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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 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, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20330
GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0886359
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1411 SW MORRISON STREET, SUITE 400, PORTLAND, OREGON 97205
(Address of principal executive offices)
Registrant's telephone number, including area code: (503)-205-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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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 voting stock held by non-affiliates of the
Registrant is $7,444,870 as of November 30, 1999 based upon the last closing
price as reported by the Nasdaq National Market System ($1.00).
The number of shares outstanding of the Registrant's Common Stock as of November
30, 2000 was 9,002,101 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement for its 2001 Annual Meeting of Shareholders.
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GARDENBURGER, INC.
2000 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 11
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
12
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 20
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 21
PART III
Item 10. Directors and Executive Officers of the Registrant 22
Item 11. Executive Compensation 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management 22
Item 13. Certain Relationships and Related Transactions 22
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 23
Signatures 24
1
PART I
ITEM 1. BUSINESS
- ------- --------
GENERAL
Gardenburger, Inc. (the "Company" or "Gardenburger") was organized in 1985 as an
Oregon corporation under the name Wholesome & Hearty Foods, Inc. and completed
its initial public offering in 1992. The Company changed its name to
Gardenburger, Inc., in October 1997. The Company's Common Stock trades on the
National Market Tier of the Nasdaq Stock Market under the symbol "GBUR."
COMPANY OVERVIEW
Gardenburger is a leading producer and marketer of branded veggie burgers. The
Company's Gardenburger(R) product line, featuring the Original Gardenburger(R)
grain-based veggie burger, is a leading national brand in the retail grocery,
food service, club store and natural foods channels of distribution. During
1999, the Company elected to change its fiscal year to a September 30 fiscal
year-end. Results for 1999 are therefore reflected in a nine-month "stub" year.
The Company operates in one business segment. See Note 1 to the Company's
financial statements included in this report.
As a result of product development and its consumer and trade marketing, the
Company has emerged as a leader in the veggie burger segment of the meat
alternative category. The past year has seen a decline in consumer consumption
of veggie burgers as a wider range of meat alternative products have become
available. In response to this shift in consumer tastes, the Company is
expanding its product line in early fiscal 2001 to include a chicken fillet
alternative, a sausage alternative, and a crumbles or ground meat alternative.
The Company's objective is to be a leading provider of meatless meal
alternatives in the four primary distribution channels in which it distributes
its products--retail grocery stores; food service, including restaurants,
universities and other commercial outlets; club stores; and natural foods
outlets. The Company currently distributes its products through more than 27,000
retail outlets, 35,000 food service outlets, 500 club store locations and 3,500
natural foods stores.
Within the retail grocery channel, the Company's largest channel of
distribution, the Company has approximately 182,000 retail grocery placements of
its products, representing an all commodity volume ("ACV")1 penetration of 91%,
and an average of 6.6 product variations available in each retail outlet. Each
product line is commonly referred to as a stock keeping unit ("SKU").
BUSINESS STRATEGY
Historically, Gardenburger's objective has been to capitalize on growth
opportunities for veggie burgers by increasing household penetration, consumer
usage and product distribution throughout all channels of distribution. The
recent year has seen increased competition in the veggie burger segment of the
meat alternative category and has seen consumer interest shift to other meat
alternative products rapidly becoming available on the market. Accordingly,
Gardenburger's business strategy has shifted and consists of the following key
elements:
FOCUS ON ACHIEVING PROFITABILITY. During fiscal 2000, Gardenburger's management
shifted from a strategy of rapid growth to one focused on achieving near-term
- ----------------------------
1 All commodity volume compares the total sales volume of the stores carrying
the Company's products to the total sales volume throughout the retail grocery
channel.
2
profitability. To achieve this goal, Gardenburger spent substantially less on
product advertising, focused on cost improvements in the production area, and
initiated cost reduction measures at the Portland support center. This business
model resulted in lower sales revenue and improved operating results. The
Company plans to continue the drive towards profitability in fiscal 2001 and
will manage all distribution channels with a goal of channel profitability for
the year. There is no assurance that Gardenburger will be able to successfully
execute this strategy and maintain its market share in the veggie burger
segment, particularly given the current highly competitive retail market.
INTRODUCE NEW PRODUCTS BEYOND VEGGIE BURGERS. In fiscal 2001, Gardenburger plans
to move beyond the veggie burger segment of the meat alternative category. With
a greater variety of meat alternative products available, consumer tastes have
become varied and selective. Consumer sales in the veggie burger segment
decreased approximately 11 percent in fiscal 2000; however, sales in the
non-burger meat alternative segment increased approximately 27 percent. To take
advantage of this trend, the Company launched a chicken alternative product in
October 2000 in the retail and natural food channels and intends to launch a
crumbles ground meat alternative and a sausage alternative product in the food
service channel in early 2001. Gardenburger believes that new product
introductions in other segments of the meat alternative category will support
its efforts to manage a leadership position in all channels and reinforce the
Gardenburger brand.
TASTE IMPROVEMENT. Gardenburger is committed to great tasting products and
constantly strives for product improvements. In fiscal 2000, Gardenburger
introduced its revolutionary Flame Grilled Hamburger Style veggie burger. This
product has a backyard grill taste and has raised the standard for taste for
veggie soy burgers. The Company currently has a patent pending for the flame
grilled concept and technology.
PENETRATE MULTIPLE DISTRIBUTION CHANNELS. The Company is already a leader in the
retail grocery, food service, club store and natural foods distribution
channels. The Company's goal is to manage a strong brand position in these
channels with profitability in all channels. The Company recognizes that the
increased competition in the grocery channel may result in a loss of market
share. The Company is aggressively pursuing profitable growth in the food
service channel where it has a strong presence and wide distribution. In
addition, Gardenburger believes that other distribution channels, such as
convenience stores, present growth opportunities and the Company plans to
actively pursue these markets.
PRODUCTS
Gardenburger is committed to offering healthy, great tasting and convenient
meatless food choices to consumers. The Company's principal products are
currently veggie burgers, veggie-grain based and soy based, which are currently
offered in seven flavors. Gardenburger also offers specialized products in
certain channels, including Gardenburger Sub(R), GardenSausage(R) and
GardenVegan(R). In October 2000, the Company introduced the Chik'n Grill(TM)
product, which imitates the taste and texture of chicken, in the grocery and
natural foods channels. The Company intends to introduce a sausage alternative
product and a crumbles ground meat alternative product in early 2001 in its food
service channel.
Gardenburger's recipes for its products are proprietary, although they contain
commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms,
brown rice, onions, rolled oats, low-fat cheeses, bulgur wheat, natural
seasonings and spices and contain no artificial additives. Soy based burgers are
seasoned to taste like ground beef. All of the Company's veggie burgers are
considerably lower in fat and calories than hamburgers of comparable weight.
3
The Company's retail grocery products are as follows:
2.5 OZ. VEGGIE-GRAIN BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- ------------------------------------ -------------------- ------------------------ ------------------- --------------
The Original Gardenburger(R) Veggie-grain based Mushrooms, brown rice, Low fat 130
burger onions, rolled oats and
low-fat cheese
Gardenburger Santa Fe(R) Spicy, Mexican Red and black beans, Low fat 130
flavor burger Anaheim chilies, red and
yellow bell peppers,
cilantro
Gardenburger Veggie Medley(R) Vegetable emphasis Soy cheese, broccoli, No fat 90
burger carrots, red and yellow
bell peppers
Gardenburger Savory Mushroom(TM) Gourmet burger Portabella mushrooms, Low fat 110
wild rice
Gardenburger Fire Roasted Gourmet burger Roasted garlic, Low fat 120
Vegetable (TM) sun-dried tomatoes
2.5 OZ. MEAT SUBSTITUTE PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- ------------------------------------ -------------------- ------------------------ ------------------- --------------
Gardenburger Hamburger Style(R) Hamburger analog Soy, wheat gluten No fat 90
Classic burger
Gardenburger Flame Grilled(TM) Flame grilled Soy 4 grams of fat 120
Hamburger Style analog burger
Chik'N Grill(TM) Flame grilled Soy, wheat gluten Low fat 100
analog chicken
All of the Company's products are frozen. The Company believes that its colorful
retail packaging, which features recipes and prominent Gardenburger script logo
on all sides of the package, contributes to brand recognition and easy consumer
identification of Gardenburger products, and is superior to that of its
competitors.
Gardenburger veggie burgers sold in retail grocery stores weigh 2.5 ounces and
come in boxes containing four patties. Gardenburger veggie burgers sold in the
food service channel are available in both 3.4-ounce and 5-ounce sizes.
Gardenburger veggie burgers are distributed to club stores in packages of 12, 15
or 18 burgers of 3.4 ounces each.
DISTRIBUTION
The Company primarily distributes its products into four channels: retail
grocery, food service, club stores and natural foods stores.
RETAIL GROCERY. Gardenburger veggie burgers can now be found in more than 27,000
grocery stores with over 182,000 placements at September 30, 2000. The Company's
4
ACV penetration in the U.S. retail grocery channel is approximately 91% as of
September 30, 2000, with an average of 6.6 SKUs. The Company's products are
currently carried in most major U.S. retail grocery chains.
FOOD SERVICE. The Company distributes its products to more than 35,000 food
service outlets throughout the U.S. and Canada, including restaurant chains such
as Applebee's, Fuddruckers, Marie Callenders, Red Robin, Subway and T.G.I.
Friday's. In many of these restaurants, the Gardenburger brand name appears on
the menu. Additional points of food service distribution include academic
institutions, hotels and other outlets, including amusement parks and sports
stadiums. In the United States, there are approximately 800,000 outlets in the
food service channel. The Company relies primarily on distributors such as Sysco
for distribution to this channel.
CLUB STORES. The Company's products are distributed to club stores with over 500
locations, including Costco and Sam's Club. Currently, these stores carry the
Gardenburger Original(R) and/or the Gardenburger Flame Grilled(TM) Hamburger
Style veggie burger in the 3.4 ounce food service size.
NATURAL FOODS. The Company's products are distributed to more than 3,500 natural
food stores, including Whole Foods and Wild Oats. The Company utilizes food
brokers that specialize in natural foods stores.
The Company's ability to expand distribution in each of the described channels
will depend in part on consumer preferences, and to a certain extent on
continuation of the current trends of health awareness, emphasis on a reduced
fat diet and reduced consumption of red meat, as well as safety concerns
associated with red and white meat. There is always a risk that further
development of low fat red or white meat products or technological advances that
limit food-borne disease risks may lead to a change in consumer preferences and
reduce demand for meat replacement products. Demand for the Company's products
may be adversely affected by such changes, which may occur rapidly and without
warning. Because of the Company's current primary dependence on a single product
line, any change in consumer preferences or increase in competition in the
veggie burger market segment would adversely affect the Company's business to a
greater degree than if it had multiple significant product lines.
The Company sells its products in North America primarily through approximately
60 independent, commissioned food brokers and 500 active distributors. The
retail food brokers have close working relationships with the leading grocery
chains, club stores and natural food stores and arrange for sales of
Gardenburger products, which the Company then ships directly to the retailers'
warehouses. Products sold into the food service channel are purchased from the
Company by distributors who arrange for shipment by temperature-controlled truck
to their frozen storage warehouses in principal cities throughout the United
States and Canada for distribution to food service outlets. The Company has no
long-term contracts with its food brokers and distributors and occasionally
changes brokers or distributors in an effort to increase coverage in a
geographic region. The Company could experience a substantial temporary or
permanent decline in net sales if one or more of the Company's major food
brokers or distributors were to discontinue handling the Company's products, go
out of business, or decide to emphasize distributing products of the Company's
competitors.
