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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: December 31, 1998
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)
----------------------
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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $70,744,520 as of February 26, 1999 based upon the last closing
price as reported by the Nasdaq National Market System ($11.00).
The number of shares outstanding of the Registrant's Common Stock as of February
26, 1999 was 8,755,561 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 1999 Annual Meeting of Shareholders.
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GARDENBURGER, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 27
Signatures 28
PART I
ITEM 1. BUSINESS
- - ------- --------
COMPANY OVERVIEW
Gardenburger, Inc. (the "Company") is the leading producer and marketer of
branded veggie burgers. The Company's Gardenburger(R) product line, featuring
the grain-based original Gardenburger veggie burger, is the number one national
brand in market share in the retail grocery, food service, club store and
natural foods channels of distribution. The Company's net sales grew to $100.1
million for the year ended December 31, 1998, a 76% increase over the same
period of 1997.
As a result of innovative product development and its consumer and trade
marketing, the Company has emerged as the leader in the rapidly growing veggie
burger segment of the meat alternative category, which is one of the fastest
growing categories in the food industry. By making the Gardenburger brand the
premier name in this market segment and establishing broad distribution of its
products, the Company believes it is well-positioned to benefit as the veggie
burger increasingly becomes a mainstream consumer product.
The Company's objective is to be the leading provider of veggie burgers in the
four primary distribution channels in which the Company 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 26,000
retail outlets, 35,000 food service outlets, 600 club store locations and 4,000
natural foods stores.
In 1997, the Company began a strategic initiative to penetrate the retail
grocery channel, which is the largest channel of distribution. At that time, the
Company had approximately 20,000 retail grocery placements of its products,
representing an all commodity volume ("ACV")1 penetration of 30%, and an average
of 1.8 product variations available in each retail outlet. Each product line is
commonly referred to as a stock keeping unit ("SKU"). As of December 31, 1998,
there were over 143,000 retail grocery placements of the Company's products in
more than 26,000 grocery stores, representing an ACV penetration level of 89%,
with an average of 5.4 SKUs per store. This rapid expansion in the availability
of the Company's products occurred following an aggressive national television
advertising campaign in 1998. According to A.C. Nielsen Scantrack, there was a
203% increase in consumer purchases of the Company's veggie burgers in retail
grocery stores in 1998 compared to 1997, and these additional purchases
represent 81% of the unit volume increase in total veggie burger sales through
the retail grocery channel since January 1, 1998.
The Company was organized in 1985 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 currently
trades on the National Market Tier of The Nasdaq Stock Market under the symbol
"GBUR."
- - -------------------------------
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
GROWTH STRATEGY
The Company's objective is to capitalize on what it believes to be a significant
growth opportunity for veggie burgers by increasing household penetration,
consumer usage and product distribution throughout all channels of distribution.
Accordingly, the Company's growth strategy consists of the following key
elements:
CONTINUE TO LEAD MAINSTREAMING OF VEGGIE BURGERS. The Company believes that its
national advertising efforts have acted as a significant catalyst for the
conversion of the veggie burger from a niche to a mainstream product. The
Company has captured 81% of the unit volume increase in total veggie burger
sales in the retail grocery channel since January 1, 1998. The Company intends
to continue its efforts to capture a substantial share of the expected growth in
veggie burger sales.
CAPTURE THE VEGGIE BURGER SEGMENT. The Company's goal is to make the
Gardenburger brand the premier name in the meat alternative category. By doing
so, the Company believes it can maximize its share of this category on a long
term basis and sustain the premium pricing levels associated with
category-leading branded products. The Company's objective is for consumers to
associate the Gardenburger brand name with the veggie burger in the way
consumers associate Campbell's with soups, Heinz with ketchup and Gatorade with
sports drinks.
INCREASE CONSUMER AWARENESS, TRIAL AND USAGE TO ACCELERATE CATEGORY LEADERSHIP.
The Company believes that increased consumer awareness, trial and usage are the
keys to achieving significant growth among mainstream consumers and to
establishing the Gardenburger line as the brand of choice in the veggie burger
segment. The Company, therefore, is committed to building consumer demand for
its products through aggressive investments in national television and print
advertising, in-store sampling, coupon promotion and other marketing techniques.
PENETRATE MULTIPLE DISTRIBUTION CHANNELS. The Company is already the leader in
the retail grocery, food service, club store and natural foods distribution
channels, although it is most dominant in the retail grocery channel. The
Company's goal is to expand its leadership position in the retail grocery
channel and substantially improve upon its current 46% market share while also
focusing on further penetration of the food service and club store channels. In
addition, the Company believes other distribution channels, such as vending and
convenience stores, present growth opportunities. The Company believes that its
leadership in multiple distribution channels will allow it to achieve economies
of scale in manufacturing and advertising.
LEVERAGE NEW PRODUCT INTRODUCTIONS TO REINFORCE BRAND SUPERIORITY. The Company
intends to continue to improve its existing products as well as to develop new
product varieties. In March 1998, the Company introduced three new gourmet
flavors of its veggie burger. Two of these flavors, Gardenburger Savory
Mushroom(TM) and Gardenburger Fire Roasted Vegetable(TM), are currently ranked
in the top five in veggie burger sales in the retail grocery channel. The
Company believes that innovative product improvements and new product
introductions will support the Company's efforts to increase its shelf space in
retail grocery stores and reinforce the Gardenburger brand.
3
The Company believes that continued revenue growth can be achieved and sales
growth maintained if it continues to advertise and promote its products at
current levels. Consumer demand may not increase or may even decline without
renewed advertising and promotional efforts. In addition, the Company has a
limited operating history and limited experience relating to the long-term
effect of advertising and promotional activities (like coupons and other trade
promotions) on sales levels. It is possible that consumers who originally buy
during a trade promotion may not continue to purchase the Company's products
without incentives. A failure to attract repeat customers or an inability to
continue current advertising and promotional levels could lead to a decrease in
sales growth or even reduced sales.
Consistent with its growth strategy, the Company has experienced rapid growth,
which places and will continue to place significant demands on the Company's
management, administrative, operating and financial resources. The Company's
future performance and profitability will depend in large part on its ability to
continue to execute its growth strategy, adapt to and continue to foster its
rapid growth, retain and continue to attract qualified employees, and
successfully implement enhancements to its internal information systems and
adapt those systems, as necessary, to respond to expansion of its business.
PRODUCTS
The Company is committed to offering healthy, great tasting and convenient
meatless food choices to consumers. The Company's principal products are veggie
burgers, either veggie-grain based or soy based, which are currently offered in
eight flavors. The Company also offers specialized products in certain channels,
including Gardenburger Sub(R), GardenSausage(R) and GardenVegan(R).
The Company'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, egg whites,
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.
4
2.5 OZ. VEGGIE-GRAIN BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- - ------------------------------------ -------------------- ------------------------ ------------------- --------------
Gardenburger(R)Original Veggie-grain based Mushrooms, brown rice, Low fat 130
burger onions, rolled oats and
low-fat cheese
Gardenburger Spicy, Mexican Red and black beans, Low fat 120
Zesty Bean(R) flavor burger Anaheim chilies, red
and yellow bell
peppers, cilantro
Gardenburger Veggie Medley(R) Vegetable emphasis Soy cheese, broccoli, No fat 100
burger carrots, red and
yellow bell peppers
*Gardenburger Savory Mushroom(TM) Gourmet burger Portabella mushrooms, Low fat 120
wild rice
*Gardenburger Fire Roasted Gourmet burger Roasted garlic, Low fat 120
*Gardenburger Classic Greek(TM) Gourmet burger Kalamata olives, feta Low fat 120
cheese
2.5 OZ. SOY BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- - ------------------------------------ -------------------- ------------------------ ------------------- --------------
Gardenburger Hamburger Style(R) Hamburger analog Soy, wheat gluten No fat 90
burger
Gardenburger Hamburger Style(R)with Hamburger analog Soy, wheat gluten, Low fat 110
Cheese burger mozzarella and cheddar
cheese
- - --------------------------
* MARCH 1998 NEW PRODUCT INTRODUCTIONS.
All of the Company's products are frozen. The Company believes that its colorful
product 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 of four or bags of eight. 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 15
burgers of 3.4 ounces each.
5
DISTRIBUTION
The Company primarily distributes its products into four channels: retail
grocery, food service, club stores and natural foods stores. In addition, it
recently began distribution in the vending channel.
RETAIL GROCERY. Beginning in 1997, the Company began aggressively expanding
distribution of its veggie burgers in the retail grocery channel, and
Gardenburger veggie burgers can now be found in more than 26,000 grocery stores.
