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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

For the Fiscal Year Ended: September 30, 2001

OR

Commission File Number: 0- 20330

GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)

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 $2,828,816 as of December 5, 2001 based upon the average bid and asked prices as reported by the NASD's OTC Bulletin Board ($0.40).

    The number of shares outstanding of the Registrant's Common Stock as of December 5, 2001 was 9,002,101 shares.

Documents Incorporated by Reference

    The Registrant has incorporated into Part III of Form 10-K by reference portions of its Proxy Statement for its 2002 Annual Meeting of Shareholders.

GARDENBURGER, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

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PART I

Item 1. Business

General

    Gardenburger, Inc. (the "Company" or "Gardenburger") was organized in 1985 as an Oregon corporation under the name Wholesome & Hearty Foods, Inc. and completed its initial public offering in 1992. The Company changed its name to Gardenburger, Inc., in October 1997. Until March 1, 2001, the Company's Common Stock was traded on the National Market Tier of the Nasdaq Stock Market under the symbol "GBUR." Because the Company no longer met certain Nasdaq listing requirements, beginning March 1, 2001, the Company's Common Stock trades on the over-the-counter market and is quoted on the NASD's OTC Bulletin Board.

Company Overview

    Gardenburger is a leading producer and marketer of branded veggie burgers and meat alternative products. The Company's Gardenburger® product line, featuring the Original Gardenburger® veggie burger, is a leading national brand in the retail grocery, food service, club store and natural foods channels of distribution.

    During 1999, the Company elected to change its fiscal year to a September 30 fiscal year-end. Results for 1999 are therefore reflected in a nine-month "stub" year. The Company operates in one business segment. See Note 1 to the Company's financial statements included in this report.

    As a result of product development and consumer and trade marketing, the Company has emerged as a leader in the veggie burger segment of the meat alternative category. The past year has seen an overall expansion of consumer consumption of meat alternative products, particularly of new, innovative products. Veggie burgers remain the entry point to this market, with consumers quickly expanding to the wider range of meat alternative products rapidly becoming available in the marketplace. In response to this broadening of consumer tastes, the Company expanded its product line in fiscal 2001 beyond the burger occasion to include center-of-the-plate meatless options such as a chicken fillet, pork ribs, meatballs, and a ground beef alternative. The addition of these products has allowed the Company to categorize its product line into products "From the Garden," such as the original grain-based veggie burger; products "Off the Grill," such as its breakthrough Flame Grilled Hamburger alternative, the Chik'N Grill chicken fillet and the new Riblets; and products used "In the Kitchen," such as Meatless Meatballs.

    The Company intends to continue as an innovative force in the meat alternative category with the objective of being a leading provider of meatless meal alternatives in the four primary distribution channels in which it distributes its products—retail grocery stores; food service, including restaurants, universities and other commercial outlets; club stores; and natural foods outlets. The Company currently distributes its products through more than 25,000 retail outlets, 35,000 food service outlets, 640 club store locations and 3,500 natural foods stores.

    Within the retail grocery channel, the Company's largest channel of distribution, the Company has approximately 121,000 retail grocery placements of its products, representing an all commodity volume ("ACV")1 penetration of 82%, with an average of 5 product variations available in each retail outlet. Each product line is commonly referred to as a stock keeping unit ("SKU").

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.

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Business Strategy

    In recent years, the Company has seen increased competition in the veggie burger segment of the meat alternative category and has seen consumer penetration of meat alternative burgers decline due to heavy spending by competitors to build market share rather than increase category consumption. Gardenburger's business strategy consists of the following key elements:

    Focus on Achieving Profitability.  During fiscal 2001, Gardenburger's management was focused on achieving near-term profitability. To move towards this goal, Gardenburger made substantial reductions in fixed overhead as it shifted to an overhead structure that fits its current level of business yet provides an acceptable platform for future growth. This new business model resulted in lower sales revenue throughout fiscal 2001 and improved operating results in the second half of fiscal 2001. The Company plans to continue the drive towards profitability in fiscal 2002 and will manage each distribution channel with a goal of channel profitability for the year. There is no assurance that Gardenburger will be able to successfully execute this strategy and maintain its market share in the veggie burger segment, particularly given the current highly competitive retail market.