5
The following table lists selected retailers, distributors and food service
outlets that offer the Company's products for sale to consumers:
RETAIL FOOD SERVICE (CONTINUED)
- ------ ------------------------
GROCERY RESTAURANTS
A&P Applebee's
AWG Arctic Circle
Albertsons A&W
Burris Foods Wholesale Burgerville
C&S Wholesale Carrows
Cub Stores Coco's
Demoulas Dairy Queen
Dillon's Stores Damon's
Dominick's Flamers
Fleming Wholesale Foster Freeze
Fred Meyer Fuddruckers
Giant Eagle IHOP
Giant Food Lyons
Hannaford Marie Callenders
Jewel Red Robin
King/Cullen Sizzler
King Supers Subway
Kroger T.G.I. Friday's
Marsh Village Inn
Meijers
Nash Finch Wholesale HOTELS
Publix Super Markets Holiday Inn
QFC Marriott
Rainbow Foods Sheraton
Raley's
Ralph's UNIVERSITIES
Randall's Colorado University
Safeway DePaul
Shaw's Harvard
Smith's Indiana University
Shoprite Johns Hopkins University
Stop and Shop MIT
Supervalu Wholesale Princeton
Thriftway Purdue
Tops Stanford
Von's University of California, Berkeley
Wakefern UCLA
Wal-Mart University of Chicago
Wegmans USC
White Rose Wholesale
Winn-Dixie SPORTS/ENTERTAINMENT
Dodger Stadium
NATURAL FOODS Yankee Stadium
Wild Oats Rose Garden
Whole Foods Six Flags
Universal Studios
CLUB STORES
Costco CONTRACT MANAGEMENT COMPANIES
Sam's Club ARAMARK
Bon Apetit
FOOD SERVICE Compass
- ------------
Gukenheimer
DISTRIBUTORS Sodexho/Marriott
Alliant/FSA/DOT
Sysco
U.S. Food Service (formerly Rykoff-Sexton)
6
The Company's sales by region are as follows:
% OF NET SALES
REGION FY 2000 FY 1999 FY 1998
- ------ ------- ------- -------
Northeast 26% 27% 32%
Southwest 6% 9% 9%
Midwest 17% 14% 14%
Northwest 34% 34% 28%
Southeast 13% 13% 14%
Canada 4% 3% 3%
---- ---- ----
100% 100% 100%
To date, the Company has focused its sales efforts primarily in North America,
and international sales have not been material. The Company believes, however,
that opportunities exist for international distribution of Gardenburger
products.
SALES AND MARKETING
SALES. Gardenburger's sales objective is to manage a strong market position with
its veggie burgers in the retail grocery, food service, club store and natural
foods store channels and to expand beyond veggie burgers in the meat alternative
category. The Company's use of regional food brokers as its representatives
allows it to maintain contact with the nation's major retail grocery chains and
food service outlets without a large internal sales force. Brokers are paid
sales commissions on all products sold.
Gardenburger's Vice President of Grocery and Club Sales and Vice President and
General Manager of Food Service Sales and Marketing coordinate the Company's
sales efforts. Gardenburger's regional sales force, located strategically in the
Company's primary geographic sales regions and in proximity to its brokers, is
divided into a food service division and a retail grocery division. The regional
sales managers, who joined the Company from major food products companies such
as Campbell's, Nestle, Quaker Oats and Sara Lee, have substantial sales and
industry experience. These regional sales managers coordinate the efforts of the
food brokers and distributors.
MARKETING. In 1998 and 1999, Gardenburger's primary marketing objective was to
build awareness of the veggie burger in general and the Gardenburger brand in
particular in order to increase the market for veggie burgers and to make the
Gardenburger brand the premier name in the veggie burger segment. To achieve
this goal, the Company spent heavily for media advertising and consumer
couponing. The Company was successful in these goals; however, it determined
that it needed to move to a profit driven business model in fiscal 2000. As a
result, sales and marketing expenses were reduced to approximately $28 million
in fiscal 2000 from $48 million in fiscal 1999 and $59 million in fiscal 1998.
Media advertising was curtailed for fiscal 2000 and the Company focused spending
on trade customers as a way to more directly influence consumers. Gardenburger's
marketing efforts are timed to take advantage of seasonal increases in demand
attributable to the summer grilling season and the tendency of Americans to
renew their commitment to a healthy life style each January. The acquisition of
Gardenburger's two major competitors by large food companies in fiscal 2000
resulted in significant competition in the veggie burger market, particularly in
the grocery distribution channel. It is unknown if these competitors will
continue their aggressive marketing tactics and, if so, what effect this will
have on Gardenburger's sales.
7
RESEARCH AND DEVELOPMENT
Gardenburger's research and development activities are focused on the
development of new meat alternative products outside the veggie burger sub
category of the meat alternative market, as well as improvement and increased
efficiency in the manufacturing process. In addition to its permanent R&D staff,
the Company involves other employees as well as outside consultants on an
as-needed basis for specific projects. Gardenburger's R&D staff developed the
Gardenburger Flame Grilled Hamburger Style(R) product introduced in 2000 and the
new Chik'n Grill product introduced in October 2000. The Company is also working
on expanding its line of soy-based meat analogs as soy continues to garner
positive national attention. In promoting the soy-based products, Gardenburger
is relying on the October 1999 announcement by the U.S. Food and Drug
Administration ("FDA") that certain amounts of soy consumed as part of a healthy
diet may reduce the risk of heart disease. The Company conducts its research and
development activities at its facilities in Clearfield, Utah.
In fiscal 2000, 1999 and 1998, the Company spent approximately $319,000,
$553,000 and $1,121,000, respectively, on research and development activities.
MANUFACTURING
The Company's 120,000 square-foot Clearfield facility handles multiple
manufacturing lines for the Company's products. The first line commenced
operations in early 1998. A second line began producing in June 1999. The
Company believes the Clearfield facility will be able to support the Company's
growth plans. Clearfield, Utah is a more central location than Portland, Oregon,
with better distribution routes.
The production process involves cleaning, chopping and mixing the ingredients,
then forming, baking and quick-freezing the veggie burgers and finally packaging
them. Gardenburger's manufacturing process at its Clearfield facility is highly
automated, mixing and baking products in assembly-line fashion with minimal
human interaction. The Clearfield facility also utilizes newly-developed,
proprietary ovens that quickly cook the products. Products are shipped fully
cooked, frozen and packaged via temperature controlled truck to distributors
throughout North America.
A significant disruption in the Clearfield facility's production capacity as a
result of, for instance, fire, severe weather, regulatory actions, work
stoppages or other factors could disable the Company's capacity to manufacture
its products. If Gardenburger veggie burgers became less available, consumers
may switch to another brand of veggie burger and grocery stores may reduce shelf
space allocated to Gardenburger's products. Any significant disruption in
manufacturing would likely have a material adverse effect on the Company's
results of operations and financial condition.
In fiscal 2001, the Company intends to actively pursue co-packing, partnerships,
or other business arrangements to more fully utilize its manufacturing
capabilities. These arrangements could improve the Company's manufacturing
operations and gross margin percentages.
COMPETITION
The market for veggie burgers and other meat alternative products is highly
competitive. The Company's products compete primarily on the basis of taste,
quality of natural ingredients, ease of preparation, availability, price,
consumer awareness and brand preference.
8
Gardenburger believes that its products compare favorably to those offered by
its competitors. The Company prices its products competitively to its primary
competitors. The calorie and fat content of Gardenburger(R) products is
generally equivalent to that of competitors' products.
The Company believes that its principal competitors are The Kellogg Company,
which distributes its products under the "Morningstar Farms" label to the food
service and retail grocery channels; and Phillip Morris/Kraft Food Products,
which distributes soy-based meat analog burgers primarily in the retail grocery,
club and natural food channels under the "Boca Burger" label. These companies
have substantially greater financial resources and marketing experience than the
Company. In addition, other major national food products companies could decide
to produce veggie burgers at any time in the future.
The Company's products also compete indirectly with low fat meat products, such
as ConAgra's Healthy Choice 96 percent Extra Lean Ground Beef burger, and
chicken or turkey based low fat products distributed by several large companies
such as Tyson Foods, and with frozen, mass-produced low calorie/low fat entrees,
including national brands such as Healthy Choice, Lean Cuisine and Weight
Watchers. These products are produced by large companies with substantially
greater financial resources, name recognition and marketing experience than the
Company.
SIGNIFICANT CUSTOMERS
No customer represented more than 10 percent of net revenue in fiscal 2000.
SOURCES OF SUPPLY
Gardenburger uses natural ingredients such as mushrooms, oats, rice, onions and
soy protein. These are common agricultural items typically available in most
parts of the United States. In addition, Gardenburger uses packaging and other
materials that are common in the food industry. As a result, the Company
believes, but cannot assure, that its sources of supply are reasonably reliable
and that the Company is at no greater risk regarding supply issues than other
similar food processors and producers.
EMPLOYEES
As of November 30, 2000, the Company had approximately 177 full-time equivalent
employees, including 38 employees at its headquarters in Portland and 126 at its
Clearfield facility. None of the Company's employees is subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be good.
INTELLECTUAL PROPERTY
Gardenburger has approximately 19 U.S. registered trademarks, including
"Gardenburger," "Gardenburger Hamburger Style," "Gardenburger Sub" and
"GardenSausage." The Company has registered certain trademarks in Australia,
Canada, France, Germany and the United Kingdom, along with other smaller
countries, and applied for registration of certain trademarks in various other
foreign countries, including but not limited to Japan, Mexico and Thailand.
The Company actively monitors use of its trademarks by food service customers
and others and takes action it believes appropriate to halt infringement or
improper usage. The Company defends its intellectual property aggressively and,
from time to time, has been engaged in infringement protection activities.
Nonetheless, in the event third parties infringe or misappropriate the Company's
trademarks, the Company may have to incur substantial costs to protect its
intellectual property or risk losing its rights. Any large expenditure or loss
of rights could have a material adverse effect on the Company's results of
operations and financial position.
9
The Company generally does not hold any patents covering its recipes or
production methods and, therefore, can protect them only as trade secrets. Some
or all of these trade secrets could be obtained by others or could enter the
public domain, which could place the Company at a competitive disadvantage. In
2000, the Company applied for patent status for its Flame Grilled process and
currently has a "Patent Pending" status.
MANAGEMENT INFORMATION SYSTEMS
The Company has utilized a number of computer systems in its business. In March
1999, the Company upgraded its systems with a single Baan enterprise resource
planning system. This upgrade is expected to meet the Company's information
systems needs for the next several years. In addition to integrating
manufacturing, sales and accounting functions, the new Baan system increased the
availability of real-time information for management analysis and use in
operations. The Baan system has enhanced the Company's production planning
(planning of raw material purchases) and demand forecasting (matching supply to
distribution centers with order volume) capabilities. The Baan system also
includes pallet tagging, bar coding and scanning applications that facilitate
tracking of raw materials and finished goods through the Company's manufacturing
operation. The Baan system will enable the Company to expand its use of EDI if
desired by customers and suppliers, which the Company believes will expedite
order entry, payment and cash collection processes.