The Company's ACV penetration in the U.S. retail grocery channel has risen from
less than 30% at the beginning of 1996, with an average of 1.8 SKUs, to an ACV
penetration of 89% as of December 31, 1998, with an average of 5.4 SKUs. The
Company has increased its retail grocery placements from approximately 20,000 at
the beginning of 1997 to over 143,000 as of December 31, 1998. 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, Denny's, Fuddruckers, Marie Callenders, Red Robin, Subway and
T.G.I. Friday's. In many of these restaurants, the Gardenburger brand name
appears directly 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 600
locations, including Costco and Sam's Club. The Company relies on Norpac Food
Sales, Inc. as its broker in this channel. Currently, these stores carry the
Gardenburger Original veggie burger in the 3.4 ounce food service size, and the
Company recently introduced the Gardenburger Hamburger Style in a number of
these stores.
NATURAL FOODS. The Company's products are distributed to more than 4,000 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 dependence on a single product line, any
change in consumer preferences or increase in competition in the veggie burger
market segment wold adversely affect the Company's business to a greater degree
than if it had multiple 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
6
to their frozen storage warehouses in principal cities in 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.
The following table lists selected retailers, distributors and food service
outlets that offer the Company's products for sale to consumers:
Retail Food Service
------ ------------
GROCERY RESTAURANTS
A&P Applebee's
Albertsons Damon's
Buttrey's Denny's
Dominick's IHOP
Food Lion Jeremiah's
Fred Meyer Lyons
Giant Eagle Peppermill
Giant Food Red Robin
HEB Sizzler
Jewel Subway
Kroger T.G.I. Friday's
Meijers
Publix Super Markets HOTELS
Ralph's Holiday Inn
Safeway Marriott
Thriftway Sheraton
Von's
Winn-Dixie UNIVERSITIES
Stanford
NATURAL FOODS UCLA
Wild Oats University of California, Berkeley
Whole Foods Harvard
MIT
CLUB STORES
Costco SPORTS/ENTERTAINMENT
Sam's Club Dodger Stadium
Yankee Stadium
DISTRIBUTORS Rose Garden
Sysco Six Flags
Rykoff-Sexton Universal Studios
7
Prior to 1997, the Company focused primarily on distribution of its products in
the Western United States. However, following the Company's 1998 marketing
campaign and in connection with the Company's penetration into the retail
grocery channel, product sales have become increasingly broad-based:
% OF NET SALES
--------------
REGION 1998 1997
- - ------ ---- ----
Northeast 30% 25%
Southwest 29% 33%
Midwest 14% 11%
Northwest 12% 16%
Southeast 12% 11%
Canada 3% 4%
---- ----
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. The Company's sales objective is to maintain its veggie burgers as the
number one brand in the retail grocery, food service, club store and natural
foods store channels. 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 volume sold. Commission rates as a
percentage of net sales have declined as the Company has grown.
The Company's Vice President of Retail Sales and Senior Vice President of Food
Service Sales and Marketing, located in Portland, Oregon and Chicago, Illinois,
respectively, coordinate the Company's sales efforts. The Company'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. The Company's primary marketing objective is 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. The Company spent $14 million on
advertising in 1998. Advertising and marketing strategies are directed by the
Company's Vice President of Marketing and developed in collaboration with an
outside advertising agency. The Company advertises through a wide variety of
media, including television, print, restaurant menus and point-of-sale displays.
Any decrease in planned advertising expenditures would adversely effect the
Company's ability to execute its marketing strategy.
8
In 1998, the Company undertook a significant national television ad campaign,
featuring three animated commercials, some of which aired during prime-time on
NBC, CBS, Fox and selected cable networks. The pinnacle of this campaign was a
30-second spot that aired during the final episode of "Seinfeld" in May 1998.
This spot received national attention prior to airing, including articles in THE
WALL STREET JOURNAL and news stories on NBC Nightly News with Tom Brokaw and CNN
Financial News.
Print advertisements for the Gardenburger brand have appeared in a number of
magazines with national circulation. In 1998, the Company used five different
"cartoon" print ads.
During 1998, the Company's marketing included four free-standing newspaper
inserts with coupons, which appeared throughout the United States. The Company
also invested heavily in grocery trade programs to support its rapid
distribution gains and to encourage trial of the Company's products, including
product demonstrations, introductory allowances and temporary price reductions.
The Company expects investment in trade programs to decline as a percentage of
net sales because the Company intends to increase its reliance on advertising
and couponing, which the Company believes will create more consumer awareness,
trials and usage than trade programs.
The Company introduced a new coupon promotion at the beginning of 1999, which it
plans to follow with a renewed television advertising campaign in the spring.
Although the Company's 1998 advertising efforts resulted in substantially
increased net sales, there is no assurance that this trend can be sustained,
that the planned campaign will occur or be successful, or that the Company can
maintain current net sales levels.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the development
of new varieties of the Gardenburger(R) veggie burger and the improvement of
existing flavors, 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. The Company's R&D staff developed the Gardenburger
Hamburger Style(R) and the three gourmet flavors of veggie burgers introduced in
March 1998, two of which were ranked in the top five in sales in the veggie
burger category in the retail grocery channel. Several new Gardenburger
varieties are currently under development, with introductions planned in 1999.
The Company conducts its research and development activities in its facilities
in both Portland, Oregon and Clearfield, Utah.
In 1998 and 1997, the Company spent approximately $1,121,000 and $565,000,
respectively, on research and development activities. In 1996, the Company spent
approximately $1.0 million on such activities, including $612,000 of acquired
in-process research and development in connection with its acquisition of
Gorilla Foods, Inc.
MANUFACTURING
The Company historically produced its line of veggie burgers using a batch
process in its Portland, Oregon plant. Beginning in February 1998, the Company
began assembly-line production at a second facility, located in Clearfield,
Utah, near Salt Lake City. The Company operates the Clearfield plant under a
five-year lease, with an option to renew for two successive five-year terms.
9
The 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 is scheduled to begin producing at full capacity by April 1999. The
Company has announced plans to discontinue production at its Portland facility
as of April 30, 1999. The Company believes the Clearfield facility, once fully
operational, will be able to support up to approximately $240 million of annual
net sales at current price levels. 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. The Company's manufacturing process in 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 and by temperature controlled container to Europe.
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. In addition, if the second production line does not operate as
efficiently as expected, the Company would not be able to manufacture its
products at planned levels. 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 the Company's products. Any
significant disruption in manufacturing would likely have a material adverse
effect on the Company's results of operations and financial condition.
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.
The Company believes that its products compare favorably to those offered by its
competitors. The Company prices its products competitively or at a slight
premium 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 Worthington Foods, Inc.,
which distributes its products under the "Morningstar Farms" label to the food
service and retail grocery channels, and Boca Burger, Inc., which distributes
soy-based meat analog burgers primarily in the retail grocery and natural food
channels. Recently, Worthington Foods acquired the "Harvest Burger" brand from
Archer Daniels Midland and began marketing and selling the brand in early 1999.
Previously, Harvest Burger was marketed and sold by Pillsbury under the "Green
Giant" brand name pursuant to a joint venture with Archer Daniels Midland. In
addition, other major national food products companies could decide to produce
veggie burgers at any time in the future.
10
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
NORPAC Food Sales ("Norpac") accounted for approximately 13.6 percent of the
Company's 1998 revenue and, at December 31, 1998, accounted for 7.6 percent of
the outstanding accounts receivable balance. NORPAC has been a significant
customer of the Company for several years, and its loss could have a material
adverse effect on the Company's business.
SOURCES OF SUPPLY
The Company uses natural ingredients such as mushrooms, oats, rice, onions, and
egg whites. These are common agricultural items typically available in most
parts of the United States. In addition, the Company 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 December 31, 1998, the Company had approximately 320 full-time equivalent
employees, including 70 employees at its headquarters in Portland, 90 at its
Portland production facility, and 160 at its Clearfield facility. In March 1999,
the Company announced the closure of the Portland facility, resulting in the
termination of approximately 75 employees by April 30, 1999. None of the
Company's employees is subject to a collective bargaining agreement, and the
Company considers its relations with its employees to be excellent.
INTELLECTUAL PROPERTY
The Company 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 business.
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.
11
MANAGEMENT INFORMATION SYSTEMS
The Company currently utilizes a number of computer systems in its business.
These include the Cimpro system that handles inventory control, order entry and
accounts payable functions; a DOS-based general ledger system; and an electronic
data interchange ("EDI") system currently used primarily to provide order
confirmation and other historical information to some food brokers and
distributors.
The Company is upgrading its existing systems by replacing the Cimpro, general
ledger, and EDI systems with a single Baan enterprise resource planning system.
This upgrade is scheduled for completion by mid-1999 and 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
will increase the availability of real-time information for management analysis
and use in operations. The Baan system will enhance 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 will
facilitate tracking of raw materials and finished goods through the Company's
manufacturing operation. The new system should 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.