    Introduce New Products Beyond Veggie Burgers.  In fiscal 2001, Gardenburger moved beyond the veggie burger segment of the meat alternative category. Although the category is not drawing new users, current consumers are adding new items to their menu with increasing frequency. Grocery sales in the veggie burger segment decreased approximately 5% percent in fiscal 2001; however, sales in the non-burger meat alternative segment increased approximately 20% percent. To take advantage of this trend, the Company launched Chik'N Grill™, a chicken alternative product, in the first quarter of fiscal 2001, and Riblets, a meatless barbequed pork rib alternative, and Meatless Meatballs in the fourth quarter of fiscal 2001. Gardenburger believes that new product introductions in other segments of the meat alternative category will support its efforts to maintain a leadership position in all channels and reinforce the Gardenburger brand.

    Increase Key Channel Penetration.  The Company is already a leader in the retail grocery, food service, club store and natural foods distribution channels. The Company's goal is to manage a strong brand position in these channels with profitability in all channels. The Company recognizes that increased competition in the grocery channel may result in a loss of market share. The Company is aggressively pursuing profitable growth in the food service and club store channels where it has a strong presence and wide distribution. In fiscal 2001, the Company entered into a co-branding arrangement with Costco, the nation's largest club store chain, under which a special formula of the Company's flagship Gardenburger Original™ product is sold nationwide under the combined Gardenburger and Kirkland Signature names. In addition, Gardenburger believes that other distribution channels, such as fast food chains, present growth opportunities and the Company continues to actively pursue these markets.

Products

    Gardenburger is committed to offering better for you, great tasting, and convenient meatless food choices to consumers. The Company's principal products are grain, vegetable and soy-based veggie burgers, which are offered in more than nine flavors. Gardenburger also offers specialized products in certain channels, including Gardenburger Sub®, GardenSausage® and GardenVegan®. In fiscal 2001, the Company introduced its Chik'N Grill™ product, which imitates the taste and texture of chicken; Riblets, which imitate the taste and texture of boneless pork ribs; and soy-based Meatless Meatballs.

    Gardenburger's recipes for its products are proprietary, although they contain commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms, brown rice, onions, rolled oats, cheeses, bulgur wheat, natural seasonings and spices. Soy based products are seasoned to taste like

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chicken, pork or ground beef. All of the Company's meat alternative products are considerably lower in fat and calories than respective meat products of comparable weight and are all natural.

    The Company's retail grocery products are as follows:

From the Garden Products

Off the Grill Products

In the Kitchen Products

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Club Channel Products

Food Service Products

    All of the Company's products are frozen. Gardenburger grain-veggie burgers sold in retail grocery stores weigh 2.5 ounces and come in boxes containing four patties. Gardenburger grain-veggie burgers sold in the food service channel are available in both 3.4-ounce and 5-ounce sizes. Gardenburger grain-veggie burgers are distributed to club stores in packages of 12, 15 or 18 burgers of 3.4 ounces each. Chik'N Grill sold in retail grocery stores weigh 2.5 ounces and come in boxes containing four patties. Chik'N Grill sold in food service and club stores are 3.0-ounces. Riblets are sold in retail grocery in packages of two 5-ounce servings and Meatballs are sold in retail grocery in 12-ounce packages.

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Distribution

    The Company primarily distributes its products into four channels: retail grocery, food service, club stores and natural foods stores.

    Retail Grocery.  Gardenburger veggie burgers can now be found in more than 25,000 grocery stores with over 121,000 placements at September 30, 2001. The Company's ACV penetration in the U.S. retail grocery channel is approximately 82% as of September 30, 2001, with an average of 5 SKUs. The Company's products are currently carried in the majority of the major U.S. retail grocery chains.

    Food Service.  The Company distributes its products to more than 35,000 food service outlets throughout the U.S. and Canada, including restaurant chains such as Applebee's, Fuddruckers, Marie Callenders, Red Robin, Subway and T.G.I. Friday's. In many of these restaurants, the Gardenburger brand name appears on the menu. Additional points of food service distribution include academic institutions, hotels and other outlets, including amusement parks and sports stadiums. In the United States, there are approximately 800,000 outlets in the food service channel. The Company relies primarily on distributors such as Sysco for distribution to this channel.