Gardenburger's Clearfield, Utah manufacturing facility is highly automated,
using a number of computerized process level controllers.
GOVERNMENT REGULATION
The manufacturing, packaging, storage, distribution and labeling of food
products are subject to extensive federal and state laws and regulations. The
FDA has issued regulations governing the ingredients that may be used in food
products, the content of labels on food products and the labeling claims that
may be made for foods. Foods may only include additives, colors and ingredients
that are either approved by the FDA or generally recognized as safe.
Gardenburger products must be manufactured in compliance with the FDA's current
Good Manufacturing Practice regulations applicable to food.
Regulators have broad powers to protect public health, including the power to
inspect the Company's products and facilities, to order the shutdown of a
facility or to seize or stop shipment of the Company's products and order a
recall of previously shipped products, as well as the power to impose
substantial fines and seek criminal sanctions against the Company or its
officers. The Company does not currently carry insurance against the cost of a
product recall, and a significant recall would have an adverse effect on the
Company's results of operations and financial condition. In addition, negative
publicity may result if regulators take any of the foregoing actions against the
Company or if the Company were to voluntarily recall products to avoid
regulatory enforcement.
INSURANCE
The Company maintains insurance against various risks related to its business.
This includes property and casualty, business interruption, director and officer
liability, food spoilage, products liability (but not product recalls) and
workers' compensation insurance. The Company currently maintains $2 million of
product liability insurance coverage and $20 million of general umbrella
coverage. The Company considers its policies adequate to cover the major risks
in its business, but there can be no assurance that this coverage will be
sufficient to cover the cost of defense or damages in the event of a significant
product liability claim.
10
ITEM 2. PROPERTIES
- ------- ----------
The Company leases approximately 19,000 square feet of administrative office
space at 1411 SW Morrison, Suite 400 in Portland, Oregon, pursuant to a second
two-year extension to its original lease that terminates on December 31, 2002.
Current monthly rent is approximately $24,100.
The Company leased additional space for research and development and production
at 1416 S.E. Eighth Avenue in Portland, Oregon through March 31, 2000. The
facility was leased pursuant to a one-year lease agreement from Frank S. Card, a
shareholder of the Company, at a rental rate of $2,700 per month. The lease was
terminated when the research and development activities were relocated to the
Company's production facility in Clearfield, Utah.
The Company leases 120,000 square feet of production space at Freeport Center,
Building A-16, in Clearfield, Utah, pursuant to a five-year lease that
terminates on December 31, 2002. The Company has the option to renew the lease
for two successive five-year terms. The Company began utilizing such space for
production in the first quarter of 1998. The monthly rent on this facility is
currently $28,000, and will increase to $30,500 beginning January 1, 2001.
The Company also leases 16,000 square feet of storage space at the Freeport
Center in Clearfield. The lease commenced February 15, 1999 and will expire
December 31, 2002. The Company has an option to renew the lease for an
additional three-year term. The monthly rent for the storage space is $3,200.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
There are currently no material, pending legal proceedings to which the Company
or its subsidiaries are a party. From time to time, the Company becomes involved
in ordinary, routine or regulatory legal proceedings incidental to the business
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
September 30, 2000.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
The Company's Common Stock trades on the National Market tier of The Nasdaq
Stock Market under the symbol GBUR. The high and low sales prices for the two
years in the period ended September 30, 2000 were as follows:
Fiscal 1999 High Low
------------------------------------------- ---------- --------
Quarter 1 $ 13.75 $ 8.63
Quarter 2 12.50 9.50
Quarter 3 10.25 7.50
Quarter 4 9.00 5.00
Fiscal 2000 High Low
------------------------------------------- ---------- --------
Quarter 1 $ 9.25 $ 5.50
Quarter 2 7.13 4.44
Quarter 3 6.00 3.44
Quarter 4 5.75 2.19
The number of shareholders of record and approximate number of beneficial owners
of the Company's Common Stock at November 30, 2000 were 610 and approximately
10,500, respectively.
There were no cash dividends declared or paid in 2000 or 1999 on the Company's
Common Stock. The Company does not anticipate declaring cash dividends on its
Common Stock in the foreseeable future. The Company may not, without the consent
of Dresdner Kleinwort Benson Private Equity Partners, LP ("Dresdner"), declare
or pay any cash dividends or make any distributions with respect to its capital
stock or other equity securities to the extent that at least $5,000,000 in
principal amount remains outstanding under the Company's convertible senior
subordinated notes and Dresdner owns a majority of the then outstanding
principal amount.
In addition, no cash dividends may be paid on the Company's Common Stock unless
dividends have been paid on all outstanding shares of the Company's Series A and
Series B Convertible Preferred Stock in an amount equal to 12% cumulative
dividends accrued on such preferred shares through the record date for the
common stock dividend (or, if greater, the amount of the common stock dividend
payable on the preferred shares on an as-converted basis). The quarterly
dividend accruing on the preferred shares is $975,000.
12
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
YEAR NINE MONTHS YEAR ENDED DECEMBER 31,
-------------------------------------
IN THOUSANDS, ENDED ENDED
EXCEPT PER SHARE AMOUNTS SEPTEMBER 30, SEPTEMBER 30,
2000 1999 1998 1997 1996
- ------------------------------------ ---------------- ---------------- --------- --------- ----------
STATEMENT OF OPERATIONS DATA(1)
Net sales $ 71,043 $ 60,106 $100,120 $ 56,837 $ 40,527
Gross margin 34,906 25,772 49,550 29,601 20,621
Sales and marketing expense 28,288 48,021 58,513 26,191 13,583
General and administrative expense
7,304 5,064 5,387 5,471 4,963
Restructuring and other charges
- 2,684 - - 612
Operating income (loss) (686) (29,997) (14,350) (2,061) 1,463
Preferred dividends 12,492 1,980 - - -
Net income (loss) available for
common shareholders $ (32,653) $ (22,146) $(10,042) $ (1,393) $ 1,063
Basic net income (loss) per share $ (3.67) $ (2.51) $ (1.16) $ (0.16) $ 0.13
Diluted net income (loss) per share $ (3.67) $ (2.51) $ (1.16) $ (0.16) $ 0.12
BALANCE SHEET DATA
Working capital $ 8,058 $ 11,741 $ 7,354 $ 11,504 $ 13,393
Total assets 25,160 52,702 55,048 26,470 24,934
Long-term convertible notes payable
15,000 15,000 15,000 - -
Convertible redeemable preferred
stock 36,513 32,147 - - -
Shareholders' equity (deficit) (34,311) (10,319) 10,926 19,839 20,979
(1)Statement of operations data for 1999 includes only nine months of
activity due to the Company's change in its fiscal year during 1999 from a
calendar year to a fiscal year ended September 30.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve known and
unknown risks and uncertainties. The Company's actual results, performance, or
achievements could differ materially from historical results or from any future
results anticipated by the forward-looking statements. In addition to statements
that explicitly describe such risks and uncertainties, readers should consider
statements containing words like "believes," "expects," "intends," "anticipates"
or "plans" to be uncertain and forward-looking. Important risks that could cause
actual results, performance or achievements to differ from those expressed or
implied by the forward-looking statements are described below and elsewhere in
this Form 10-K. Investors are cautioned not to place undue reliance on the
forward-looking statements.
GENERAL
The Company's net sales are attributable almost entirely to the Gardenburger(R)
veggie burger (and related veggie patty products). If demand for the
Gardenburger veggie burger declines or does not increase at the rate currently
anticipated, whether as a result of competition, lower consumer demand or other
unforeseen events, the Company's business will be adversely affected to a
greater degree than if it had multiple product lines. Any decrease in the
Company's net sales levels may lead to reductions in the amount of shelf space
allocated to the Company's products at grocery stores, or menu space devoted to
such products at food service outlets.
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations for
the periods indicated and presents the results of operations as a percentage of
net sales.
September 30, September 30, December 31,
Year Ended(1) 2000 1999 1998
- --------------------------------------------- ----------------- ---------------- ----------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 50.9 57.1 50.5
----------------- ---------------- ----------------
Gross margin 49.1 42.9 49.5
Sales and marketing expense 39.8 79.9 58.4
General and administrative expense 10.3 8.4 5.4
Restructuring charges -- 4.5 --
----------------- ---------------- ----------------
Operating loss (1.0) (49.9) (14.3)
Other expense (2.8) (2.3) (1.5)
----------------- ---------------- ----------------
Loss before income taxes (3.8) (52.2) (15.8)
Income tax (expense) benefit (24.6) 18.7 5.8
----------------- ---------------- ----------------
Loss before preferred dividends (28.4) (33.5) (10.0)
Preferred dividends (17.6) (3.3) --
----------------- ---------------- ----------------
Net loss (46.0)% (36.8)% (10.0)%
================= ================ ================
(1) Statements of operations data for 1999 includes only nine months of activity
due to the Company's change in its fiscal year during 1999 from a calendar
year to a fiscal year ended September 30.
14
2000 COMPARED TO 1999
GENERAL. During 1999, the Company changed its fiscal year end to September 30
from December 31. Accordingly, the following discussion compares the
twelve-month period ended September 30, 2000 ("fiscal 2000") with the nine-month
period ended September 30, 1999 ("fiscal 1999").
NET SALES. Net sales for fiscal 2000 increased to $71.0 million from $60.1
million for fiscal 1999. The increase is primarily due to the change in the
Company's fiscal year, offset by reduced unit sales in fiscal 2000 due to
decreased advertising and couponing and an overall decrease in unit sales within
the veggie burger category. The Company has experienced an extremely competitive
environment in fiscal 2000, particularly in the retail grocery and club store
portions of its business. This, coupled with an overall decline in consumer
purchasing in the veggie burger market, has resulted in decreased unit sales for
fiscal 2000 on an annualized basis.
GROSS MARGIN. Gross margin increased to $34.9 million (49.1 percent of net
sales) for fiscal 2000 from $25.8 million (42.9 percent of net sales) for fiscal
1999. The increase in the gross margin is primarily due to the change in the
Company's fiscal year, as well as increased efficiencies at the Company's
production facility. The increase in the gross margin percentage is primarily a
result of the second production line at the Company's Clearfield plant being
fully on-line as well as favorable purchase prices for dairy products during
fiscal 2000.
SALES AND MARKETING EXPENSE. Sales and marketing expense decreased to $28.3
million (39.8 percent of net sales) for fiscal 2000 from $48.0 million (79.9
percent of net sales) for fiscal 1999. The Company has reduced its sales and
marketing expenditures as it has moved to a profit driven business model in
fiscal 2000 from its more aggressive media advertising model in fiscal 1999. The
Company has significantly reduced its discretionary marketing expenses and is
focusing its marketing spending on areas that it believes will more efficiently
manage its market position, especially within the grocery channel.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense ("G&A")
increased to $7.3 million (10.3 percent of net sales) for fiscal 2000 from $5.1
million (8.4 percent of net sales) for fiscal 1999. The increase is due
primarily to the change in the Company's fiscal year, increased depreciation
expense related to the Company's new information system, and certain one-time
severance payments and costs related to new strategic initiatives, offset in
part by lower salaries and related costs as a result of an organizational
downsizing which began in September 1999.