The Company's Utah manufacturing facility is highly automated, using a number of
computerized process level controllers. The Company is considering implementing
a manufacturing enterprise system to further facilitate integration of
manufacturing information with information available through the Baan system.
GOVERNMENT REGULATION
The manufacturing, packaging, storage, distribution and labeling of food
products are subject to extensive federal and state laws and regulations. The
Food and Drug Administration (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(R) veggie burgers 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 business 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.
12
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.
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 two-year
extension to its original lease that terminates on December 31, 2000. Current
monthly rent is approximately $24,100.
The Company leases 15,000 square feet of distribution space at 215 SE Stark,
Portland, Oregon under a month-to-month lease that is terminable on two months'
notice. Rental on the Stark Street facility is $9,000 per month in 1999.
The Company leases additional space for research and development and production
at 1416 S.E. Eighth Avenue in Portland, Oregon. The facility is 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, which the Company considers to be
consistent with rental rates charged by unaffiliated property owners in the same
market area. The lease term expires on December 31, 1999. The Company has an
option to renew the lease for an additional one-year term.
The Company also 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.
The Company recently entered into a lease for 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.
The Company owns 40,000 square feet of production facilities at 1005 S.E.
Washington Street, Portland, Oregon, and a 1,200 square foot annex at the same
location. The Company has announced plans to sell this facility in connection
with the closure of its Portland production plant.
The Company owns approximately 18 acres of land near the Portland Airport. The
property was originally purchased as a site for expansion of the Company's
manufacturing capabilities, but is no longer needed for this purpose since the
lease of the Clearfield facility. The Company is currently marketing this
property for sale.
13
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
December 31, 1998.
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 Common Stock traded under the symbol
WHFI until October 17, 1997, when the symbol was changed to GBUR in connection
with the change in the Company's name from Wholesome & Hearty Foods, Inc. to
Gardenburger, Inc.
The high and low sales prices for the two years in the period ended December 31,
1998 were as follows:
1997 High Low
------------------------- ---------- --------
Quarter 1 $ 7.13 $ 6.00
Quarter 2 8.50 6.63
Quarter 3 10.13 7.13
Quarter 4 12.00 8.13
1998 High Low
------------------------- ---------- --------
Quarter 1 $ 13.88 $ 8.00
Quarter 2 16.13 10.13
Quarter 3 15.13 9.25
Quarter 4 13.75 8.63
The number of shareholders of record and approximate number of beneficial
shareholders at March 5, 1999 was 683 and 10,650, respectively.
There were no cash dividends declared or paid in 1998 or 1997. The Company does
not anticipate declaring cash dividends in the foreseeable future. The Company
may not, without the consent of Dresdner Kleinwort Benson Private Equity
Partners, LP ("Dresdner") declare or pay any 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.
14
ITEM 6. SELECTED FINANCIAL DATA
- - ------- -----------------------
IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994
- - ------------------------------------------ ------------ ---------- ---------- ----------- -----------
STATEMENT OF OPERATIONS DATA
Net sales $ 100,120 $ 56,837 $ 40,527 $ 36,818 $ 24,448
Gross margin 49,550 29,601 20,621 18,720 13,057
Sales and marketing expense 58,513 26,191 13,583 11,151 6,357
General and administrative expense 5,387 5,471 4,963 3,871 2,397
Operating income (loss) (14,350) (2,061) 1,463 3,698 3,591
Net income (loss) $ (10,042) $ (1,393) $ 1,063 $ 2,510 $ 2,391
Basic net income (loss) per share $ (1.16) $ (0.16) $ 0.13 $ 0.33 $ 0.32
Diluted net income (loss) per share $ (1.16) $ (0.16) $ 0.12 $ 0.29 $ 0.28
BALANCE SHEET DATA
Working capital $ 7,354 $ 11,504 $ 13,393 $ 11,978 $ 11,037
Total assets 55,048 26,470 24,934 19,325 15,320
Shareholders' equity 10,926 19,839 20,979 16,955 14,028
GROWTH INDICATORS (UNAUDITED)
Net sales growth 76% 40% 10% 51% 83%
Operating income growth (decline) n/a n/a (60%) 3% 35%
Net income growth (decline) n/a n/a (58%) 5% 56%
Diluted net income per share growth
(decline) n/a n/a (59%) 4% 47%
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
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.
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. In addition, the Company
15
has experienced a large increase in net sales over the past year due in large
part to substantial expenditures on advertising during 1998. Consumer demand may
not continue to increase or may even decline without renewed advertising and
marketing expenditures, and there is no guarantee that current sales increases
can be maintained. 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,
thereby compounding the difficulty of continuing current growth trends, and even
current sales levels. The Company plans to continue advertising and other
promotions in 1999 with expenditures similar to those in 1998, but there is no
assurance that sufficient funds will be available to support such advertising or
that future advertising will be as successful in generating new sales as the
Company's 1998 campaign.
Over the past two years, the Company has incurred significant operating and net
losses due largely to its efforts to penetrate the retail grocery channel and to
mainstream its veggie burger products through extensive advertising and other
marketing expenditures. Continued growth of the Company's business will require
significant additional working capital to support the Company's planned
advertising campaign. The Company has some funds available under its existing
revolving lines of credit, but amounts available for borrowing thereunder are
insufficient to support the Company's discretionary marketing spending. As a
result, the Company has entered into an agreement with an investor group to sell
$32.5 million of convertible preferred stock. See "Liquidity and Capital
Resources" below. The Company's inability to maintain adequate sources of
funding would cause the Company to significantly curtail its strategic plans and
could lead to decreased sales growth or even a reduction in sales.
The Company has significant outstanding indebtedness to Bank of America N.T. &
S.A. ("Bank of America") and Dresdner Kleinwort Benson Private Equity Partners
LP ("Dresdner"). These debt instruments require the Company to maintain
compliance with certain financial ratios described under "Liquidity and Capital
Resources" below. The Company presently is not in compliance with certain of the
financial ratio covenants in its debt instruments, but has received waivers from
both Bank of America and Dresdner. Nonetheless, either or both of Bank of
America and Dresdner could require the Company to repay all amounts outstanding
if it continues to fail to comply with the financial ratio covenants in its debt
instruments. Any acceleration of repayment would require the Company to seek
replacement debt or equity financing, which may only be available, if at all, on
terms less favorable than its existing debt.
The Company leases various food processing, production and other equipment
pursuant to two operating leases for use in its Clearfield, Utah production
facility. Lease payments on the equipment totaled $2.2 million in 1998 and will
total approximately $2.8 million in 1999. The leases were accomplished through
lease agreements between the Company and BA Leasing & Capital Corporation ("BA
Capital"), an affiliate of Bank of America. Each lease agreement contains
certain cross-default provisions with the Company's existing line of credit
agreement with Bank of America, which provide that any default under any other
borrowing or credit agreement constitutes a default under each lease agreement
if the default consists of failure to make payment when due or gives the holder
a right of acceleration. In addition, the financial covenants in the Bank of
America credit agreement will survive as covenants under each lease agreement in
the event the line of credit agreement is terminated. If any event of default by
16
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 term, which term ranges from five
to seven years, depending upon the equipment.
The Company is no longer producing inventory in its Portland facility, and plans
to sell the plant building. As a result, the Company's Clearfield, Utah facility
will be expected to handle all of the Company's production. The Company has
recently commenced operation of a second production line at the Clearfield
facility and expects its second line to be fully operational by the end of the
third quarter.
In light of the foregoing factors, as well as other variables, investors are
cautioned not to place undue reliance on current financial performance or
historical trends and such trends should not be relied on to anticipate future
financial results.
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.
Calendar year ended December 31, 1998 December 31, 1997 December 31, 1996
- - ------------------------------- ----------------- ----------------- -----------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 50.5 47.9 49.1
----------------- ----------------- -----------------
Gross margin 49.5 52.1 50.9
Sales and marketing expense
58.4 46.1 33.5
General and administrative
expense 5.4 9.6 12.3
Acquired in-process re-search
and development -- -- 1.5
----------------- ----------------- -----------------
Operating income (loss) (14.3) (3.6) 3.6
Other income (expense) (1.5) -- 0.8
----------------- ----------------- -----------------
Income (loss) before income
taxes (15.8) (3.6) 4.4
Income taxes (benefit) (5.8) (1.1) 1.8
================= ================= =================
Net income (loss) (10.0)% (2.5)% 2.6%
================= ================= =================
1998 COMPARED TO 1997
NET SALES Net sales for 1998 increased 76.2 percent to $100.1 million from $56.8
million for 1997. The Company has increased its sales levels in its retail
grocery, food service and club store channels. The increase in overall net sales
is primarily related to increased unit sales in the Company's grocery channel as
a result of the Company's investment in efforts to expand this channel,
including its national advertising campaign. The Company increased prices on
certain products in its grocery channel an average of 7 percent in the fourth
quarter of 1997, which also contributed to the increase in net sales in 1998.