    Club Stores.  The Company's products are distributed to club stores with over 640 locations, including Costco and Sam's Club. Currently, these stores carry the Costco co-branded Gardenburger/Kirkland Signature or the Gardenburger Flame Grilled™ Hamburger Style veggie burger in the 3.4 ounce food service size.  The Company is currently testing its Chik'N Grill product in two Costco regions.

    Natural Foods.  The Company's products are distributed to more than 3,500 natural food stores, including Whole Foods and Wild Oats. The Company utilizes food brokers that specialize in natural foods stores.

    The Company's ability to expand distribution in each of the described channels will depend in part on consumer preferences, and to a certain extent on continuation of the current trends of health awareness, emphasis on reduced consumption of red meat, as well as safety concerns associated with red and white meat. There is always a risk that further development of low fat red or white meat products or technological advances that limit food-borne disease risks may lead to a change in consumer preferences and reduce demand for meat replacement products. Demand for the Company's products may be adversely affected by such changes, which may occur rapidly and without warning. Because of the Company's current primary dependence on a single product line, any change in consumer preferences or increase in competition in the veggie burger market segment would adversely affect the Company's business to a greater degree than if it had multiple significant product lines.

    The Company sells its products in North America primarily through approximately 60 independent, commissioned food brokers and 500 active distributors. The retail food brokers have close working relationships with the leading grocery chains, club stores and natural food stores and arrange for sales of Gardenburger products, which the Company then ships directly to the retailers' warehouses. Products sold into the food service channel are purchased from the Company by distributors who arrange for shipment by temperature-controlled truck to their frozen storage warehouses in principal cities throughout the United States for distribution to food service outlets and some Canadian grocery and 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.

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    The following table lists selected retailers, distributors and food service outlets that offer the Company's products for sale to consumers:

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    The Company's sales by region are as follows:

    To date, the Company has focused its sales efforts primarily in North America, and international sales have not been material. The Company believes, however, that opportunities exist for international distribution of Gardenburger products.

Sales and Marketing

    Sales.  Gardenburger's sales objective is to manage a strong market position with its veggie burgers in the retail grocery, food service, club store and natural foods store channels and to expand beyond veggie burgers in the meat alternative category. The Company's use of regional food brokers as its representatives allows it to maintain contact with the nation's major retail grocery chains and food service outlets without a large internal sales force. Brokers are paid sales commissions on all products sold.

    Gardenburger's Vice President of Grocery and Club Sales and its Senior Vice President of Food Service and International lead the Company's internal sales efforts. Gardenburger's regional sales force is located strategically in the Company's primary geographic sales regions and in proximity to its brokers, is divided into a food service division, a retail grocery division and a club division. The regional sales directors have substantial sales and industry experience. These regional sales directors coordinate the efforts of the food brokers and distributors.

    Marketing.  Gardenburger curtailed its media advertising in fiscal 2000 and 2001 and instead focused its spending on trade customers as a way to more directly influence consumers. Gardenburger's marketing efforts are timed to take advantage of seasonal increases in demand attributable to the summer grilling season and the tendency of Americans to renew their commitment to a healthy lifestyle each January. Gardenburger continues to gain positive consumer acceptance due to the October 1999 announcement by the U.S. Food and Drug Administration ("FDA") that certain amounts of soy consumed as part of a healthy diet may reduce the risk of heart disease.

Research and Development

    Gardenburger's research and development activities are focused on the development of new meat alternative products outside the veggie burger sub-category of the meat alternative market, as well as improvement and increased efficiency in the manufacturing process. The Company continues to work on expanding its line of soy-based meat analogs as soy continues to garner positive national attention. The Company conducts its research and development activities at its facilities in Clearfield, Utah.

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    In fiscal 2001, 2000 and 1999, the Company spent approximately $188,000, $319,000 and $553,000, respectively, on research and development activities.