RESTRUCTURING CHARGE. The Company incurred a restructuring charge of $2.7
million during fiscal 1999 related to the closure of its Portland, Oregon
production facility, a fair market value adjustment for two of the Company's
Portland, Oregon area properties and the write-off of an older information
system. In the first quarter of fiscal 2000, the Company sold one Portland area
property referred to above for net proceeds of approximately $1.5 million and
recognized a gain on the sale of approximately $174,000. In October 2000, the
Company sold the second Portland area property referred to above for net
proceeds of approximately $645,000. No gain or loss was recognized on the sale
as a valuation allowance was recorded in fiscal 1999.
OPERATING LOSS. Loss from operations was $686,000 in fiscal 2000 compared to an
operating loss of $30.0 million for fiscal 1999. The improvement in operating
15
results was primarily due to increased gross margin percentages and decreased
sales and marketing expenses as a percentage of net sales as discussed above,
partially offset by lower sales on an annualized basis for fiscal 2000.
OTHER EXPENSE, NET. Other expense, net for fiscal 2000 was $303,000 and
primarily consisted of losses from sales of fixed assets.
INCOME TAXES. Income tax expense was $17.5 million in fiscal 2000, which
consists of a $17.5 million valuation reserve against the Company's deferred
income tax assets. As of September 30, 2000, the Company had net operating loss
carryforwards (NOLs) totaling approximately $45.3 million. Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") requires that the tax benefit of such NOLs and other deductible temporary
differences be recorded as an asset to the extent that management assesses the
utilization of such NOLs to be reasonably assured in the near future. Otherwise,
a valuation reserve is required to be recorded. Such a reserve was recorded in
the fourth quarter of fiscal 2000 as a result of recurring operating losses in
recent years and as a result of increased competition leading to poorer than
expected results for fiscal 2000.
PREFERRED DIVIDENDS. Preferred dividends were $12.5 million during fiscal 2000
compared to $2.0 million in fiscal 1999. In April 1999, the Company issued $32.5
million of Series A and Series B convertible preferred stock that is entitled to
a 12% cumulative annual dividend, resulting in a non-cash quarterly dividend
charge of $975,000. In addition, the $2.3 million of related issuance costs are
being accreted over five years, after which the preferred stock may be redeemed,
totaling approximately $117,000 per quarter. In the first quarter of fiscal
2000, due to an adjustment in the Series B conversion price to $3.75 per share
from $10.00 per share, the Company recorded a non-cash charge of $8.1 million
related to the implied value of the beneficial conversion feature.
NET LOSS AVAILABLE FOR COMMON SHAREHOLDERS. Net loss available for common
shareholders was $32.7 million in fiscal 2000 compared to $22.1 million in
fiscal 1999. The $32.7 million loss available for common shareholders for fiscal
2000 includes the additional $8.1 million non-cash preferred dividends charge in
the first quarter of fiscal 2000 as well as the $17.5 million valuation reserve
against the Company's net deferred tax assets as discussed above. The Company
believes that the impact of inflation was not material for fiscal years 2000 and
1999.
1999 COMPARED TO 1998
GENERAL. During 1999, the Company changed its fiscal year end to September 30
from December 31. Accordingly, the following discussion compares the nine-month
period ended September 30, 1999 ("fiscal 1999") with the twelve-month period
ended December 31, 1998 ("fiscal 1998").
NET SALES. Net sales for fiscal 1999 decreased to $60.1 million from $100.1
million for fiscal 1998. The decrease is attributable to both the change in the
Company's fiscal year and a decrease in unit sales. During the 1998 period,
external events, such as e. coli outbreaks in the U.S. and mad cow disease in
the U.K., brought attention to the dangers of eating red meat. Management
believes that these events worked synergistically with the Company's advertising
campaign during 1998 to increase unit sales. No similar events occurred during
1999. In addition, the Company experienced lower than anticipated new consumer
trial during 1999, and unfavorable weather conditions adversely affected the
1999 grilling season. To a lesser extent, the lower sales figures in fiscal 1999
16
reflect the impact of the Company's strong December 1998 sales, as customers,
especially in the grocery channel, stocked up on product in anticipation of
extensive January 1999 consumer promotions.
GROSS MARGIN. Gross margin decreased to $25.8 million (42.9 percent of net
sales) for fiscal 1999 from $49.6 million (49.5 percent of net sales) for fiscal
1998. The decrease in the gross margin is a result of the reduction in sales
discussed above as well as a lower gross margin percentage. The decrease in the
gross margin percentage is primarily a result of start-up costs related to
bringing up the second production line at the Clearfield facility and of
operating manufacturing facilities at less than 100 percent of capacity in order
to reduce product inventories in line with decreased sales levels for fiscal
1999.
SALES AND MARKETING EXPENSE. Sales and marketing expense decreased to $48.0
million (79.9 percent of net sales) for fiscal 1999 from $58.5 million (58.4
percent of net sales) for fiscal 1998. The decrease in spending in fiscal 1999
is primarily a result of the change in fiscal year. Of the $48.0 million spent
in fiscal 1999, approximately $35.8 million was for discretionary spending such
as television advertising, couponing and trade programs.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense ("G&A")
decreased to $5.1 million (8.4 percent of net sales) for fiscal 1999 from $5.4
million (5.4 percent of net sales) for fiscal 1998. The decrease is due
primarily to the change in the Company's fiscal year, offset in part by costs
related to implementing a year 2000 compliant management information system and
the associated depreciation expense.
RESTRUCTURING CHARGE. The Company incurred a restructuring charge of $2.7
million during fiscal 1999 related to the closure of its Portland, Oregon
production facility, a fair market value adjustment for two of the Company's
Portland, Oregon area properties and the write-off of an older information
system. At September 30, 1999, no amounts remained in accrued liabilities
related to these charges.
OPERATING LOSS. Operating loss was $30.0 million in fiscal 1999 compared to an
operating loss of $14.4 million for fiscal 1998 as a result of the individual
line item changes discussed above, including, in particular, the decreased gross
margin percentage and increased sales and marketing expense as a percentage of
net sales.
INCOME TAXES. Income taxes are based on an estimated rate of approximately 36
percent for fiscal 1999 compared to the approximately 37 percent rate used for
fiscal 1998.
PREFERRED DIVIDENDS. The Company is accruing a 12 percent cumulative annual
dividend on its convertible preferred stock payable upon redemption of the
stock. The convertible preferred stock was issued in April 1999. The quarterly
dividend is $975,000. In addition, the $2.3 million of related issuance costs
are being accreted over five years, after which the preferred stock may be
redeemed, totaling approximately $117,000 per quarter.
NET LOSS AVAILABLE FOR COMMON SHAREHOLDERS. Net loss available for common
shareholders was $22.1 million in fiscal 1999 compared to $10.0 million in
fiscal 1998 as a result of the individual line item changes discussed above. The
Company believes that the impact of inflation was not material for fiscal years
1999 and 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had working capital of $8.1 million, which
included $2.2 million of cash and cash equivalents, compared to $11.7 million in
17
working capital at September 30, 1999, including $7.0 million of cash and cash
equivalents. The $3.6 million decrease in available working capital is primarily
due to $3.2 million used in operations, $855,000 used for the purchase of
property and equipment and $2.4 million used for payment on the Company's line
of credit, offset by $1.6 million in proceeds from the sale of property.
Accounts receivable decreased $2.0 million to $4.1 million at September 30, 2000
compared to $6.1 million at September 30, 1999, primarily due to lower sales in
the fourth quarter of fiscal 2000. Days sales outstanding decreased to 28 days
at September 30, 2000 from 32 days at September 30, 1999.
Inventories remained relatively flat at $7.5 million at September 30, 2000
compared to $7.3 million at September 30, 1999. Inventory turned 4.5 times on an
annualized basis in the fourth quarter of fiscal 2000 compared to 5.5 times on
an annualized basis in the fourth quarter of fiscal 1999.
The Company recorded a valuation reserve of $17.5 million related primarily to
the tax benefit associated with $45.3 million of net operating loss
carryforwards ("NOLs") generated through September 30, 2000. As a result, net
deferred income tax assets were reduced to zero at September 30, 2000 from $17.5
million at September 30, 1999.
Accounts payable decreased $4.8 million to $1.9 million at September 30, 2000
from $6.7 million at September 30, 1999, primarily as a result of decreased
spending on advertising and related costs in fiscal 2000.
Payroll and related liabilities increased $470,000 to $1.4 million at September
30, 2000 from $941,000 at September 30, 1999, primarily as a result of payments
under accrued retention compensation agreements in fiscal 2000 that did not
occur in fiscal 1999.
Other current liabilities decreased $1.2 million to $1.9 million at September
30, 2000 from $3.1 million at September 30, 1999, primarily as a result of the
timing of payments and amount of accruals related to couponing and certain trade
related expenditures.
Capital expenditures of $855,000 during fiscal 2000 primarily resulted from
expenditures for the Company's production facility. Capital expenditures are
estimated to total approximately $750,000 for fiscal 2001, primarily for
equipment to support new products at the Company's production facility.
Additional paid-in capital increased $8.1 million to $12.4 million at September
30, 2000 from $4.3 million at September 30, 1999 as a result of the $8.1 million
non-cash charge related to the implied value of the beneficial conversion
feature of the Series B convertible preferred stock.
At September 30, 2000, the Company had outstanding $15.0 million of 7 percent
Convertible Senior Subordinated Notes (the "Notes") held by Dresdner Kleinwort
Benson Private Equity Partners L.P. ("Dresdner"). The Notes are convertible into
shares of the Company's Common Stock at the option of the holder until maturity
in 2003, at which time they will be due in full if not previously converted. The
Company may also elect to prepay the Notes, if not previously converted, at any
time, subject to a prepayment premium prior to March 31, 2002. The conversion
price of the Notes at September 30, 2000 was $11.42 per share. In December 2000,
the Company and Dresdner agreed to amend the Notes to provide an additional
alternative for interest payments. The Company may elect, with prior written
18
consent from Dresdner, to satisfy its semiannual obligation to pay interest on
the Notes by increasing the then unpaid principal amount of the Notes by an
amount equal to the interest then payable. Under this alternative, the interest
payable shall be calculated at an annual interest rate of 10% rather than 7%.
The Company, with Dresdner's consent, has elected to use the new alternative for
the interest payable at September 30, 2000 and, as such, the total principal
amount of the Notes has been increased to $15,750,000.
Under the terms of the Note Purchase Agreement, as amended, relating to the
Notes, the Company must comply with one financial covenant as follows: the
Company must not have a cumulative cash loss in excess of $5.0 million from
December 23, 1999 through December 23, 2002. At September 30, 2000, the Company
was in compliance with this covenant.
In April 1999, the Company closed a stock purchase agreement selling $32.5
million of convertible preferred stock to several investors. Under the terms of
the agreement, the Company sold an aggregate of 2,762,500 shares of Series A
convertible preferred stock and 487,500 shares of Series B convertible preferred
stock to members of the investor group, at a price of $10 per share for each
series, or an aggregate consideration of $32.5 million, and received net
proceeds of $30.2 million. At September 30, 2000, the Series A preferred shares
were convertible at a price of $10.00 per share and the Series B preferred
shares were convertible at $3.75 per share (subject to antidilution adjustments)
at any time following issuance at the discretion of the holder. The Company did
not meet certain performance targets for the twelve months ended December 31,
1999 specified in the terms of the Series B convertible preferred stock,
triggering an adjustment in the Series B conversion price to $3.75 per share
from $10.00 per share. As a result of the adjustment, the Company recorded an
approximately $8.1 million non-cash charge for additional preferred dividends to
account for the implied value of the beneficial conversion feature. Both series
of preferred stock are entitled to a 12 percent cumulative annual dividend
payable upon redemption of the stock or in the event of a sale or liquidation of
the Company. Shares may not be redeemed until five years after the original date
of issuance, at which time they may be redeemed at the election of the holders
or, under certain conditions, at the discretion of the Company. The redemption
value, exclusive of accrued but unpaid dividends, of the Series A and Series B
convertible preferred stock is $27.6 million and $4.9 million, respectively. The
difference between the carrying amount and the redemption value of the
convertible preferred stock is being accreted as additional preferred dividends
over the period until redemption.