Net sales were higher in the 1998 third and fourth quarters than in the second
quarter. The Company's market share in the grocery channel reached an all-time
high of 56 percent during the third quarter of 1998 and averaged 42 percent
during all of 1998. During 1998, the Company increased its U.S. All Commodity
Volume ("ACV") to 89 percent from 68 percent at the end of 1997. ACV compares
the total sales volume of the stores carrying the Company's products to the
total sales volume throughout the retail grocery channel.
17
GROSS MARGIN Gross margin increased 67.4 percent to $49.6 million (49.5 percent
of net sales) for 1998 from $29.6 million (52.1 percent of net sales) for 1997.
The decrease in the annualized gross margin percentage is primarily a result of
start-up costs associated with the Company's new manufacturing facility in
Clearfield, Utah. The Company achieved a gross margin percentage of 51.9 percent
in the fourth quarter of 1998. The improvement in gross margin during the fourth
quarter of 1998 compared to the average for the year is primarily a result of
declining start-up costs and increased manufacturing efficiencies at the
Clearfield facility. The Company commenced operation of a second production line
at its Clearfield facility in early 1999 and ceased production at its Portland
production facility on March 1, 1999. The costs incurred in connection with the
start-up of a second production line are expected to result in lower gross
margins in the first and possibly second quarters of 1999 compared to the fourth
quarter of 1998. The Company expects that gross margin percentages for all of
1999 will be slightly higher than the gross margin percentages achieved for all
of 1998, but this expectation could be affected by any unexpected delays in
completing the second production line. Following transfer of all production to
the Clearfield facility, the Company expects to have $240 million of total
production capacity, based on current estimates. Unit costs of production are
expected to be lower than with the Company's historical batch manufacturing
process used at the Portland facility.
SALES AND MARKETING EXPENSE Sales and marketing expense increased to $58.5
million (58.4 percent of net sales) for 1998 from $26.2 million (46.1 percent of
net sales) for 1997. The increase in spending in 1998 is primarily a result of
costs associated with the Company's aggressive 1998 advertising plan, including
a national television advertising campaign during the second and third quarters,
and the introduction of new products into the retail grocery channel. The
Company spent approximately $11.0 million on media advertising during the first
half of 1998 and approximately $3.6 million on media advertising during the
second half of 1998. The Company plans to continue expenditures for
advertising and marketing at approximately 1998 levels during 1999, which is
expected to yield a reduction in sales and marketing expense as a percent of net
sales as net sales increase.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("g&a")
decreased to $5.4 million (5.4 percent of net sales) for 1998 from $5.5 million
(9.6 percent of net sales) for 1997. The Company has been able to maintain its
g&a expenditures at 1997 levels while increasing sales, thereby decreasing g&a
as a percentage of net sales. The Company received a $240,000 insurance
settlement in the first quarter of 1997 that effectively lowered g&a expense in
1997.
OPERATING LOSS Operating loss was $14.4 million in 1998 compared to an operating
loss of $2.1 million for 1997 as a result of the individual line item changes
discussed above, including in particular the increased advertising expenses
incurred by the Company consistent with its strategic plan.
18
OTHER INCOME (EXPENSE) Other income (expense) was a net expense of $1.5 million
in 1998 compared to net income of $9,000 in 1997 primarily as a result of
increased interest expense during 1998 related to debt incurred during 1998 to
help fund the Company's increased sales and marketing activities.
INCOME TAXES Income taxes are based on an estimated rate of approximately 37
percent for 1998 compared to the approximately 32 percent rate used for 1997.
The increase in the rate is primarily attributable to a decrease in meals and
entertainment expense and non-deductible goodwill amortization in relation to
the reported net loss of the Company, offset in part by a decrease in tax exempt
dividends and interest.
NET INCOME (LOSS) Net loss was $10.0 million in 1998 compared to a net loss of
$1.4 million in 1997 as a result of the individual line item changes discussed
above. The Company believes that the impact of inflation on the net loss was not
material for fiscal years 1998 and 1997.
1997 COMPARED TO 1996
NET SALES Net sales for 1997 increased 40.2 percent to $56.8 million from $40.5
million for 1996. The Company increased its sales levels in each of its major
channels, including food service, retail and club stores. Such increases were
primarily a result of increased marketing and public relations activities, which
increased awareness of the Company's products throughout its channels of
distribution. The Company increased its store penetration from 30 percent U.S.
ACV at the end of 1996 to 70 percent U.S. ACV by the end of 1997.
GROSS MARGIN Gross margin increased 43.5 percent to $29.6 million (52.1 percent
of net sales) for 1997 from $20.6 million (50.9 percent of net sales) for 1996.
The increase in gross margin as a percentage of net sales was primarily due to
an increased sales base to absorb fixed costs, improvements in manufacturing
efficiencies at its Portland, Oregon manufacturing facility, and selected price
increases.
SALES AND MARKETING EXPENSE Sales and marketing expense increased to $26.2
million (46.1 percent of net sales) for 1997 from $13.6 million (33.5 percent of
net sales) for 1996. The increase was primarily a result of costs associated
with the Company's plan to aggressively expand its retail grocery business
nationwide in 1997 and increased promotional activities, including the launching
of a new national print advertising campaign.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense increased
to $5.5 million (9.6 percent of net sales) for 1997 from $5.0 million (12.3
percent of net sales) for 1996. General and administrative expense remained
relatively constant as increases in compensation expense related to additional
personnel to support the growth of the Company and increased bonus accruals in
1997 were substantially offset by a decrease in severance and hiring costs,
absence of litigation costs in 1997 resulting from settlement of a lawsuit
against the Company during the third quarter of 1996 and a related insurance
refund of $240,000 which was received in the first quarter of 1997.
19
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisition
of Gorilla Foods, Inc. in 1996, the Company recorded a one-time pretax charge of
$612,000 ($386,000 net of taxes) related to acquired in-process research and
development costs. The value assigned to the in-process research and development
was determined by appraisal and represents those efforts in process at the
acquisition date that had not yet established technological feasibility and that
had no alternative future uses. Accounting rules require that such costs be
charged to expense as incurred.
OPERATING INCOME (LOSS) Operating loss was $2.1 million in 1997 compared to
operating income (without the one-time charge for purchased in-process research
and development) of $2.1 million (5.1 percent of net sales) for 1996 as a result
of the individual line item changes discussed above.
OTHER INCOME (EXPENSE) Other income decreased to $9,000 in 1997 from $327,000 in
1996 primarily as a result of decreased cash balances in 1997 and therefore
lower interest income in 1997, as well as a loss in 1997 related to the
disposition of certain property and equipment.
INCOME TAXES The Company's income tax rate for 1997 decreased to 32.1 percent
compared to 40.6 percent for 1996, primarily due to lower amounts of tax exempt
interest and dividends, as well as a lower effective state tax rate in 1997.
NET INCOME (LOSS) Net loss was $1.4 million for 1997 compared to net income of
$1.1 million (2.6 percent of net sales) for 1996 as a result of the individual
line item changes discussed above. The Company believes that the impact of
inflation on net income (loss) was not material for fiscal years 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $7.4 million, which
included $2.3 million of cash and cash equivalents as compared to $11.5 million
in working capital at December 31, 1997, including $2.6 million of cash and cash
equivalents. The $4.1 million decrease in available working capital is primarily
due to the use of $23.7 million in operations and net purchases of $5.9 million
of property and equipment, offset by $30.0 million provided by net short and
long-term borrowings and $0.6 million provided by the exercise of stock options
and related income tax benefits.
Accounts receivable increased $6.9 million to $15.0 million at December 31, 1998
from $8.1 million at December 31, 1997, due primarily to significantly higher
sales during the fourth quarter of 1998 compared to the fourth quarter of 1997.
Days sales outstanding increased to 47 at December 31, 1998 from 34 at December
31, 1997.
Inventories increased $9.3 million to $12.5 million at December 31, 1998 from
$3.2 million at December 31, 1997 in order to support an expected increased
level of sales as well as to provide for potential delays in bringing the second
production line at the Clearfield facility on-line. Inventory turned 5.3 times
on an annualized basis during the fourth quarter of 1998 compared to 9.6 times
on an annualized basis for the fourth quarter of 1997.
20
In May 1997, the Company entered into a lease for its production facility in
Clearfield, Utah. Later that year and in 1998, the Company entered into two
separate leases for various production and other equipment used at this
facility. Total lease payments for the facility and equipment in 1998 were $2.2
million. In 1999, total payments will be approximately $3.1 million.