Manufacturing

    The Company's 120,000 square-foot Clearfield facility handles multiple manufacturing lines for the Company's products. The Company believes the Clearfield facility will be able to support the Company's growth plans for the foreseeable future. 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 products and finally packaging them. Gardenburger's manufacturing process at its Clearfield facility is highly automated, mixing and baking products in assembly-line fashion with minimal human interaction. The Clearfield facility also utilizes newly-developed, proprietary ovens that quickly cook the products. Products are shipped, fully cooked, frozen and packaged via temperature controlled trucks to distributors throughout North America.

    The Company considers food safety a high priority and has prepared, in conjunction with government agencies, a Hazard Analysis and Critical Control Point (HACCP) system and other programs directed at ensuring the safety of Gardenburger's products. HACCP is a comprehensive system food companies use to monitor specific steps in food production to identify safety issues. Using this type of system, the Company can focus on the areas in which greatest risks exist and implement preventive measures.

    A significant disruption in the Clearfield facility's production capacity as a result of, for instance, fire, severe weather, regulatory actions, work stoppages or other factors, could disable the Company's capacity to manufacture its products. If Gardenburger meat alternative products became less available, consumers may switch to another brand of products and grocery stores may reduce shelf space allocated to Gardenburger's products. Any significant disruption in manufacturing would likely have a material adverse effect on the Company's results of operations and financial condition.

Competition

    The market for veggie burgers and other meat alternative products is highly competitive. The Company's products compete primarily on the basis of brand preference, taste, quality of natural ingredients, ease of preparation, availability, price and consumer awareness.

    Gardenburger believes that its products compare favorably to those offered by its competitors. The Company prices its products competitively to its primary competitors. The calorie and fat content of Gardenburger® products is generally equivalent to that of competitors' products.

    The Company believes that its principal competitors are The Kellogg Company, which distributes its products under the "Morningstar Farms," and "Harvest Burger" brand names to the food service and retail grocery channels; and Phillip Morris/Kraft Food Products, which distributes soy-based meat analog products primarily in the retail grocery, club and natural food channels under the "Boca Burger" label. These companies have substantially greater financial and marketing resources than Gardenburger. In addition, other major national food products companies could decide to produce meat alternative products at any time in the future.

    The Company's products also compete indirectly with low fat meat products, such as ConAgra's Healthy Choice 96 percent Extra Lean Ground Beef burger, and chicken or turkey based low fat products distributed by several large companies such as Tyson Foods, and with frozen, mass-produced low calorie/low fat entrees, including national brands such as Healthy Choice, Lean Cuisine and Weight Watchers. Large companies with substantially greater financial resources, name recognition and marketing resources than the Company produce these products.

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Significant Customers

    Sysco Foods ("Sysco") and Dot Foods ("Dot") each accounted for 10.1 percent of the Company's fiscal 2001 revenue. At September 30, 2001, Sysco accounted for 17.8 percent and Dot accounted for 13.1 percent of the outstanding accounts receivable balance. Both are food service distributors and sell the Company's products to restaurants, hotels, and other food service customers. The loss of these customers could have a material adverse effect on the Company's business; however, there are competing food service distributors through which the Company's products could be purchased by the end users.

Sources of Supply

    Gardenburger uses natural ingredients such as mushrooms, oats, rice, onions and soy protein. These are common agricultural items typically available in most parts of the United States. In addition, Gardenburger uses packaging and other materials that are common in the food industry. As a result, the Company believes, but cannot assure, that its sources of supply are reasonably reliable and that the Company is at no greater risk regarding supply issues than other similar food processors and producers.

Employees

    As of September 30, 2001, the Company had approximately 180 full-time equivalent employees, including 42 employees at its headquarters in Portland and 138 at its Clearfield facility. None of the Company's employees are subject to a collective bargaining agreement, and the Company believes its relations with its employees to be good.

Intellectual Property

    Gardenburger has approximately 19 U.S. registered trademarks, including "Gardenburger," "Gardenburger Hamburger Style," "Gardenburger Sub" and "GardenSausage." The Company has registered certain trademarks in Australia, Canada, France, Germany and the United Kingdom, along with other smaller countries, and applied for registration of certain trademarks in various other foreign countries, including but not limited to Japan, Mexico and Thailand.