In December 1999, the Company entered into a Loan and Security Agreement with
Banc of America Commercial Finance Corporation (the "Agreement"). Effective
October 2, 2000, Banc of America sold the loan under the existing agreement to
Wells Fargo Business Credit, Inc. The Agreement provides for a line of credit
based on eligible accounts receivable and inventories of up to $25.0 million
(assuming 30 percent participation by another lender) and expires on December
23, 2002. The interest rate on the line is prime plus 0.125% or 9.625% at
September 30, 2000. The Company had $2.6 million outstanding under this line at
September 30, 2000. There is one financial covenant under the Agreement as
follows: the Company must not have a cumulative cash loss in excess of $5.0
million from the origination date of the Agreement through the expiration date
of the Agreement. At September 30, 2000, the Company was in compliance with this
covenant. The Company's principal sources of liquidity are borrowings under this
credit facility and funds generated from operations. The Company anticipates
that cash generated from operations and bank borrowings will be sufficient to
satisfy working capital and capital expenditure requirements for current
operations for the next twelve months.
19
The Company leases various food processing, production and other equipment in
use at its Clearfield, Utah production facility pursuant to two lease agreements
between the Company and BA Leasing & Capital Corporation ("BA Capital"), an
affiliate of Bank of America. Each lease agreement contains a cross-default
provision stating that any default under any other borrowing or credit agreement
that includes a failure to make payment when due or gives the holder a right of
acceleration constitutes an event of default. If an event of default by the
Company occurred under the lease agreements with BA Capital, the Company's
manufacturing capacity would be significantly curtailed or even eliminated if BA
Capital were to exercise its right to sell the equipment. In addition, neither
lease agreement contains express provisions giving the Company a right to
purchase the equipment at the end of the lease terms, which range from five to
seven years, depending upon the equipment.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued Statement of Financial Accounting Standards No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999,
the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an
amendment to Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities". SFAS 137 and 138 establish
accounting and reporting standards for all derivative instruments. SFAS 137 and
138 are effective for fiscal years beginning after June 15, 2000. The Company
does not currently have any derivative instruments, nor does it participate in
hedging activities, and therefore it does not expect the adoption of these
standards to have a material impact on its financial position or results of
operations.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101"). SAB 101 summarized certain areas of the Staff's
views in applying generally accepted accounting principles to revenue
recognition in financial statements. In June 2000, SAB 101B was issued which
deferred the implementation date of SAB 101 until the fourth quarter of the
first fiscal year beginning after December 15, 1999. The Company does not expect
that SAB 101 will have a significant impact on its financial condition or
results of operations.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"). EITF 00-14
is intended to provide consensus guidance for the accounting for sales subject
to rebates and revenue sharing arrangements as well as coupons and discounts.
The issue addresses the income statement classification of rebates and other
discounts as well as the accounting for those rebates and discounts. As a result
of additional discussion by the EITF in July 2000, the implementation date of
EITF 00-14 has been delayed until the fourth quarter of the first fiscal year
beginning after December 15, 1999. Upon application of the consensus,
comparative financial statements for prior periods should be reclassified to
comply with the classification guidelines of EITF 00-14. While it is expected
that EITF 00-14 will have an impact on the Company's financial statements, the
extent of the impact is not known at this time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company's only financial instrument with market risk exposure is its
variable rate line of credit. At September 30, 2000, the Company had $2.6
20
million outstanding under this credit line at an annual interest rate of 9.625
percent. A hypothetical 10 percent change in interest rates would not have a
material impact on the Company's cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The financial statements and notes thereto required by this item begin on page
F-1 as listed in Item 14 of Part IV of this document.
Unaudited quarterly financial data for each of the seven quarters in the period
ended September 30, 2000 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER (1)
- ----------------------------------- ----------- ----------- ----------- ---------------
2000
Net sales $ 18,750 $ 14,361 $ 21,333 $ 16,599
Gross margin 9,969 6,652 10,377 7,908
Net loss (2) (8,772) (2,791) (704) (20,386)
Basic and diluted net loss per share (0.99) (0.32) (0.08) (2.28)
1999
Net sales $ 13,563 $ 22,228 $ 24,315 n/a
Gross margin 6,210 9,177 10,385 n/a
Net loss (3) (5,456) (11,428) (5,262) n/a
Basic and diluted net loss per share (0.62) (1.29) (0.60) n/a
(1)Quarterly statement of operations data for 1999 includes only three quarters
of activity due to the Company's change in its fiscal year during 1999 from a
calendar year to a fiscal year ended September 30.
(2)Included in net loss in the first quarter of 2000 is an $8.1 million
non-cash charge related to the implied value of the Series B preferred stock
beneficial conversion feature. Included in net loss in the fourth quarter of
2000 is a $17.5 million non-cash income tax valuation allowance against net
deferred tax assets.
(3)Included in net loss in the first and second quarters of 1999, respectively,
is a restructuring charge totaling $1,100 and $1,584 on a pre-tax basis.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Information required by this item is included under the captions ELECTION OF
DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE, in the Company's Proxy Statement for its 2001 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Information required by this item is included under the captions EXECUTIVE
COMPENSATION, DIRECTOR COMPENSATION, EMPLOYMENT CONTRACTS AND SEVERANCE AND
CHANGE-IN-CONTROL ARRANGEMENTS and COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS in the Company's Proxy Statement for its
2001 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's Proxy
Statement for its 2001 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information required by this item is included under the caption COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS AND
MANAGEMENT TRANSACTIONS in the Company's Proxy Statement for its 2001 Annual
Meeting of Shareholders and is incorporated herein by reference.
22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Arthur Andersen LLP F-1
Balance Sheets - September 30, 2000 and 1999 F-2
Statements of Operations - Year ended September 30, 2000,
nine months ended September 30, 1999 and year ended December 31,
1998 F-3
Statements of Shareholders' Equity (Deficit) - Year ended September
30, 2000, nine months ended F-4 September 30, 1999 and year ended
December 31, 1998 F-4
Statements of Cash Flows - Year ended September 30, 2000, nine months
ended September 30, 1999 and year ended December 31, 1998 F-5
Notes to Financial Statements F-6
Report of Independent Public Accountants on Financial Statement
Schedule F-17
Schedule II Valuation and Qualifying Accounts F-18
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended September 30,
2000.
(c) EXHIBITS
Exhibits are listed on the Index to Exhibits following the financial statements
included in this report.
23
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, thereunto duly authorized.
Date: December 22, 2000.
GARDENBURGER, INC.
By: /s/ JAMES W. LINFORD
--------------------
James W. Linford
Interim President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on December 22, 2000.
Signature Title
- --------- -----
/s/ JAMES W. LINFORD Interim President and Chief Executive Officer
- --------------------------- (Principal Executive Officer)
James W. Linford
/s/ LORRAINE CRAWFORD Corporate Controller and Acting Chief
- --------------------------- Financial Officer
Lorraine Crawford (Principal Financial and Accounting Officer)
/s/ KYLE A. ANDERSON Director
- ---------------------------
Kyle A. Anderson
/s/ ALEXANDER P. COLEMAN Director
- ---------------------------
Alexander P. Coleman
/s/ JASON M. FISH Director
- ---------------------------
Jason M. Fish
/s/ RONALD C. KESSELMAN Chairman of the Board
- ---------------------------
Ronald C. Kesselman
/s/ RICHARD L. MAZER Director
- ---------------------------
Richard L. Mazer
/s/ MARY O. MCWILLIAMS Director
- ---------------------------
Mary O. McWilliams
/s/ MICHAEL L. RAY Director
- ---------------------------
Michael L. Ray
/s/ E. KAY STEPP Director
- ---------------------------
E. Kay Stepp
- --------------------------- Founder and Director
Paul F. Wenner
24
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation, as amended April 14, 1999 (18)
3.2 1995 Restated Bylaws, as amended July 13, 1999 (20)
10.1 Amended and Restated Rights Agreement between the Company and
First Chicago Trust Company of New York, dated July 15, 1999 (20)
10.2 Purchase and Sale Agreement and Receipt for Earnest Money
between the Company and Ironwood Investments, dated August 11,
1999 (21)
10.3 Purchase and Sale Agreement and Receipt for Earnest Money between
the Company and John M. Hopkins, dated October 5, 2000
10.4 Loan and Security Agreement, dated December 23, 1999, between
Banc of America Commercial Finance Corporation through its
Commercial Funding Division and the Company (22)
10.5 Morrison Plaza Office Lease, dated October 29, 1996 (10)
10.6 First Amendment to Morrison Plaza Office Lease, dated December 9,
1997 (11)
10.7 Lease extension for Morrison Plaza Office Building, dated
September 11, 1998 (14)
10.8 Third Amendment to Lease--Lease Extension for Morrison Plaza
Office Building, dated August 1, 2000
10.9 Facility Lease by and between Freeport Center Associates, a Utah
general partnership and the Company, dated May 28, 1997 (9)
10.10 Addendum, dated August 1, 1997, to Facility Lease by and
between Freeport Center Associates, and the Company (11)
10.11 Warehouse Lease between Freeport Center Associates and the
Company, dated January 25, 1999 (17)
10.12 Lease Agreement between BA Leasing & Capital Corporation and
the Company, dated as of December 17, 1997 (11)
10.13 First Amendment, dated June 4, 1998, to Lease Agreement, dated
December 17, 1997 between BA Leasing & Capital Corporation and the
Company (13)
10.14 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of May 28, 1998 (14)
10.15 First Amendment, dated January 14, 1999, to Lease Agreement
between BA Leasing & Capital Corporation and the Company, dated as
of May 28, 1998 (17)
10.16 Purchase Agreement Assignment, dated June 23, 1999, between
Gardenburger, Inc. and BA Leasing & Capital Corporation (19)
10.17 Note Purchase Agreement, dated as of March 27, 1998, between
the Company and Dresdner Kleinwort Benson Private Equity Partners
L.P. (12)
E-1
Exhibit No.