Capital expenditures of $5.9 million during 1998 resulted primarily from
expenditures of $3.3 million for equipment for the Company's Clearfield
production facility and $2.2 million for information systems infrastructure. The
Company anticipates spending approximately $1.4 million on information systems
infrastructure during 1999.
During March 1998, the Company completed a private placement of $15 million of 7
percent Convertible Senior Subordinated Notes (the "Notes") with Dresdner. The
Notes are convertible into shares of the Company's Common Stock at the option of
Dresdner 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 two years from the date of issuance. The
conversion price is $12.90 based on a conversion premium of 120 percent of the
market price of the Company's Common Stock at the time the transaction was
negotiated. The conversion price will be adjusted to approximately $12.14 upon
completion of the preferred stock financing discussed below. Under the terms of
the Note Purchase Agreement relating to the Notes, the Company must comply with
certain covenants and maintain certain financial ratios as follows: current
assets to current liabilities of at least 1.575 to 1.0, measured monthly; total
liabilities, exclusive of the Notes, to tangible net worth, inclusive of the
Notes, not to exceed 1.1 to 1.0, measured monthly; and a minimum fixed charge
coverage ratio of 1.08 to 1.0, measured annually. At December 31, 1998, the
Company was out of compliance with its financial ratio covenants under the
Notes. The Company received a waiver of compliance from Dresdner through the
period ended December 31, 1998.
In April 1998, the Company entered into a Business Loan Agreement (as amended,
the "Agreement") with Bank of America for a $10.0 million revolving line of
credit. In July 1998, the Agreement was amended to increase the maximum
borrowing limit to $14.5 million. The Agreement also provides for a separate
$5.0 million revolving line of credit through February 28, 1999 and $3.0 million
through July 1, 1999. At December 31, 1998, the Company had $15.0 million
outstanding of $19.5 million available under this Agreement at interest rates
ranging from 6.06 percent to 7.06 percent. In March 1999, the Agreement was
amended to consolidate the $14.5 million and the $5.0 million lines of credit.
In addition, the interest rate was changed to the bank's reference rate plus one
percentage point, or at the option of the Company, at LIBOR plus 4.0 percentage
points or the Offshore rate plus 4.0 percentage points.
The Agreement is secured by all equipment, inventory, receivables and other
personal property owned by the Company. The Agreement contains certain covenants
relating to the availability of financial information from the Company, as well
as the maintenance of certain financial ratios as follows: current assets to
current liabilities of at least 1.5 to 1.0; total liabilities, exclusive of the
Notes, to tangible net worth, inclusive of the Notes, not exceeding 1.0 to 1.0;
and a minimum fixed charge coverage ratio of 1.2 to 1.0. At December 31, 1998,
the Company was out of compliance with the financial ratio covenants under the
Agreement. The Company received a waiver of compliance from Bank of America
through the period ended December 31, 1998. The consolidated line of credit
expired March 19, 1999. The Company is currently renegotiating its credit
facilities.
21
Management believes that the Company's existing working capital, in combination
with cash flow from operations and funds available under credit facilities,
should be sufficient to support working capital requirements in the near term.
In order to continue its current strategic plan, including significant
discretionary advertising expenditures at 1998 levels, the Company determined
that it needed to raise additional capital in the first half of 1999.
Accordingly on March 29, 1999, the Company entered into a definitive stock
purchase agreement to sell $32.5 million of convertible preferred stock to a
group of investors. Under the terms of the agreement, the Company will sell 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, each at a price of $10 per share, or an aggregate consideration
of $32.5 million, subject to certain closing conditions. The preferred shares
are convertible at a price of $10 per share at any time following issuance at
the discretion of the holder. The Series B conversion price will be adjusted to
$3.75 if the Company fails to meet specified performance targets for fiscal
years 1999 and 2000. 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 point they may be redeemed
at the election of the holders or, under certain conditions, at the discretion
of the Company.
The preferred stock sale is scheduled to close in mid-April 1999. The Company
plans to use $25 million of the net proceeds of the transaction to pursue its
strategic business plan, including its marketing and advertising campaign, and
the balance of the net proceeds as working capital.
YEAR 2000
INFORMATION SYSTEMS The Company utilizes, or will utilize by mid-1999, packaged
application strategies for all critical information systems functions, which
have all been certified to be Year 2000 compliant by the vendors. This includes
enterprise software, operating systems, networking components, application and
data servers, PC hardware, and core office automation software. The Company is
currently performing various component tests to verify full Year 2000
operational compliance and additional tests are planned. In addition to the
information system component testing, the Company will conduct a system wide
test, to include all components from the desktop to the data center, to ensure
that all of the compliant components will function properly as a whole. The
focus of these tests will be to ensure that the Company's business processes run
end-to-end with no Year 2000 errors or issues. The Company expects to have
tested and ensured Year 2000 compliance for all critical information systems by
August 31, 1999.
22
SUPPLIER AND CUSTOMER BASE The Company has begun a Year 2000 supplier and
customer audit program. As a part of this program, the Company has contacted
all of its critical suppliers and significant customers to inform them of the
Company's Year 2000 expectations and to request copies of their compliance
programs.
COST The Company expects to incur no more than $150,000 of incremental costs to
ensure Year 2000 compliance of its information systems. All system hardware and
software upgrades already completed, or anticipated to be completed prior to the
year 2000, were budgeted in the normal course of business regardless of the Year
2000 issue. The costs of the Company's Year 2000 identification, assessment,
replacement and testing efforts and the dates for completion of such efforts are
based on management's best estimates, which include assumptions regarding future
events such as the continued availability of certain resources, the success of
third-party compliance efforts, and other factors. Actual results may differ
materially from management's expectations.
RISKS Despite the Company's efforts to identify all internal systems with Year
2000 issues, it is likely that unexpected problems will arise. As with most
businesses, the Company will also be at risk from external infrastructure
failures that could arise from Year 2000 failures. It is possible, for example,
that electrical power, telephone and financial networks across the nation will
experience breakdowns in the days and weeks following January 1, 2000. There is
also a real possibility of failures of key components in the national
transportation infrastructure or delays in rail, over-the-road and air shipments
due to failures in transportation control systems due to the Year 2000 problem.
Investigation and assessment of risks associated with such ubiquitous and
interconnected utility systems and transportation systems are beyond the
resources of the Company. The failure by the Company or third parties to correct
a material Year 2000 problem could result in an interruption in, or a failure
of, certain of the Company's normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Company has not yet
developed any contingency plans in regard to its internal systems, supplier or
customer issues or any of the more global infrastructure issues. The Company
expects to consider whether such plans are needed by August 1999. This process
will include identifying, assessing and developing plans for dealing with the
most reasonably likely worst case scenario facing the Company.
23
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"). This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. The objective of SFAS 130 is to report a measure of all
changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. The Company
adopted SFAS 130 during the first quarter of 1998. Comprehensive loss did not
differ from currently reported net loss in the periods presented.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - -------- ----------------------------------------------------------
No disclosure is required under this item.
24
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 eight quarters in the
two-year period ended December 31, 1998 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- - ----------------------------------- ----------- ----------- ----------- -----------
1998
Net sales $ 13,040 $ 25,739 $ 32,630 $ 28,711
Gross margin 6,153 12,302 16,192 14,903
Net income (loss) (4,318) (6,240) 182 334
Basic net income (loss) per share (0.50) (0.72) 0.02 0.04
Diluted net income (loss) per share (0.50) (0.72) 0.02 0.03
1997
Net sales $ 10,304 $ 13,465 $ 16,071 $ 16,997
Gross margin 5,115 6,842 8,179 9,465
Net income (loss) (355) (1,371) (645) 978
Basic net income (loss) per share (0.04) (0.16) (0.08) 0.11
Diluted net income (loss) per share (0.04) (0.16) (0.08) 0.10
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
25
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 1999 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
1999 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 1999 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 MANAGEMENT
TRANSACTIONS in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.
26
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 - December 31, 1998 and 1997 F-2
Statements of Operations for the years ended December 31,
1998,1997 and 1996
F-3
Statements of Shareholders' Equity - December 31, 1998, 1997
and 1996 F-4
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
F-5
Notes to Financial Statements F-6
Report of Independent Public Accountants on Financial
Statement Schedule
F-16
Schedule II Valuation and Qualifying Accounts F-17
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1998.
(c) EXHIBITS
Exhibits are listed on the Index to Exhibits following the financial statements
included in this report.
27
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: March 31, 1999
GARDENBURGER, INC.
By: /s/ Lyle G. Hubbard
----------------------
Lyle G. Hubbard
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 March 31, 1999.