    The Company actively monitors use of its trademarks by food service customers and others and takes action it believes appropriate to halt infringement or improper usage. The Company defends its intellectual property aggressively and, from time to time, has been engaged in infringement protection activities. Nonetheless, in the event third parties infringe or misappropriate the Company's trademarks, the Company may have to incur substantial costs to protect its intellectual property or risk losing its rights. Any large expenditure or loss of rights could have a material adverse effect on the Company's results of operations and financial position.

    The Company generally does not hold any patents covering its recipes or production methods and, therefore, can protect them only as trade secrets. Some or all of these trade secrets could be obtained by others or could enter the public domain, which could place the Company at a competitive disadvantage. In 2000, the Company applied for patent status for its Flame Grilled process and currently has a "Patent Pending" status.

Management Information Systems

    In March 1999, the Company upgraded its systems with a single Baan enterprise resource planning system. This upgrade is expected to meet the Company's information systems needs for the next several years. In addition to integrating manufacturing, sales and accounting functions, the Baan system increased the availability of real-time information for management analysis and use in operations. The Baan system has enhanced the Company's production planning (planning of raw material purchases)

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and demand forecasting (matching supply to distribution centers with order volume) capabilities. The Baan system also includes pallet tagging, bar coding and scanning applications that facilitate tracking of raw materials and finished goods through the Company's manufacturing operation. The Baan system has enabled 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.

Government Regulation

    The manufacturing, packaging, storage, distribution and labeling of food products are subject to extensive federal and state laws and regulations. The FDA has issued regulations governing the ingredients that may be used in food products, the content of labels on food products and the labeling claims that may be made for foods. Foods may only include additives, colors and ingredients that are either approved by the FDA or generally recognized as safe. Gardenburger products must be manufactured in compliance with the FDA's current Good Manufacturing Practice regulations applicable to food.

    Regulators have broad powers to protect public health, including the power to inspect the Company's products and facilities, to order the shutdown of a facility or to seize or stop shipment of the Company's products and order a recall of previously shipped products, as well as the power to impose substantial fines and seek criminal sanctions against the Company or its officers. The Company does not currently carry insurance against the cost of a product recall, and a significant recall would have an adverse effect on the Company's results of operations and financial condition. In addition, negative publicity may result if regulators take any of the foregoing actions against the Company or if the Company were to voluntarily recall products to avoid regulatory enforcement.

Insurance

    The Company maintains insurance against various risks related to its business. This includes property and casualty, business interruption, director and officer liability, food spoilage, products liability (but not product recalls) and workers' compensation insurance. The Company currently maintains $2 million of product liability insurance coverage and $20 million of general umbrella coverage. The Company considers its policies adequate to cover the major risks in its business, but there can be no assurance that this coverage will be sufficient to cover the cost of defense or damages in the event of a significant product liability claim.

Item 2. Properties

    The Company leases approximately 19,000 square feet of administrative office space at 1411 SW Morrison, Suite 400 in Portland, Oregon, pursuant to a second two-year extension to its original lease that terminates on December 31, 2002. Current monthly rent is approximately $24,100.

    The Company 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 monthly rent on this facility is currently $30,500.

    The Company also leases 16,000 square feet of storage space at the Freeport Center in Clearfield. The lease commenced February 15, 1999 and will expire December 31, 2002. The Company has an option to renew the lease for an additional three-year term. The monthly rent for the storage space is $3,200.

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Item 3. Legal Proceedings

    There are currently no material, pending legal proceedings to which the Company or its subsidiaries are a party. From time to time, the Company becomes involved in ordinary, routine or regulatory legal proceedings incidental to the business of the Company.

Item 4. Submission of Matters to a Vote of Security Holders

    No matters were submitted to a vote of security holders during the quarter ended September 30, 2001.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

    Until March 1, 2001, the Company's Common Stock traded on the National Market tier of The Nasdaq Stock Market under the symbol GBUR. Due to the Company's failure to meet certain Nasdaq listing requirements, subsequent to March 1, 2001, the Company's Common Stock began trading on the over-the-counter market and is quoted on the NASD's OTC Bulletin Board. Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. The high and low sales prices (bid quotations after March 1, 2001) for the two years in the period ended September 30, 2001 were as follows:

    The number of shareholders of record and approximate number of beneficial owners of the Company's Common Stock at November 16, 2001 were 578 and 7,000, respectively.