- -----------
10.18 Convertible Senior Subordinated Note, dated March 27, 1998 (12)
10.19 First Amendment to Note Purchase Agreement, dated December 30,
1999, between the Company and Dresdner Kleinwort Benson Private
Equity Partners L.P. (22)
10.20 Registration Rights Agreement, dated as of March 27, 1998,
between the Company and Dresdner Kleinwort Benson Private
Equity Partners L.P. (12)
10.21 Stock Purchase Agreement, dated March 29, 1999, by and between
Gardenburger, Inc. and Rosewood Capital III, L.P., Farallon
Capital Management LLC, Gruber & McBaine Capital Management,
LLC, BT Capital Investors LP and certain other purchasers
identified therein (16)
10.22 Amendment and Waiver of Stock Purchase Agreement, dated April 14,
1999, by and between Gardenburger, Inc., and the Purchasers
identified on Exhibit A thereto (18)
10.23 Investor Rights Agreement, dated April 14, 1999, by and between
Gardenburger, Inc., and the investors identified on Exhibit A
thereto (18)
10.24 1992 First Amended and Restated Combination Stock Option Plan, as
amended (15) (19)
10.25 Form of Incentive Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15) (17)
10.26 Form of Non-Statutory Stock Option Agreement for Option grants
to executive officers
after May 24, 1995 (15) (17)
10.27 Paul F. Wenner Stock Option Agreement (2) (15)
10.28 Lyle Hubbard Employment Agreement, dated April 14, 1996 (10) (15)
10.29 Agreement to Extend and Amend Employment Agreement, dated
November 16, 1998, to Lyle Hubbard Employment Agreement, dated
April 14, 1996 (15) (17)
10.30 Agreement to Extend and Amend Employment Agreement, dated March
5, 1999, to Lyle Hubbard Employment Agreement, dated April 14,
1996 (15) (17)
10.31 Third Amendment to Employment Agreement, dated December 9, 1999,
between the Company and Lyle Hubbard (15)(21)
10.32 Separation Agreement and Release, dated August 4, 2000,
between the Company and Lyle Hubbard (15)
10.33 Paul F. Wenner Employment Agreement and Amendment thereto (1) (15)
10.34 Form of Severance Agreement for Executive Officers (10) (15)
10.35 Form of Indemnification Agreement between the Company and its
Officers and Directors (15) (17)
10.36 2000 Executive Annual Incentive Plan (15)(21)
10.37 Retention Incentive Agreement, dated December 9, 1999,
between the Company and Lyle Hubbard (15)(21)
10.38 Form of Retention Incentive Agreement between the Company and
nine senior executives (15)(21)
E-2
Exhibit No.
- -----------
10.39 Form of Change in Control Agreement between the Company and
nine senior executives (15)(21)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Description of Common Stock of Gardenburger, Inc. (18)
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Commission File No. 33-46623), filed May 6, 1992.
(2) Incorporated by reference to the Company's 1992 Form 10-K Annual Report,
filed March 23, 1993.
(3) Incorporated by reference to the Company's 1993 Form 10-K Annual Report,
filed March 23, 1994.
(4) Incorporated by reference to the Company's 1994 Form 10-K Annual Report,
filed March 30, 1995.
(5) Incorporated by reference to the Company's 1995 Form 10-K Annual Report,
filed March 29, 1996.
(6) Incorporated by reference to the Company's Form 10-Q Quarterly Report
for the quarter ended September 30, 1996, filed November 4, 1996.
(7) Incorporated by reference to the Company's Form 8-K Current Report, filed
May 8, 1996.
(8) Incorporated by reference to the Company's Form 10-Q Quarterly Report
for the quarter ended September 30, 1997, filed November 4, 1997.
(9) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended June 30, 1997, filed August 14, 1997.
(10) Incorporated by reference to the Company's 1996 Form 10-K Annual Report,
filed March 25, 1997.
(11) Incorporated by reference to the Company's 1997 Form 10-K Annual Report,
filed March 31, 1998.
(12) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1998, filed May 15, 1998.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1998, filed August 12, 1998.
(14) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1998, filed November 5, 1998.
(15) Management contract or compensatory plan or arrangement.
(16) Incorporated by reference to the Company's Form 8-K Current Report, filed
April 1, 1999.
(17) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998, filed March 31, 1999.
(18) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1999, filed May 17, 1999.
(19) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1999, filed August 13, 1999.
(20) Incorporated by reference to the Company's Registration Statement on
Form S-8 (No. 333-92665), filed December 13, 1999.
(21) Incorporated by reference to the Company's Form 10-K for the nine-month
transition period ended September 30, 1999, filed December 27, 1999.
(22) Incorporated by reference to the Company's Form 10-Q for the quarter ended
December 31, 1999, filed February 9, 2000.
E-3
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Gardenburger, Inc.:
We have audited the accompanying balance sheets of Gardenburger, Inc. (an Oregon
corporation) as of September 30, 2000 and 1999 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the year ended
September 30, 2000, the nine months ended September 30, 1999 and the year ended
December 31, 1998. 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 in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gardenburger, Inc. as of
September 30, 2000 and 1999, and the results of its operations and its cash
flows for the year ended September 30, 2000, the nine months ended September 30,
1999 and the year ended December 31, 1998, in conformity with accounting
principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
November 7, 2000
F-1
GARDENBURGER, INC.
BALANCE SHEETS
(In thousands, except share amounts)
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,178 $ 7,033
Accounts receivable, net of allowances of
$264 and $301 4,098 6,133
Inventories, net 7,499 7,268
Prepaid expenses 2,079 2,207
Deferred income taxes - 4,775
Total Current Assets 15,854 27,416
-------- --------
Property, Plant and Equipment, net of accumulated
depreciation of $5,235 and $3,960 7,342 10,275
Deferred Income Taxes - 12,691
Other Assets, net of accumulated amortization of
$1,207 and $804 1,964 2,320
-------- --------
Total Assets $ 25,160 $ 52,702
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term note payable $ 2,591 $ 5,000
Accounts payable 1,876 6,669
Payroll and related liabilities payable 1,411 941
Other current liabilities 1,918 3,065
-------- --------
Total Current Liabilities 7,796 15,675
Other Long-Term Liabilities 162 199
Convertible Notes Payable 15,000 15,000
Convertible Redeemable Preferred Stock 36,513 32,147
Shareholders' Equity (Deficit):
Preferred Stock, no par value, 5,000,000 shares
authorized - -
Common Stock, no par value, 25,000,000 shares
authorized; shares issued and outstanding:
8,972,601 and 8,841,451 11,153 10,619
Additional paid-in capital 12,405 4,277
Retained deficit (57,869) (25,215)
-------- --------
Total Shareholders' Equity (Deficit) (34,311) (10,319)
-------- --------
Total Liabilities and Shareholders' Equity (Deficit) $ 25,160 $ 52,702
======== ========
The accompanying notes are an integral part of these balance sheets.
F-2
GARDENBURGER, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1998
------------------ ------------------ ------------------
Net sales $ 71,043 $ 60,106 $ 100,120
Cost of goods sold 36,137 34,334 50,570
------------------ ------------------ ------------------
Gross margin 34,906 25,772 49,550
Operating expenses:
Sales and marketing 28,288 48,021 58,513
General and administrative 7,304 5,064 5,387
Restructuring charge - 2,684 -
------------------ ------------------ ------------------
35,592 55,769 63,900
------------------ ------------------ ------------------
Operating loss (686) (29,997) (14,350)
Other income (expense):
Interest income 125 197 115
Interest expense (1,823) (1,596) (1,404)
Other, net (303) 7 (200)
------------------ ------------------ ------------------
(2,001) (1,392) (1,489)
------------------ ------------------ ------------------
Loss before benefit from income taxes (2,687) (31,389) (15,839)
Provision for (benefit from) income taxes 17,474 (11,223) (5,797)
------------------ ------------------ ------------------
Loss before preferred dividends (20,161) (20,166) (10,042)
Preferred dividends (12,492) (1,980) -
------------------ ------------------ ------------------
Net loss available for common shareholders $ (32,653) $ (22,146) $ (10,042)
================== ================== ==================
Net loss per share - basic and diluted $ (3.67) $ (2.51) $ (1.16)
================== ================== ==================
Shares used in per share calculations 8,891 8,812 8,659
================== ================== ==================
The accompanying notes are an integral part of these statements.
F-3
GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Year Ended September 30, 2000, the Nine Months Ended September 30, 1999
and the Year Ended December 31, 1998
(In thousands, except share amounts)
Additional Retained Total
Common Stock Paid-In Earnings Shareholders'
---------------------------
Shares Amount Capital (Deficit) Equity (Deficit)
------------ ------------ ------------- ------------- ----------------
BALANCE AT DECEMBER 31, 1997 8,608,254 $ 8,651 $ 4,203 $ 6,985 $ 19,839
Exercise of common stock options 74,586 541 - - 541
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 72 - 72
Issuance of shares in exchange for
interest on convertible notes payable 50,971 525 - - 525
Foreign currency translation - - - (9) (9)
Net loss - - - (10,042) (10,042)
------------ ------------ ------------- ------------- ----------------
BALANCE AT DECEMBER 31, 1998 8,733,811 9,717 4,275 (3,066) 10,926
Exercise of common stock options 55,660 377 - - 377
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 2 - 2
Issuance of shares in exchange for
interest on convertible notes payable 51,980 525 - - 525
Accrual of preferred dividends - - - (1,980) (1,980)
Foreign currency translation - - - (3) (3)
Loss before preferred dividends - - - (20,166) (20,166)
------------ ------------ ------------- ------------- ----------------
BALANCE AT SEPTEMBER 30, 1999 8,841,451 10,619 4,277 (25,215) (10,319)
Exercise of common stock options 55,600 115 - - 115
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 3 - 3
Issuance of shares in exchange for
interest on convertible notes payable 75,550 419 - - 419
Reset of conversion price of Series B
preferred stock - - 8,125 - 8,125
Accrual of preferred dividends - - - (12,492) (12,492)
Foreign currency translation - - - (1) (1)
Loss before preferred dividends - - - (20,161) (20,161)
------------ ------------ ------------- ------------- ----------------
BALANCE AT SEPTEMBER 30, 2000 8,972,601 $ 11,153 $ 12,405 $ (57,869) $ (34,311)
============ ============ ============= ============= ================
The accompanying notes are an integral part of these statements.
F-4
GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
FOR THE YEAR FOR THE NINE FOR THE YEAR
ENDED MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 1998
---------------- --------------- ----------------
Cash flows from operating activities:
Loss before preferred dividends $ (20,161) $ (20,166) $ (10,042)
Effect of exchange rate on operating accounts (1) (3) (9)
Adjustments to reconcile loss before preferred dividends to
net cash flows used in operating activities:
Depreciation and amortization 2,235 1,600 1,637
Non-cash portion of restructuring charge - 1,584 -
Other non-cash expenses 421 214 481
Loss on sale of fixed assets 339 19 75
Deferred income taxes 17,466 (11,235) (5,956)
(Increase) decrease in:
Accounts receivable, net 2,035 8,836 (6,896)
Inventories, net (231) 5,189 (9,254)
Prepaid expenses 128 2,308 (2,194)
Income taxes receivable, net - - 475
Increase (decrease) in:
Accounts payable (4,793) (3,039) 6,543
Payroll and related liabilities 470 (881) 206
Other accrued liabilities (1,147) 699 1,264
---------------- --------------- ----------------
Net cash used in operating activities (3,239) (14,875) (23,670)
Cash flows from investing activities:
Payments for purchase of property and equipment (855) (1,031) (11,282)
Proceeds from sale of property and equipment 1,580 33 5,355
Other assets, net (47) 42 (102)
---------------- --------------- ----------------
Net cash provided by (used in) investing activities 678 (956) (6,029)
Cash flows from financing activities:
Proceeds from (payments on) line of credit, net (2,409) (10,000) 15,000
Proceeds from issuance of convertible notes payable - - 15,000
Financing fees from issuance of convertible notes payable - - (1,124)
Issuance of preferred stock, net of issuance costs - 30,167 -
Proceeds from exercise of common stock options and warrants 115 377 541
---------------- ---------------
Net cash provided by (used in) financing activities (2,294) 20,544 29,417
---------------- --------------- ----------------
Increase (decrease) in cash and cash equivalents (4,855) 4,713 (282)
Cash and cash equivalents:
Beginning of period 7,033 2,320 2,602
---------------- --------------- ----------------
End of period $ 2,178 $ 7,033 $ 2,320
================ =============== ================
The accompanying notes are an integral part of these statements.