Signature Title
- - --------- -----
/s/ Lyle G. Hubbard Director, President and Chief
- - ------------------------ Executive Officer
Lyle G. Hubbard (Principal Executive Officer)
/s/ Richard C. Dietz Executive Vice President,
- - ------------------------ Chief Financial Officer, Secretary
Richard C. Dietz and Treasurer
(Principal Financial and Accounting
Officer)
/s/ Alexander P. Coleman Director
- - ------------------------
Alexander P. Coleman
/s/ Ronald C. Kesselman Director
- - ------------------------
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 Chairman of the Board
- - ------------------------
E. Kay Stepp
/s/ Paul F. Wenner Founder, Chief Creative Officer
- - ------------------------ and Director
Paul F. Wenner
28
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 December 31, 1998 and 1997 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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
December 31, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Portland, Oregon,
January 26, 1999
(except for the matters discussed in
Note 13, as to which the date is
March 30, 1999)
F-1
GARDENBURGER, INC.
BALANCE SHEEETS
(In thousands, except share amounts)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,320 $ 2,602
Accounts receivable, net of allowances of
$148 and $275 14,969 8,073
Inventories, net 12,457 3,203
Prepaid expenses 4,515 2,321
Income taxes receivable - 475
Deferred income taxes 1,989 713
--------- ---------
Total Current Assets 36,250 17,387
Property, Plant and Equipment, net of accumulated
depreciation of $3,174 and $2,005 12,238 7,822
Deferred Income Taxes 4,242 -
Other Assets, net of accumulated amortization of
$534 and $250 2,318 1,261
--------- ---------
Total Assets $ 55,048 $ 26,470
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term note payable $ 15,000 $ -
Accounts payable 9,708 3,165
Payroll and related liabilities payable 1,822 1,616
Accrued brokers' commissions 973 469
Other current liabilities 1,393 633
--------- ---------
Total Current Liabilities 28,896 5,883
Deferred Income Taxes - 438
Other Long-Term Liabilities 226 310
Convertible Notes Payable 15,000 -
Shareholders' Equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued - -
Common Stock, no par value, 25,000,000 shares
authorized; shares issued and outstanding:
8,733,811 and 8,608,254 9,717 8,651
Additional paid-in capital 4,275 4,203
Retained earnings (deficit) (3,066) 6,985
--------- ---------
Total Shareholders' Equity 10,926 19,839
--------- ---------
Total Liabilities and Shareholders' Equity $ 55,048 $ 26,470
========= =========
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 Ended December 31,
---------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
Net sales $ 100,120 $ 56,837 $ 40,527
Cost of goods sold 50,570 27,236 19,906
-------------- --------------- --------------
Gross margin 49,550 29,601 20,621
Operating expenses:
Sales and marketing 58,513 26,191 13,583
General and administrative 5,387 5,471 4,963
Acquired in-process research & development - - 612
-------------- --------------- --------------
63,900 31,662 19,158
-------------- --------------- --------------
Operating income (loss) (14,350) (2,061) 1,463
Other income (expense):
Interest income 115 185 365
Interest expense (1,404) (40) -
Other, net (200) (136) (38)
-------------- --------------- --------------
(1,489) 9 327
-------------- --------------- --------------
Income (loss) before provision for
(benefit from) income taxes (15,839) (2,052) 1,790
Provision for (benefit from) income taxes (5,797) (659) 727
============== =============== ==============
Net income (loss) $ (10,042) $ (1,393) $ 1,063
============== =============== ==============
Net income (loss) per share - basic $ (1.16) $ (0.16) $ 0.13
============== =============== ==============
Net income (loss) per share - diluted $ (1.16) $ (0.16) $ 0.12
============== =============== ==============
The accompanying notes are an integral part of these statements.
F-3
GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands, except share amounts)
Common Stock Additional Retained Total
------------------------------ Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
------------ ------------- -------------- -------------- ----------------
Balance at December 31, 1995 7,701,456 $ 7,603 $ 2,053 $ 7,299 $ 16,955
Exercise of Common Stock Options 625,000 625 - - 625
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 1,336 - 1,336
Issuance of shares for acquisition
of Gorilla Foods, Inc. 240,000 240 750 - 990
Foreign currency translation - - - 10 10
Net income - - - 1,063 1,063
------------ ------------- -------------- -------------- ---------------
Balance at December 31, 1996 8,566,456 8,468 4,139 8,372 20,979
Exercise of Common Stock Options 41,798 183 - - 183
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 64 - 64
Foreign currency translation - - - 6 6
Net loss - - - (1,393) (1,393)
------------ ------------- -------------- -------------- ---------------
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
============ ============= ============== ============== ===============
The accompanying notes are an integral part of these statements.
F-4
GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
For the Year Ended December 31,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
Cash flows from operating activities:
Net income (loss) $ (10,042) $ (1,393) $ 1,063
Effect of exchange rate on operating accounts (9) 6 10
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 1,637 977 594
Other non-cash expenses 409 - -
Acquired in-process research and development, net of tax - - 386
Loss on sale of fixed assets 75 145 52
Deferred income taxes (5,956) (307) (57)
(Increase) decrease in:
Accounts receivable, net (6,896) (5,273) 141
Inventories, net (9,254) 1,587 (3,228)
Prepaid expenses (2,194) (1,943) (181)
Income taxes receivable, net 475 178 (922)
Increase in:
Accounts payable 6,543 992 1,134
Payroll and related liabilities 206 937 50
Other accrued liabilities 1,264 501 413
--------------- --------------- --------------
Net cash used in operating activities (23,742) (3,593) (545)
Cash flows from investing activities:
Payments for purchase of property and equipment (11,282) (12,141) (2,428)
Proceeds from sale of equipment 5,355 10,477 26
Cash paid for Gorilla Foods and Whole Food Marketing - - (419)
Other assets, net (102) (143) (87)
--------------- --------------- --------------
Net cash used in investing activities (6,029) (1,807) (2,908)
Cash flows from financing activities:
Proceeds from line of credit, net 15,000 - -
Proceeds from issuance of convertible notes payable 15,000 - -
Financing fees from issuance of convertible notes payable (1,124) - -
Proceeds from exercise of common stock options and warrants 541 183 625
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 72 64 1,336
--------------- --------------- --------------
Net cash provided by financing activities 29,489 247 1,961
Decrease in cash and cash equivalents (282) (5,153) (1,492)
Cash and cash equivalents:
Beginning of period 2,602 7,755 9,247
--------------- --------------- --------------
End of period $ 2,320 $ 2,602 $ 7,755
================ ================ ==============
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.
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.
OTHER ASSETS
Other assets consist principally of $1,085 in deferred financing fees and $873
in goodwill as of December 31, 1998. 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
F-6
LONG-LIVED ASSETS
In fiscal year 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED of. The adoption of SFAS 121 had no
impact on the Company's financial position or on its results of operations.
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.
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 December 31, 1998, one customer accounted for approximately
14 percent of revenue and 8 percent of the accounts receivable balance at
December 31, 1998.
For the year ended December 31, 1997, two customers accounted for approximately
19 percent and 10 percent of revenue and 10 percent and 7 percent of the
accounts receivable balance at December 31, 1997, respectively.
For the year ended December 31, 1996, two customers accounted for approximately
23 percent and 12 percent of revenue and 32 percent and 13 percent of the
accounts receivable balance at December 31, 1996, respectively.
Historically, the Company has not incurred significant losses related to its
accounts receivable.
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 $19,904,
$3,844 and $1,539 in 1998, 1997 and 1996, respectively.
F-7
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 $1,121 in 1998, $565 in 1997 and $1,000 in
1996, which includes a one-time charge of $612 for in-process research and
development in conjunction with the acquisition of Gorilla Foods (see Note 8).
NET INCOME (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. Following is a reconciliation of basic EPS and diluted EPS:
Year Ended December 31, 1998 1997 1996
- - ----------------------------- ----------------------------- ----------------------------- ---------------------------
Per Share Per Share Per Share
Amount Amount Amount
BASIC EPS Loss Shares Loss Shares Income Shares
----------------------------- ----------------------------- ---------------------------
Income (loss) available to
Common Shareholders $(10,042) 8,659 $ (1.16) $(1,393) 8,584 $ (0.16) $ 1,063 8,456 $ 0.13
========= ========= =========
EFFECT OF DILUTIVE SECURITIES
Stock Options - - - - - 610
---------- -------- --------- --------- -------- --------
DILUTED EPS
Income (loss) available to
Common Shareholders $(10,042) 8,659 $ (1.16) $(1,393) 8,584 $ (0.16) $ 1,063 9,066 $ 0.12
========= ========= =========
At December 31, 1998, 1997 and 1996, the Company had options outstanding
covering 2,768, 2,447 and 959 shares, respectively, of the Company's Common
Stock not included in the above calculations since they would have been
antidilutive. In addition, at December 31, 1998, the Company had 1,163 shares
issuable pursuant to the Company's convertible notes that were not included as
they would have been antidilutive.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
2. INVENTORIES
- - --------------
Detail of inventories at December 31, 1998 and 1997 is as follows:
December 31, 1998 1997
- - ------------------------------- ---------------- -----------------
Raw materials $ 2,843 $ 1,148
Packaging and supplies 275 193
Finished goods 9,339 1,862
================ =================
$ 12,457 $ 3,203
================ =================
F-8
3. PROPERTY, PLANT AND EQUIPMENT
- - --------------------------------
December 31, 1998 1997
- - ------------------------------------ ------------------ ----------------
Land $ 787 $ 787
Building and improvements 5,262 3,374
Machinery and equipment 7,320 3,949
Office furniture and equipment 2,043 1,717
------------------ ----------------
15,412 9,827
Less accumulated depreciation (3,174) (2,005)
================== ================
$ 12,238 $ 7,822
================== ================
4. LINE OF CREDIT
- - -----------------
In April 1998, the Company entered into a Business Loan Agreement (as amended,
the "Agreement") with Bank of America NT & SA for a $10.0 million revolving line
of credit, which expires July 1, 1999. In July 1998, the Agreement was amended
to increase the maximum borrowing limit to $14.5 million. Interest is at the
bank's reference rate, or at the option of the Company, at LIBOR plus 1.0
percentage points or the Offshore Rate (as defined) plus 1.0 percentage points.