    There were no cash dividends declared or paid in 2001 or 2000 on the Company's Common Stock. The Company does not anticipate declaring cash dividends on its Common Stock in the foreseeable future. The Company may not, without the consent of Dresdner Kleinwort Benson Private Equity Partners, LP ("Dresdner"), declare or pay any cash dividends or make any distributions with respect to its capital stock or other equity securities to the extent that at least $5 million in principal amount remains outstanding under the Company's convertible senior subordinated notes and Dresdner owns a majority of the then outstanding principal amount.

    In addition, no cash dividends may be paid on the Company's Common Stock unless dividends have been paid on all outstanding shares of the Company's Series A and Series B Convertible Preferred Stock in an amount equal to 12% cumulative dividends accrued on such preferred shares through the record date for the common stock dividend (or, if greater, the amount of the common stock dividend payable on the preferred shares on an as-converted basis). The quarterly dividend accruing on the preferred shares is $975,000.

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Item 6. Selected Financial Data

(1)

Statement of operations data for 1999 includes only nine months of activity due to the Company's change in its fiscal year during 1999 from a calendar year to a fiscal year ended September 30.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of  Operations

Forward-Looking Statements

    This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve known and unknown risks and uncertainties. The Company's actual results, performance, or achievements could differ materially from historical results or from any future results anticipated by the forward-looking statements. In addition to statements that explicitly describe such risks and uncertainties, readers should consider statements containing words like "believes," "expects," "intends," "anticipates" or "plans" to be uncertain and forward-looking. Important risks that could cause actual results, performance or achievements to differ from those expressed or implied by the forward-looking statements are described below and elsewhere in this Form 10-K. Investors are cautioned not to place undue reliance on the forward-looking statements.

General

    Approximately 95 percent of the Company's net sales are attributable to the Gardenburger® veggie burger (and related veggie patty products). However, consumers are quickly moving to the wider range of meat alternative products rapidly becoming available in the marketplace. In response to this development in consumer tastes, the Company expanded its product line in fiscal 2001 to include a chicken fillet alternative, a pork rib alternative, an imitation meatball, and a crumbles or ground meat alternative. The addition of these innovative products has allowed the Company to categorize its product line into products "From the Garden," such as the original grain-based veggie burgers; products "Off the Grill," such as its breakthrough Flame Grilled Hamburger alternative, the Chik'N Grill chicken fillet and the new Riblets; and products used "In the Kitchen," such as the imitation meatballs.

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.

(1)

Statement of operations data for 1999 includes only nine months of activity due to the Company's change in its fiscal year during 1999 from a calendar year to a fiscal year ended September 30.

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2001 Compared to 2000

    Net sales.  Net sales for fiscal 2001 decreased to $59.6 million from $71.0 million for fiscal 2000. The decrease is primarily due to lower unit sales due to competition and consumer preference for meat alternative choices beyond burgers. In response to this development in consumer tastes, the Company expanded its product line in fiscal 2001 to include a chicken fillet alternative, a pork rib alternative, an imitation meatball, and a crumbles or ground meat alternative. Additionally, the Company experienced a disruption of its Canadian distribution in the first quarter of fiscal 2001 due to the financial difficulties of its distributor in that country. During the second quarter of fiscal 2001, the Company began utilizing a new Canadian distributor.

    Gross margin.  Gross margin decreased to $27.0 million (45.3 percent of net sales) for fiscal 2001 from $34.9 million (49.1 percent of net sales) for fiscal 2000. The decrease in the gross margin is primarily a result of lower sales and a decreased gross margin percentage. The decrease in the gross margin percentage is primarily due to decreased production levels as a result of lower sales of veggie burgers and costs related to the start-up of production of the new Chik'N Grill product in the first half of fiscal 2001 and the start-up of Meatless Meatballs and Riblets in the fourth quarter of fiscal 2001.

    Sales and marketing expense.  Sales and marketing expense decreased to $22.4 million (37.6 percent of net sales) for fiscal 2001 from $28.3 million (39.8 percent of net sales) for fiscal 2000. The decrease in sales and marketing expenditures is primarily due to lower incentive spending with trade customers, reduced fixed selling overhead and reduced variable selling costs such as freight and commissions. These cost reductions are associated with lower sales levels as well as cost saving measures implemented in fiscal 2001.