F-5
GARDENBURGER, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------
ORGANIZATION AND NATURE OF OPERATIONS
Gardenburger, Inc. was incorporated in Oregon in 1985 to provide a line of
meatless food products in response to the public's awareness of the importance
of diet to overall health and fitness. Toward this end, the Company developed
and now produces and distributes frozen, meatless food products that are
generally low in cholesterol and fat, consisting primarily of various flavors
and styles of veggie burgers. The Company's products are principally sold to
retail and food service customers throughout the United States.
CHANGE IN REPORTING PERIOD
In July 1999, the Company changed its fiscal year end to September 30. Fiscal
1999 ended on September 30, 1999 and fiscal 2000 began October 1, 1999. For
purposes of these footnotes, the nine month period ended September 30, 1999 will
be referred to herein as the year ended September 30, 1999. See Note 8,
Unaudited Fiscal Year Operating Results.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management believes that the estimates used
are reasonable.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less.
INVENTORIES
Inventories are valued at standard cost, which approximates the lower of cost
(using the first-in, first-out (FIFO) method), or market, and include materials,
labor and manufacturing overhead.
F-6
OTHER ASSETS
Other assets consist principally of $880 and $1,151 in deferred financing fees,
net of accumulated amortization, as of September 30, 2000 and 1999,
respectively. Other assets also include $657 and $780 in goodwill, net of
accumulated amortization, as of September 30, 2000 and 1999, respectively.
Deferred financing fees are being amortized over the maturity period of the
related debt and goodwill is being amortized using the straight-line method over
ten years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the lease term or the
estimated useful life of the asset, whichever is shorter. Estimated useful lives
are as follows:
Buildings and improvements 3-40 years Machinery and equipment 7-30 years
Office furniture and equipment 3-10 years Vehicles 5 years
LONG-LIVED ASSETS
In accordance with SFAS 121, long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the asset.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS
131"), "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,"
for the year ended December 31, 1998. Based upon definitions contained within
SFAS 131, the Company has determined that it operates in one segment. In
addition, virtually all sales are domestic.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company invests its excess cash with high credit quality financial
institutions, which bear minimal risk, and, by policy, limits the amount of
credit exposure to any one financial institution.
For the year ended September 30, 2000, one customer accounted for approximately
9 percent of revenue and 17 percent of the accounts receivable balance at
September 30, 2000.
For the year ended September 30, 1999, one customer accounted for approximately
11 percent of revenue and 5 percent of the accounts receivable balance at
September 30, 1999.
For the year ended December 31, 1998, one customer accounted for approximately
14 percent of revenue and 8 percent of the accounts receivable balance at
December 31, 1998.
Historically, the Company has not incurred significant losses related to
accounts receivable.
F-7
REVENUE RECOGNITION
Revenue from the sale of products is generally recognized at time of shipment to
the customer. Promotional and other discounts are accrued at time of shipment
based on historical experience.
ADVERTISING COSTS
Advertising costs, including media advertising, couponing and other advertising,
which are included in sales and marketing expense, are expensed when the
advertising first takes place. Advertising expense was approximately $316 in
2000, $17,313 in 1999 and $19,904 in 1998.
SLOTTING FEES
Slotting fees associated with a new product or new territory are initially
recorded as an asset and the related expense is recognized ratably over the
12-month period beginning with the initial introduction of the product. Slotting
agreements refer to oral arrangements pursuant to which the retail grocer allows
the Company's products to be placed on the store's shelves in exchange for a
slotting fee. If a slotting fee agreement were breached, the Company would
pursue available legal remedies to enforce the agreement as appropriate.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expense was approximately $319 in 2000, $553 in 1999 and $1,121 in
1998 and is included in sales and marketing expenses in the accompanying
statements of operations.
NET LOSS PER SHARE
Basic earnings per share (EPS) is calculated using the weighted average number
of common shares outstanding for the period and diluted EPS is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding.
Basic EPS and diluted EPS are the same for all periods presented since the
Company was in a loss position in all periods.
Potentially dilutive securities that are not included in the diluted EPS
calculation because they would be antidilutive are as follows:
SEPTEMBER 30, DECEMBER 31,
-------------------
2000 1999 1998
-------- -------- ------------------
Stock options 2,778 3,247 2,768
Convertible notes 1,313 1,237 1,163
Convertible preferred stock 4,062 3,250 -
-------- -------- ------------------
Total 8,153 7,734 3,931
======== ======== ==================
F-8
2. INVENTORIES
- --------------------
Detail of inventories at September 30, 2000 and 1999 is as follows:
2000 1999
---------------- ----------------
Raw materials $ 1,126 $ 2,672
Packaging and supplies 354 538
Finished goods 6,019 4,058
---------------- ----------------
$ 7,499 $ 7,268
================ ================
3. PROPERTY, PLANT AND EQUIPMENT
- --------------------------------------
Detail of property, plant and equipment at September 30, 2000 and 1999 is as
follows:
2000 1999
------------------ --------------------
Land $ 131 $ 721
Building and improvements 1,597 2,504
Machinery and equipment 6,472 6,807
Office furniture and equipment 4,377 4,203
------------------ --------------------
12,577 14,235
Less accumulated depreciation (5,235) (3,960)
------------------ --------------------
$ 7,342 $ 10,275
================== ====================
4. LINE OF CREDIT
- -----------------------
In December 1999, the Company entered into a Loan and Security Agreement with
Banc of America Commercial Finance Corporation (the "Agreement"). Effective
October 2, 2000, Banc of America sold the loan under the existing agreement to
Wells Fargo Business Credit, Inc. The Agreement provides for a line of credit
based on eligible accounts receivable and inventories of up to $25.0 million
(assuming 30 percent participation by another lender) and expires on December
23, 2002. The interest rate on the line is prime plus 0.125% or 9.625% at
September 30, 2000. The Company had $2.6 million outstanding under this line at
September 30, 2000. There is one financial covenant under the Agreement as
follows: the Company must not have a cumulative cash loss in excess of $5.0
million from the origination date of the Agreement through the expiration date
of the Agreement. At September 30, 2000, the Company was in compliance with this
covenant.
5. LEASE COMMITMENTS
- --------------------------
Future minimum lease payments at September 30, 2000 are as follows:
YEAR ENDED SEPTEMBER 30,
- ------------------------
2001 $ 3,718
2002 3,737
2003 3,198
2004 3,017
2005 2,510
Thereafter 1,047
----------
Total $ 17,227
==========
F-9
Rental expense for the years ended September 30, 2000 and 1999 and December 31,
1998 was $3,711, $2,355 and $2,613, respectively.
6. CONVERTIBLE NOTES PAYABLE
- ----------------------------------
At September 30, 2000, the Company had outstanding $15.0 million of 7 percent
Convertible Senior Subordinated Notes (the "Notes") held by Dresdner Kleinwort
Benson Private Equity Partners L.P. ("Dresdner"). The Notes are convertible into
shares of the Company's Common Stock at the option of the holder until maturity
in 2003, at which time they will be due in full if not previously converted. The
Company may also elect to redeem the Notes, if not previously converted, at any
time after March 27, 2000. The conversion price of the Notes at September 30,
2000 was $11.42 per share.
Under the terms of the Note Purchase Agreement, as amended, relating to the
Notes, the Company must comply with one financial covenant as follows: the
Company must not have a cumulative cash loss in excess of $5.0 million from
December 23, 1999 through December 23, 2002. At September 30, 2000, the Company
was in compliance with this covenant.
See Note 13, Subsequent Events, for information regarding an increase in the
principal amount of the Notes in December 2000.
7. INCOME TAXES
- ---------------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, "ACCOUNTING FOR INCOME TAXES" ("SFAS 109"). The Company
realizes tax benefits as a result of the exercise of non-qualified stock options
and the exercise and subsequent sale of certain incentive stock options
(disqualifying dispositions). For financial reporting purposes, any reduction in
income tax obligations as a result of these tax benefits is credited to
additional paid-in capital. Tax benefits of $3, $2 and $72 were credited to
additional paid-in capital in 2000, 1999 and 1998, respectively. The provision
for (benefit from) income taxes is as follows:
SEPTEMBER 30, DECEMBER 31,
--------------------------------
2000 1999 1998
------------- ------------ -----------------
CURRENT:
Federal $ - $ - $ 129
State 8 12 30
------------- ------------ -----------------
8 12 159
DEFERRED 17,466 (11,235) (5,956)
------------- ------------ -----------------
$ 17,474 $ (11,223) $ (5,797)
============= ============ =================
F-10
Total deferred income tax assets were $20,525 and $17,907 and liabilities were
$832 and $441 at September 30, 2000 and 1999, respectively, prior to the
consideration of any valuation allowance. Individually significant temporary
differences are as follows:
SEPTEMBER 30,
-------------------------------
2000 1999
------------ ------------
Net operating loss carryforwards $ 17,416 $ 15,055
Provision for trade promotions and discounts 926 558
Total net deferred tax assets were $19.7 million as of September 30, 2000. In
accordance with SFAS 109, the Company recorded a valuation allowance against the
entire amount of net deferred tax assets as of September 30, 2000, as a result
of recurring operating losses in recent years and as a result of increased
competition leading to poorer than expected results for fiscal 2000.
The Company has tax net operating loss carryforwards, totaling $45.3 million,
which expire as follows: 2018 - $11.8 million, 2019 - $31.5 million and 2020 -
$2.0 million.
The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
SEPTEMBER 30, DECEMBER 31,
----------------------------------
2000 1999 1998
-------------- -------------- -----------------
Statutory federal income tax rate (34.0)% (34.0)% (34.0)%
State taxes, net of federal income tax benefit (2.7) (1.3) (3.9)
Tax exempt interest and dividends -- -- (0.1)
Trademark and goodwill amortization 0.9 0.1 0.2
Meals and entertainment 1.1 0.1 0.4
Effect of change in valuation allowance 685.3 -- --
Other (0.3) (0.7) 0.8
-------------- -------------- -----------------
Effective tax rate 650.3 % (35.8) % (36.6) %
============== ============== =================
8. UNAUDITED FISCAL YEAR OPERATING RESULTS
- ------------------------------------------------
The following statement of operations data is included for informational
purposes only and is unaudited for fiscal years 1996 through 1999.
