require a company that develops genetically engineered foods to inform the FDA that its safety evaluation of an engineered food is complete and that the company intends to commercialize the product. The objective of the PMN is to make the FDA and the public aware of all new genetically engineered food products entering the market. Agritope believes that a PMN procedure, if enacted, should not delay its plans to commercialize its genetically engineered fruit and vegetable products. Agritope's complete range of agribusiness and plant biotechnology activities are subject to general FDA food regulations and are, or may be, subject to regulation under various other U.S. laws and regulations. These include, but are not limited to, the Occupational Safety and Health Act, the Toxic Substances Control Act, the National Environmental Policy Act, other U.S. federal water, air and environmental quality statues and import/export control legislation. At the present time, most states generally defer to federal agencies (USDA or EPA) for the approval of genetically engineered plant field trials, although states are provided a review period prior to the issuance of a federal field trial permit. Failure to comply with applicable regulatory requirements could result in enforcement action, including withdrawal of marketing approval, seizure or recall of products, injunction or criminal prosecution. International regulatory policies for genetically engineered plants and plant products are not complete. Consequently, it is possible that additional data, labeling or other requirements will be required in countries where Agritope intends to grow and/or commercialize its genetically engineered products. Foreign regulatory authorities could require Agritope to conduct further safety assessments and potentially delay its product development programs or the commercialization of any resulting products. No assurance can be given that Agritope can obtain in a timely manner, if at all, any required regulatory approvals, exemptions, permits or other clearances either for its research or commercial activities. DEPENDENCE ON STRATEGIC PARTNERS. Agritope relies on its strategic partners for access to proprietary plant varieties. In addition, Agritope does not have or plan to have the capability to grow and distribute genetically engineered products in commercial quantities. Agritope expects some or all of the development, manufacturing and marketing of certain of its products to be performed or paid for by other parties, primarily agricultural companies, through license agreements, joint ventures or other arrangements. Commercialization of Agritope's products will require the assistance of Agritope's current strategic partners and may require that Agritope enter additional strategic partnerships with businesses experienced in the breeding, developing, producing, marketing and distributing of agricultural products. Agritope's future revenues will be dependent on the success of products developed pursuant to such collaborative relationships. There can be no assurance that Agritope will be able to establish additional strategic relationships or maintain its current strategic relationships, or that such relationships will be on terms sufficiently favorable to permit Agritope to operate profitably. Furthermore, conflicts may arise between the Company and its partners or among these third parties that could discourage them from working cooperatively with the Company. Agritope's commercial success will be dependent in part upon the performance of its strategic partners. UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY INFORMATION. Agritope has obtained certain patents, has license rights under other patents, and has filed a number of patent applications. Agritope anticipates filing patent applications for protection of its future products and technology. There can be no assurance that Agritope will obtain any patent for which it applies, that existing patents to which Agritope has rights will not be challenged, or that the issuance of a patent will give Agritope any material advantage over its competitors in connection with any of its products. Competitors may be able to produce products, which compete with a patented Agritope product without infringing on Agritope's patent rights. The issuance of a patent to Agritope or to a licensor is not conclusive as to validity or the enforceable scope of the claims of the patent. The validity and enforceability of a patent can be challenged by litigation after its issuance and, if the outcome of the litigation is adverse to the owner of the patent, the owner's rights could be diminished or withdrawn. The patent laws of other countries may differ from those of the U.S. as to the patentability of Agritope's products and processes. Moreover, the degree of protection afforded by foreign patents may be different from that of U.S. patents. The technologies used by Agritope may infringe the patents or proprietary technology of others. The cost of enforcing Agritope's patent rights in lawsuits that it may bring against infringers or of defending itself against infringement charges by other patent holders may be high and could interfere with Agritope's operations. Trade secrets and confidential know-how are important to Agritope's scientific and commercial success. Although Agritope seeks to protect its proprietary information through confidentiality agreements and appropriate contractual provisions, there can be no assurance that others will not develop independently the same or similar information or otherwise gain access to the Company's proprietary information. DEPENDENCE ON KEY PERSONNEL. Agritope depends to a large extent on the abilities and continued participation of its principal executive officers and scientific personnel. The loss of key personnel could have a material adverse effect on Agritope's business and results of operations. Competition for management and scientific staff in the agricultural biotechnology field is intense. No assurance can be given that Agritope will be able to continue to attract and retain personnel with sufficient experience and expertise to satisfy its needs. UNCERTAINTY OF PRODUCT DEVELOPMENT. Agritope's genetically engineered products are at various stages of development. There are difficult scientific objectives to be achieved in certain product development programs before the technological or commercial feasibility of the products can be demonstrated. Even the more advanced programs could encounter technological problems that may significantly