    General and administrative expense.  General and administrative expense ("G&A") decreased to $5.0 million (8.4 percent of net sales) for fiscal 2001 from $7.3 million (10.3 percent of net sales) for fiscal 2000. The decrease is primarily the result of reduced headcount and certain other overhead cost reductions at the Company's Portland, Oregon facility in fiscal 2001. In addition, certain one-time costs related to severance and strategic initiatives occurred in fiscal 2000, and were not duplicated in fiscal 2001.

    Loss from operations.  Loss from operations was $390,000 in fiscal 2001 compared to $686,000 for fiscal 2000. The improvement in operating results primarily reflects the lower operating expenses, offset in part by the lower sales and gross margin.

    Interest Expense.  Interest expense was $2.4 million for fiscal 2001, compared to $1.8 million for fiscal 2000. The increase is a result of the increase in the interest rate to 10% from 7% on the Convertible Notes for fiscal 2001, as well as an increase in the outstanding balance of the Convertible Notes, partially offset by a decrease in the balance outstanding and the interest rate on the Company's line of credit.

    Other expense, net.  Other expense, net was $57,000 for fiscal 2001 compared to $303,000 for fiscal 2000. The fiscal 2000 amount primarily consisted of losses from sales of fixed assets.

    Income taxes.  The Company did not record any tax benefit in fiscal 2001. Income tax expense was $17.5 million in fiscal 2000, which consists of a $17.5 million valuation reserve against the Company's deferred income tax assets. As of September 30, 2001, the Company had net operating loss carryforwards (NOLs) totaling approximately $50.8 million. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of such NOLs and other deductible temporary differences be recorded as an asset to the extent that management assesses the utilization of such NOLs to be reasonably assured in the near future. Otherwise, a valuation reserve is required to be recorded. Such a reserve was recorded in the fourth quarter of fiscal 2000 as a result of recurring operating losses in recent years and as a result of

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increased competition leading to poorer than expected results for fiscal 2000. The Company believes that a valuation reserve for the entire amount of net deferred tax assets continues to be appropriate at September 30, 2001.

    Preferred dividends.  Preferred dividends were $4.4 million during fiscal 2001 compared to $12.5 million in fiscal 2000. In April 1999, the Company issued $32.5 million of Series A and Series B convertible preferred stock that is entitled to a 12% cumulative annual dividend, resulting in a non-cash quarterly dividend charge of $975,000. In addition, the $2.3 million of related issuance costs are being accreted over five years, after which the preferred stock may be redeemed, totaling approximately $117,000 per quarter. In the first quarter of fiscal 2000, due to an adjustment in the Series B conversion price to $3.75 per share from $10.00 per share, the Company recorded a non-cash charge of $8.1 million related to the implied value of the beneficial conversion feature.

    Net loss available for common shareholders.  Net loss available for common shareholders was $7.2 million in fiscal 2001 compared to $32.7 million in fiscal 2000. The $32.7 million loss available for common shareholders for fiscal 2000 includes the additional $8.1 million non-cash preferred dividends charge in the first quarter of fiscal 2000 as well as the $17.5 million valuation reserve against the Company's net deferred tax assets as discussed above. The Company believes that the impact of inflation was not material for fiscal years 2001 and 2000.

2000 Compared to 1999

    General.  During 1999, the Company changed its fiscal year end to September 30 from December 31. Accordingly, the following discussion compares the twelve-month period ended September 30, 2000 ("fiscal 2000") with the nine-month period ended September 30, 1999 ("fiscal 1999").

    Net sales.  Net sales for fiscal 2000 increased to $71.0 million from $60.1 million for fiscal 1999. The increase is primarily due to the change in the Company's fiscal year, offset by reduced unit sales in fiscal 2000 due to decreased advertising and couponing and an overall decrease in unit sales within the veggie burger category. The Company experienced an extremely competitive environment in fiscal 2000, particularly in the retail grocery and club store portions of its business. This, coupled with an overall decline in consumer purchasing in the veggie burger market, resulted in decreased unit sales for fiscal 2000 on an annualized basis.