This facility also contains a provision for a $0.4 million letter of credit with
a maximum maturity of March 31, 2000. The Agreement also provides for a separate
$5.0 million revolving line of credit through February 28, 1999 and $3.0 million
through July 1, 1999. Interest on the revolving line of credit is at the bank's
reference rate or, at the option of the Company, at LIBOR plus 2.0 percentage
points or the Offshore Rate plus 2.0 percentage points. The Agreement is secured
by all equipment, inventory, receivables and other personal property owned by
the Company. The Agreement contains certain covenants relating to the
availability of financial information from the Company, as well as the
maintenance of certain financial ratios as follows: current assets to current
liabilities of at least 1.5 to 1.0; total liabilities to tangible net worth not
exceeding 1.0 to 1.0; and a minimum fixed charge coverage ratio of 1.2 to 1.0.
At December 31, 1998, the Company was out of compliance with its financial ratio
covenants under the Agreement. The Company received a waiver of compliance from
the Bank through the period ended December 31, 1998. At December 31, 1998, the
Company had $15 million outstanding under this Agreement at interest rates
ranging from 6.06 percent to 7.06 percent. See Note 13.
5. LEASE COMMITMENTS
- - --------------------
Future minimum lease payments at December 31, 1998 are as follows:
Year Ended December 31,
- - --------------------------------------
1999 $ 3,167
2000 3,686
2001 3,417
2002 3,417
2003 3,291
Thereafter 5,541
------------
Total $22,519
============
Rental expense for the years ended December 31, 1998, 1997 and 1996 was $2,613,
$601 and $257, respectively.
F-9
6. DRESDNER NOTES
- - -----------------
During March 1998, the Company completed a private placement of $15 million of 7
percent Convertible Senior Subordinated Notes (the "Notes") with Dresdner
Kleinwort Benson Private Equity Partners LP ("Dresdner"). The Notes are
convertible into shares of the Company's Common Stock at the option of Dresdner
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 two years from the date of issuance. The conversion
price is $12.90 based on a conversion premium of 120 percent of the market price
of the Company's Common Stock at the time the transaction was negotiated. Under
the terms of the Note Purchase Agreement relating to the Notes, the Company must
comply with certain covenants and maintain certain financial ratios as follows:
current assets to current liabilities of at least 1.575 to 1.0, measured
monthly; total liabilities to tangible net worth not to exceed 1.1 to 1.0,
measured monthly; and a minimum fixed charge coverage ratio of 1.08 to 1.0,
measured annually. At December 31, 1998, the Company was out of compliance with
its financial ratio covenants under the Notes. The Company received a waiver of
compliance from Dresdner through the period ended December 31, 1999.
7. INCOME TAXES
- - ---------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards 109, ACCOUNTING FOR INCOME TAXES. The Company realizes tax benefits as
a result of the exercise of nonqualified 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 $72, $64 and $1,336 were credited to additional paid-in capital in
1998, 1997 and 1996, respectively.
The provision for (benefit from) income taxes is as follows:
December 31, 1998 1997 1996
- - ----------------- ----------- ---------- ----------
CURRENT:
Federal $ 129 $ (352) $ 616
State 30 - 168
----------- ---------- ----------
159 (352) 784
DEFERRED (5,956) (307) (57)
=========== ========== ==========
$ (5,797) $ (659) $ 727
=========== ========== ==========
F-10
Total deferred income tax assets were $6,751 and $972 and liabilities were $520
and $697 at December 31, 1998 and 1997, respectively. Individually significant
temporary differences are as follows:
December 31, 1998 1997
- - ------------------------------------ ----------- ----------
Net operating loss carryforwards $ 4,602 $ -
Accounts receivable reserves 58 115
Provision for trade promotions
and discounts
1,046 318
Inventory 500 243
Book/tax depreciation differences (520) (515)
The Company believes deferred income tax assets are realizable as a result of
expected future income.
At December 31, 1998, the Company had available federal and state income tax
carryforwards of $4,244 and $358, respectively. The federal and state income tax
carryforwards expire through the year 2018 and 2013, respectively.
The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
December 31, 1998 1997 1996
- - ---------------------------------------- ------ ------ ------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State taxes, net of federal income
tax benefit (3.9) (3.5) 5.9
Tax exempt interest and dividends (0.1) (1.7) (4.0)
Trademark and goodwill amortization 0.2 1.5 2.0
Meals and entertainment 0.4 1.8 --
Revision of prior year estimates -- 1.6 2.0
Other 0.8 2.2 0.7
------ ------ ------
Effective tax rate (36.6)% (32.1)% 40.6 %
====== ====== ======
8. ACQUISITIONS
- - ---------------
In January 1996 the Company completed the acquisition of Ojai, California-based
Gorilla Foods, Inc., a privately held developer and manufacturer of wheat
protein-based, meatless food products, including the GardenDog. The Company
issued 240 shares of the Company's Common Stock in exchange for all outstanding
common shares of Gorilla Foods, and paid $69 in cash. In addition, the Company
agreed to issue up to an additional 200 shares of the Company's Common Stock in
50 share increments if the Company's sales of wheat protein-based products reach
certain levels over the ensuing five years. To date, the Company has made no
sales of wheat protein-based products. The Company incurred a one-time charge of
$612 in the first quarter of 1996 as a result of the acquisition of in-process
research and development associated with this acquisition, with the remainder of
the purchase price primarily allocated to goodwill.
In a separate transaction in January 1996, the Company completed the acquisition
of the assets of Whole Food Marketing, Inc., a Southern California based food
broker of the Company's and Gorilla Foods' products. The Company paid $350 for
F-11
the assets of Whole Food Marketing, Inc., all of which was allocated to
goodwill. This acquisition was accounted for under the purchase method.
Pro forma financial information has not been provided for these acquisitions, as
the pro forma results are not materially different from actual results.
9. RELATED PARTY TRANSACTIONS
- - -----------------------------
The Company leases its S.E. 8th Avenue plant facility from a shareholder of the
Company. The lease is for a one-year term ending December 31, 1999, and the
Company may renew the lease for an additional term of one year.
10. SHAREHOLDERS' EQUITY
- - ------------------------
PREFERRED STOCK
The Company has authorized 5,000 shares of preferred stock. 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.
STOCK OPTIONS AND WARRANTS
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, an option covering 625
of the shares was exercised. At December 31, 1998, an option to purchase 1,025
shares of Common Stock was outstanding, all of which were exercisable. At
December 31, 1998, 1,025 shares of the Company's Common Stock were reserved for
issuance under this option grant.