delay or prevent product development or product introduction. There can be no assurance that any of Agritope's products under development, if and when fully developed and tested, will perform in accordance with its expectations, that it will obtain necessary regulatory approvals in a timely manner, if at all, or that its products can be successfully and profitably produced, distributed and sold. NEED FOR PUBLIC ACCEPTANCE OF GENETICALLY ENGINEERED PRODUCTS. The commercial success of Agritope's genetically engineered products will depend in part on public acceptance of the cultivation and consumption of genetically engineered plants and plant products. Public attitudes may be influenced by claims that genetically engineered plant products are unsafe for consumption or pose a danger to the environment. There can be no assurance that Agritope's genetically engineered products will gain public acceptance. VOLATILITY OF SHARE PRICE. The market price of the Company's Common Stock is volatile. Announcements regarding technical innovations, the development of new products, the status of corporate collaborations and supply arrangements, public concern as to the safety or other implications of products, regulatory approvals, patent or proprietary rights or other developments by the Company or its competitors could have a significant impact on the market price of the Common Stock. Further, due to one or more of the foregoing or other factors, the Company's results of operations in any future quarter may not meet the expectations of securities analysts or investors. In such event, the market price of the Company's Common Stock could be materially and adversely affected. In addition, the stock markets have recently experienced significant price and volume fluctuations seemingly unrelated to the performance of individual companies. Broad market fluctuations as well as general economic and political conditions may also adversely affect the market price of the Common Stock. NO ASSURANCE AS TO CONTINUED LISTING OF COMMON STOCK ON NASDAQ SMALLCAP MARKET. In order to maintain the listing of its Common Stock on The Nasdaq SmallCap Market, Agritope is required to comply with certain Nasdaq listing maintenance standards including minimum tangible asset value amounts, public float requirements and minimum stock prices. There can be no assurance that Agritope will continue to comply with the listing maintenance standards of The Nasdaq SmallCap Market as in effect from time to time. PRODUCT LIABILITY AND RECALL RISK. Agritope could be subject to claims for personal injury or other damages resulting from its products or services or product recalls. Agritope carries liability insurance against the negligent acts of certain of its employees and a general liability insurance policy that includes coverage for product liability, but not for product recall. In addition, Agritope may require increased product liability coverage as its products are commercially developed. Such insurance is expensive and, in the future, may not be available on acceptable terms, if at all. No assurance can be given that any product liability claim or product recall will not have a material adverse effect on Agritope's business, financial condition and results of operations. TERMS FOR COMMERCIALIZATION OF CERTAIN VEGETABLE AND FLOWER CROPS. Under the terms of the research and development agreement between Agritope and Vilmorin Clause & Cie (the "Vilmorin Research Agreement"), if the parties are unable to reach agreement, the terms of agreements for commercializing any covered vegetable and flower crops resulting from Agritope research funded by Vilmorin are to be determined by "baseball" style arbitration. In this style of arbitration, the arbitrator must choose all terms proposed by one party or the other, without modification or compromise. Although "baseball" style arbitration is intended to encourage the parties to make reasonable offers and to compromise their differences, there can be no assurance that it will do so. Accordingly, Agritope may not control the terms on which some of its research will be commercialized, and there can be no assurance that the terms selected by an arbitrator would be favorable to Agritope or allow it to operate profitably. Omit?] POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK. Any sales of substantial amounts of Common Stock in the public market, or the perception that such sales might occur, could materially adversely affect the market price of the Common Stock.] [Warrants; Stock Plan; Regulation S flow back; Conversion of Series A Preferred; Omit?] ANTI-TAKEOVER CONSIDERATIONS. Agritope's Certificate of Incorporation and Bylaws may have the effect of making an acquisition of control of Agritope in a transaction not approved by the Company's board of directors more difficult. For example, the Certificate of Incorporation and Bylaws provide for a classified board, prohibit the removal of directors except for "cause," limit the ability of the stockholders and directors to change the size of the board, and require advance notice before stockholders are permitted to nominate directors or submit other proposals at stockholder meetings. In November 1997, the Company's board of directors adopted a stockholder rights plan, which may limit the unsolicited acquisition of the Company's Common Stock. In addition, subject to limitations prescribed by Delaware law, the board has the authority to issue up to 10 million shares of Agritope Preferred and to fix the rights, preferences, privileges and restrictions of those shares, and to issue up to a total of 30 million shares of the Company's Common Stock, all without any vote or action by Agritope's stockholders, except as may be required by law or any stock exchange or automated securities interdealer quotation system on which the Common Stock may then be listed or quoted. Agritope is also subject to Delaware statutory provisions governing business combinations with persons deemed to be "interested stockholders." Finally, awards made under the Company's 1997 Stock Award Plan may vest in full immediately in the event of a change in control of Agritope or similar event. The potential issuance of additional shares of Agritope capital stock and other considerations referenced above may have the effect of delaying or preventing a change in control of Agritope, may discourage offers for the Common Stock, and may adversely affect the market price of, and the voting and other rights of the holders of the Common Stock. -----END PRIVACY-ENHANCED MESSAGE-----