TWELVE MONTHS ENDED
SEPTEMBER 30, 2000 1999 1998 1997 1996
- ------------------------------------ ---------- ---------- ---------- ----------- ----------
Net sales $71,043 $ 88,817 $ 88,406 $ 48,144 $ 40,258
Cost of goods sold 36,137 48,141 44,295 23,888 19,924
Gross margin 34,906 40,676 44,111 24,256 20,334
Operating expenses 35,592 69,639 57,755 28,465 18,247
Operating income (loss) (28,963) (13,644) (4,209) 2,087
(686)
Net income (loss) available for
common shareholders (32,653) (21,826) (9,384) (2,667) 1,675
F-11
9. CONVERTIBLE REDEEMABLE PREFERRED STOCK
- -----------------------------------------------
In April 1999, the Company closed a stock purchase agreement selling $32.5
million of convertible redeemable preferred stock to several investors. Under
the terms of the agreement, the Company sold an aggregate of 2,763 shares of
Series A preferred stock and 487 shares of Series B preferred stock to members
of the investor group, at a price of $10.00 per share for each series, or an
aggregate consideration of $32.5 million, and received net proceeds of $30.2
million. At September 30, 2000, the Series A preferred shares were convertible
at a price of $10.00 per share and the Series B preferred shares were
convertible at $3.75 per share (subject to antidilution adjustments) at any time
following issuance at the discretion of the holder. The Company did not meet
certain performance targets for the twelve months ended December 31, 1999
specified in the terms of the Series B preferred stock, triggering an adjustment
in the Series B conversion price to $3.75 per share from $10.00 per share. As a
result of the adjustment, the Company recorded an approximately $8.1 million
non-cash charge for additional preferred dividends to account for the implied
value of the beneficial conversion feature. Both series of preferred stock are
entitled to a 12 percent cumulative annual dividend payable upon redemption of
the stock or in the event of a sale or liquidation of the Company. Shares may
not be redeemed until December 31, 2004, following which time they may be
redeemed at the election of the holders or, under certain conditions, at the
discretion of the Company. The redemption value, exclusive of accrued but unpaid
dividends, of the Series A and Series B preferred stock is $27.6 million and
$4.9 million, respectively. The difference between the carrying amount and the
redemption value of the convertible redeemable preferred stock is being accreted
as additional preferred dividends over the period until redemption.
10. SHAREHOLDERS' EQUITY
- -----------------------------
PREFERRED STOCK
The Company has authorized 5,000 shares of preferred stock, of which 3,250
shares have been issued (see Note 9). Such stock may be issued by the Board of
Directors in one or more series, with the preferences, limitations and rights of
each series to be determined by the Board of Directors.
PREFERRED SHARE PURCHASE RIGHTS
In April 1996, the Company declared a dividend distribution of one preferred
share purchase right on each outstanding share of the Company's Common Stock.
Each right, when exercisable, will entitle shareholders to buy one one-hundredth
of a share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $47 per share. The rights will become exercisable if a person
or group (an "Acquiring Person") acquires 15 percent or more of the Company's
Common Stock (with certain exceptions) or announces a tender offer for 15
percent or more of the Common Stock. With the exception of certain cash tender
offers, if a person becomes an Acquiring Person, or in the event of certain
mergers of the Company with an Acquiring Person, the rights will become
exercisable for shares of Common Stock with a market value of two times the
exercise price of the right. The Company's Board of Directors is entitled to
redeem the rights at $.01 per right at any time before a person has acquired 15
percent or more of the outstanding Common Stock.
F-12
STOCK PLAN OPTIONS
The Company has a 1992 First Amended and Restated Combination Stock Option Plan
(the "Plan"), which provides for the issuance of incentive stock options
("ISOs") to employees and officers of the Company and non-statutory stock
options ("NSOs") to employees, officers, directors and consultants of the
Company. Under the Plan, the exercise price of an ISO cannot be less than the
fair market value on the date of grant and the exercise price of an NSO cannot
be less than 85 percent of fair market value on the date of grant. Options
granted under the Plan generally vest three to five years from the date of grant
and generally expire ten years from the date of grant. Vesting may accelerate
upon a change in control of the Company. At September 30, 2000, the Company had
1,951 shares of Common Stock reserved for issuance under the Plan. Activity
under the Plan is summarized as follows:
SHARES AVAILABLE SHARES SUBJECT TO WEIGHTED AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
--------------------- --------------------- ----------------------
BALANCES, DECEMBER 31, 1997 649 1,443 $8.78
Options granted (172) 172 11.50
Options canceled 101 (101) 8.12
Options exercised -- (75) 7.27
--------------------- --------------------- ----------------------
BALANCES, DECEMBER 31, 1998 578 1,439 9.24
Options granted (516) 516 9.96
Options canceled 57 (57) 8.90
Options exercised -- (56) 7.18
--------------------- --------------------- ----------------------
BALANCES, SEPTEMBER 30, 1999 119 1,842 9.51
Options granted (246) 246 6.40
Options canceled 660 (660) 9.80
Options exercised -- (10) 6.50
--------------------- --------------------- ----------------------
BALANCES, SEPTEMBER 30, 2000 533 1,418 $8.86
===================== ===================== ======================
NON-PLAN OPTIONS
On March 10, 1992, the Company granted a non-statutory stock option to its then
Chief Executive Officer exercisable for 1,650 shares of the Company's Common
Stock. Such option is exercisable for a period of ten years from the date of
grant at an exercise price of $1.00 per share, the fair market value of the
Company's Common Stock on the date of grant. During 1996, a portion of the
option covering 625 of the shares was exercised and during fiscal 2000, a
portion of the option covering 45 shares was exercised. At September 30, 2000,
an option to purchase 980 shares of Common Stock remained outstanding and
exercisable in full and 980 shares of the Company's Common Stock were reserved
for issuance under this option grant.
On April 14, 1996, the Company granted an option to its then Chief Executive
Officer exercisable for 300 shares of the Company's Common Stock. Pursuant to
the terms of the original grant, such option is exercisable for a period of five
years from the Chief Executive Officer's termination date of August 4, 2000 at
an exercise price of $8.69 per share. At September 30, 2000, the entire option
remained outstanding and the Company had 300 shares reserved for issuance under
this option grant.
F-13
During 1999, the Company granted options to certain employees and two
consultants covering a total of 80 shares of the Company's Common Stock at an
average exercise price of $11.16 per share. During fiscal 2000, options covering
15 shares at an average exercise price of $11.63 were canceled and at September
30, 2000, options covering 65 shares were outstanding at an average exercise
price of $11.05. At September 30, 2000, the Company had 65 shares of its Common
Stock reserved for issuance under these options. The fair value of options
granted to non-employees was not material.
On March 1, 2000, the Company granted options to the members of its Board of
Directors covering a total of 15 shares of the Company's Common Stock. Such
options are exercisable for a period of ten years from the date of grant at an
exercise price of $5.69 per share, subject to vesting provisions over a one-year
period. At September 30, 2000, all of the options remained outstanding and the
Company had 15 shares of its Common Stock reserved for issuance under these
option grants.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 2000, 1999 and 1998 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the following
weighted average assumptions for grants:
2000 1999 1998
--------------- -------------- --------------
Risk-free interest rate 6.50% 6.00% 5.50%
Expected dividend yield 0% 0% 0%
Expected lives 6.5 years 6.5 years 6.5 years
Expected volatility 80.77% 61.49% 60.77%
Using the Black-Scholes methodology, the total value of options granted during
2000, 1999 and 1998 was $1,117, $3,816 and $1,058, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
three to five years). The weighted average per share fair value of options
granted during 2000, 1999 and 1998 was $4.30, $6.41 and $4.92, respectively.
F-14
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss available to common
shareholders and net loss per share would approximate the pro forma disclosures
below:
2000 1999 1998
------------------------- ------------------------ --------------------------
As Pro Forma As Pro Forma As Pro Forma
Reported Reported Reported
---------- ---------- ---------- ---------- ----------- ----------
Net loss available to common
shareholders $(32,653) $(34,279) $(22,146) $(24,404) $(10,042) $(11,870)
Basic and diluted net loss
per share $(3.67) $(3.86) $(2.51) $(2.77) $(1.16) $(1.37)
The following table summarizes information about all stock options outstanding
at September 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------------- --------------------------------
Weighted
Average Weighted Number of Weighted
Range of Number Remaining Average Shares Average
Exercise Prices Outstanding at Contractual Exercise Exercisable Exercise
9/30/00 Life - Years Price at 9/30/00 Price
- ------------------ ---------------- ---------------- -------------- --------------- -------------
$ 1.00 980 1.3 $ 1.00 980 $1.00
5.68 - 6.78 382 8.1 6.44 116 6.61
7.00 - 7.94 292 5.3 7.59 283 7.59
8.69 - 8.97 571 4.9 8.75 535 8.73
9.56 - 10.41 117 4.9 10.03 90 10.00
10.91 - 11.75 354 4.7 11.54 279 11.56
12.31 - 13.56 82 6.3 12.77 73 12.75
- ------------------ ---------------- ---------------- -------------- --------------- -------------
$1.00 - 13.56 2,778 4.1 $ 6.10 2,356 $5.78
================== ================ ================ ============== =============== =============
At September 30, 1999 and December 31, 1998, 2,257 and 2,010 options,
respectively, were exercisable at weighted average exercise prices of $5.58 per
share and $5.08 per share, respectively.
11. 401(K) PLAN
- --------------------
The Company has a 401(k) Salary Deferral Plan, which covers all employees who
have reached the age of 18. The covered employees may elect to have an amount
deducted from their wages for investment in a retirement plan. The Company
matches 100 percent of employee contributions up to two percent of compensation.
The Company's contribution to this plan was approximately $137 in 2000, $112 in
1999 and $137 in 1998.
F-15
12. SUPPLEMENTAL CASH FLOW INFORMATION
- -------------------------------------------
Supplemental disclosure of cash flow information is as follows:
2000 1999 1998
------------- -------------- -------------
Cash paid during the period for interest $ 455 $ 637 $ 552
Cash paid during the period for income taxes 6 10 11
Issuance of Common Stock in exchange for interest
expense on Convertible Notes 419 525 525
Preferred dividends 12,492 1,980 --
13. SUBSEQUENT EVENTS
- --------------------------
SALE OF PROPERTY
In October 2000, the Company sold the production facility it owned in Portland,
Oregon for net proceeds to the Company of approximately $645. There was no
significant gain or loss on the sale.
AMENDMENT TO CONVERTIBLE NOTES PAYABLE
In December 2000, the Company and Dresdner agreed to amend the Notes to provide
an additional alternative for interest payments. The Company may elect, with
prior written consent from Dresdner, to satisfy its semiannual obligation to pay
interest on the Notes by increasing the then unpaid principal amount of the
Notes by an amount equal to the interest then payable. Under this alternative,
the interest payable shall be calculated at an annual interest rate of 10%
rather than 7%. The Company, with Dresdner's consent, has elected to use the new
alternative for the interest payable at September 30, 2000 and, as such, the
total principal amount of the Notes has been increased to $15,750.
F-16
Report of Independent Public Accountants
on Financial Statement Schedule
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Gardenburger, Inc.'s Form 10-K, and have issued
our report thereon dated November 7, 2000. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule included
on page F-18 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
November 7, 2000
F-17
SCHEDULE II
GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1998, NINE MONTHS ENDED SEPTEMBER 30, 1999 and
YEAR ENDED SEPTEMBER 30, 2000
(In thousands)
Column A Column B Column C Column D Column E
- ------------------------------------ ----------------------------------------------- ------------------------
Balance Charged Charged to Balance
at Beginning to Costs and Other Accounts - Deductions - at End
Description of Period Expenses Describe Describe(a) of Period
- ------------------------------------ -------------- -------------- ---------------- ------------- -----------
Year Ended December 31, 1998:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 275 $ 146 $ - $ 273 $ 148
Nine Months Ended September 30, 1999:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 148 $ 190 $ - $ 37 $ 301
Year Ended September 30, 2000:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 301 $ 20 $ - $ 57 $ 264
(a) Charges to the account included in this column are for the purposes for
which the reserve was created as well as a reduction in the reserve to
levels estimated to be appropriate by the Company.
F-18