F-12
In addition, 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 December 31, 1998, the Company had
2,017 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, 1995 1,647 495 $ 10.73
Options granted (907) 907 7.87
Options canceled 21 (21) 12.11
Options exercised -- (9) 3.08
--------------------- --------------------- ----------------------
Balances, December 31, 1996 761 1,372 8.87
Options granted (172) 172 7.17
Options canceled 58 (58) 9.12
Options exercised -- (42) 4.37
--------------------- --------------------- ----------------------
Balances, December 31, 1997 647 1,444 8.78
Options granted (467) 467 9.71
Options canceled 94 (94) 8.12
Options exercised -- (74) 7.27
===================== ===================== ======================
Balances, December 31, 1998 274 1,743 $ 9.13
===================== ===================== ======================
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 1998, 1997 and 1996 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the following
weighted average assumptions for grants:
For the Year Ended December 31,
1998 1997 1996
- - ------------------------------- -------------- ------------ ------------
Risk-free interest rate 5.50% 6.25% 6.00%
Expected dividend yield 0% 0% 0%
Expected lives 6.5 years 6.5 years 8 years
Expected volatility 60.77% 58.11% 60.94%
F-13
Using the Black-Scholes methodology, the total value of options granted during
1998, 1997 and 1996 was $2,534, $760 and $4,762, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
four years). The weighted average per share fair value of options granted during
1998, 1997 and 1996 was $4.92, $4.45 and $5.55, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS 123,
the Company's net income (loss) and net income (loss) per share would
approximate the pro forma disclosures below:
For the Year Ended
December 31, 1998 1997 1996
- - -------------------------- -------------------------- ------------------------- ---------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
----------- ----------- ----------- ---------- ----------- -----------
Net income (loss) $(10,042) $(11,870) $(1,393) $(3,102) $1,063 $(299)
Basic net income (loss)
per share $(1.16) $(1.37) $(0.16) $(0.36) $0.13 $(0.04)
Diluted net income
(loss) per share $(1.16) $(1.37) $(0.16) $(0.36) $0.12 $(0.04)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to January 1, 1995,
and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
December 31, 1998:
Options Outstanding Options Exercisable
- - ------------------------------------------------------------------------------- -----------------------------------
Weighted
Average Weighted Number of Weighted
Range of Exercise Number Remaining Average Shares Average
Prices Outstanding at Contractual Exercise Exercisable at Exercise
12/31/98 Life - Years Price 12/31/98 Price
- - -------------------- ---------------- ---------------- -------------- ---------------- --------------
$ 1.00 1,025 3.1 $ 1.00 1,025 $ 1.00
3.08 1 5.0 3.08 1 3.08
6.56 - 6.78 211 7.3 6.62 127 6.62
6.88 - 7.94 290 7.4 7.45 203 7.41
8.69 - 8.97 750 7.9 8.80 273 8.75
9.56 12 6.9 9.56 12 9.56
10.91 - 11.75 391 5.1 11.56 332 11.62
12.31 - 13.56 88 8.3 12.79 37 12.90
==================== ================ ================ ============== ================ ==============
$ 1.00 - 13.56 2,768 5.6 $ 6.12 2,010 $ 5.08
==================== ================ ================ ============== ================ ==============
At December 31, 1997 and 1996, 1,783 and 1,575 options, respectively, were
exercisable at weighted average exercise prices of $4.54 per share and $4.05 per
share, respectively.
F-14
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 1998, $106 in
1997 and $74 in 1996.
12. SUPPLEMENTAL CASH FLOW INFORMATION
- - --------------------------------------
Supplemental disclosure of cash flow information is as follows:
1998 1997 1996
- - ----------------------------------------------------------- ------------- ------------- ---------------
Cash paid during the period for interest $ 552 $ -- $ --
Cash paid during the period for income taxes 11 13 1,062
Issuance of Common Stock in exchange for interest expense
on Convertible Notes 525 -- --
Issuance of Common Stock in exchange for the assets of
Gorilla Foods, Inc. -- -- 990
13. SUBSEQUENT EVENTS
- - ---------------------
In March 1999, the Agreement (see Note 4) was amended to consolidate the $14.5
million and the $5.0 million lines of credit. In addition, the interest rate was
changed to the bank's reference rate plus one percentage point, or at the option
of the Company, at LIBOR plus 4.0 percentage points or the Offshore rate plus
4.0 percentage points. This line of credit expired March 19, 1999. The Company
is currently renegotiating its credit facilities.
On March 29, 1999, the Company entered into a definitive stock purchase
agreement to sell $32.5 million of convertible preferred stock to a group of
investors. Under the terms of the agreement, the Company will sell 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, each
at a price of $10 per share, or an aggregate consideration of $32.5 million,
subject to certain closing conditions. The preferred shares are convertible at a
price of $10 per share at any time following issuance at the discretion of the
holder. The Series B conversion price will be adjusted to $3.75 if the Company
fails to meet specified performance targets for fiscal years 1999 and 2000. 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 point they may be redeemed at the
election of the holders or, under certain conditions, at the discretion of the
Company.
F-15
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 January 26, 1999. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule included
on page F-17 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.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 26, 1999
F-16
SCHEDULE II
GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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, 1996:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 120 $ 70 $ - $ 13 $ 177
Year Ended December 31, 1997:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 177 $ 128 $ - $ 30 $ 275
Year Ended December 31, 1998:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 275 $ 146 $ - $ 273 $ 148
(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-17
Exhibit Index
Exhibit No. Description
- - ----------- -----------
3.1 Restated Articles of Incorporation as amended October 17, 1997 (8)
3.2 1995 Restated Bylaws of the Company, as amended April 21, 1998 (12)
10.1 Business Loan Agreement with Bank of America NT & SA re:
Line-of-Credit, dated April 28, 1998 (12)
10.2 First Amendment, dated July 24, 1998, to Business Loan Agreement,
dated April 28, 1998, between Bank of America NT & SA and the
Company (13)
10.3 Second Amendment, dated August 18, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company (14)
10.4 Third Amendment, dated November 20, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.5 Fourth Amendment, dated December 8, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.6 Fifth Amendment, dated January 27, 1999, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.7 Sixth Amendment, dated March 8, 1999, to Business Loan Agreement,
dated April 28, 1998, between Bank of America NT & SA and the
Company
10.8 Plant Lease-1416 S.E. 8th, Portland, Oregon (1)
10.9 First Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon
(11)
10.10 Second Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon
(12)
10.11 Third Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon,
dated January 1, 1999
10.12 Consent to Assignment and Option to purchase 1005 S.E. Washington,
Portland, Oregon (1)
10.13 Morrison Plaza Office Lease dated October 29, 1996. (10)
10.14 First Amendment to Morrison Plaza Office Lease, dated December 9,
1997 (11)
10.15 Lease extension for Morrison Plaza Office Building, dated September
11, 1998 (14)
10.16 Facility Lease by and between Freeport Center Associates, a Utah
general partnership and the Company, dated May 28, 1997 (9)
E-1
Exhibit No.
- - -----------
10.17 Addendum dated August 1, 1997 to Facility Lease by and between
Freeport Center Associates, and the Company (11)
10.18 Purchase and Sale Agreement and Receipt For Earnest Money Between
the Iseli Family Partnership (Seller) and the Company (Buyer), as
amended, dated May 8, 1995 (5)
10.19 Plan and Agreement of Reorganization by Exchange by the Company of
its Voting Stock for Substantially All The Properties of Gorilla
Foods, Inc., dated January 31, 1996 (5)
10.20 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated April 25, 1996 (7)
10.21 Amendment No. 1, dated as of March 26, 1998, to Rights Agreement
dated as of April 25, 1996, between the Company and First Chicago
Trust Company of New York (12)
10.22 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of December 17, 1997 (11)
10.23 First Amendment, dated June 4, 1998, to Lease Agreement, dated
December 17, 1997 between BA Leasing & Capital Corporation and the
Company (13)
10.24 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of May
28, 1998 (14)
10.25 First Amendment, dated January 14, 1999 to Lease Agreement between
BA Leasing & Capital Corporation and the Company, dated as of May
28, 1998
10.26 Note Purchase Agreement, dated as of March 27, 1998, between the
Company and Dresdner Kleinwort Benson Private Equity Partners L.P.
(12)
10.27 Convertible Senior Subordinated Note dated March 27, 1998 (12)
10.28 Registration Rights Agreement dated as of March 27, 1998, between
the Company and Dresdner Kleinwort Benson Private Equity Partners
L.P. (12)
10.29 1992 First Amended and Restated Combination Stock Option Plan (4)
(15)
10.30 Lyle Hubbard Employment Agreement dated April 14, 1996 (10) (15)
10.31 Agreement to Extend and Amend Employment Agreement dated November
16, 1998 to Lyle Hubbard Employment Agreement dated April 14, 1996
(15)
10.32 Agreement to Extend and Amend Employment Agreement dated March 5,
1999 to Lyle Hubbard Employment Agreement dated April 14, 1996
10.33 Paul F. Wenner Employment Agreement and Amendment thereto (1) (15)
E-2
Exhibit No.
- - -----------
10.34 Paul F. Wenner Stock Option Agreement (2) (15)
10.35 Form of Severance Agreement for Executive Officers (10) (15)
10.36 Form of Indemnification Agreement between the Company and its
Officers and Directors (15)
10.37 1999 Executive Annual Incentive Plan (15)
10.38 Form of Incentive Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)
10.39 Form of Non-Statutory Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)
10.40 Warehouse Lease between Freeport Center Associates and the Company,
dated January 25, 1999.
10.41 Stock Purchase Agreement dated as of March 29, 1999, by and among
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)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Description of Common Stock of Gardenburger, Inc. (12)
(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, as
filed with the Securities and Exchange Commission on March 31, 1999.
E-3