    Gross margin.  Gross margin increased to $34.9 million (49.1 percent of net sales) for fiscal 2000 from $25.8 million (42.9 percent of net sales) for fiscal 1999. The increase in the gross margin is primarily due to the change in the Company's fiscal year, as well as increased efficiencies at the Company's production facility. The increase in the gross margin percentage is primarily a result of the second production line at the Company's Clearfield plant being fully on-line as well as favorable purchase prices for dairy products during fiscal 2000.

    Sales and marketing expense.  Sales and marketing expense decreased to $28.3 million (39.8 percent of net sales) for fiscal 2000 from $48.0 million (79.9 percent of net sales) for fiscal 1999. The Company reduced its sales and marketing expenditures as it moved to a profit driven business model in fiscal 2000 from its more aggressive media advertising model in fiscal 1999. The Company significantly reduced its discretionary marketing expenses and focused its marketing spending on areas that it believed would more efficiently manage its market position, especially within the grocery channel.

    General and administrative expense.  General and administrative expense ("G&A") increased to $7.3 million (10.3 percent of net sales) for fiscal 2000 from $5.1 million (8.4 percent of net sales) for fiscal 1999. The increase is due primarily to the change in the Company's fiscal year, increased depreciation expense related to the Company's new information system, and certain one-time severance

16

payments and costs related to strategic initiatives, offset in part by lower salaries and related costs as a result of an organizational downsizing which began in September 1999.

    Restructuring charge.  The Company incurred a restructuring charge of $2.7 million during fiscal 1999 related to the closure of its Portland, Oregon production facility, a fair market value adjustment for two of the Company's Portland, Oregon area properties and the write-off of an older information system. In the first quarter of fiscal 2000, the Company sold one Portland area property referred to above for net proceeds of approximately $1.5 million and recognized a gain on the sale of approximately $174,000. In October 2000, the Company sold the second Portland area property referred to above for net proceeds of approximately $645,000. No gain or loss was recognized on the sale as a valuation allowance was recorded in fiscal 1999.

    Operating loss.  Loss from operations was $686,000 in fiscal 2000 compared to an operating loss of $30.0 million for fiscal 1999. The improvement in operating results was primarily due to increased gross margin percentages and decreased sales and marketing expenses as a percentage of net sales as discussed above, partially offset by lower sales on an annualized basis for fiscal 2000.

    Other expense, net.  Other expense, net for fiscal 2000 was $303,000 and primarily consisted of losses from sales of fixed assets.

    Income taxes.  Income tax expense was $17.5 million in fiscal 2000, which consists of a $17.5 million valuation reserve against the Company's deferred income tax assets. As of September 30, 2000, the Company had net operating loss carryforwards (NOLs) totaling approximately $45.3 million.

    Preferred dividends.  Preferred dividends were $12.5 million during fiscal 2000 compared to $2.0 million in fiscal 1999. In April 1999, the Company issued $32.5 million of Series A and Series B convertible preferred stock that is entitled to a 12% cumulative annual dividend, resulting in a non-cash quarterly dividend charge of $975,000. In addition, the $2.3 million of related issuance costs are being accreted over five years, after which the preferred stock may be redeemed, totaling approximately $117,000 per quarter. In the first quarter of fiscal 2000, due to an adjustment in the Series B conversion price to $3.75 per share from $10.00 per share, the Company recorded a non-cash charge of $8.1 million related to the implied value of the beneficial conversion feature.

    Net loss available for common shareholders.  Net loss available for common shareholders was $32.7 million in fiscal 2000 compared to $22.1 million in fiscal 1999. The $32.7 million loss available for common shareholders for fiscal 2000 includes the additional $8.1 million non-cash preferred dividends charge in the first quarter of fiscal 2000 as well as the $17.5 million valuation reserve against the Company's net deferred tax assets as discussed above. The Company believes that the impact of inflation was not material for fiscal years 2000 and 1999.

Liquidity and Capital Resources

    At September 30, 2001, the Company had working capital of $9.9 million, which included $3.1 million of cash and cash equivalents, compared to $8.1 million in working capital at September 30, 2000, including $2.2 million of cash and cash equivalents, an increase of $887,000 from September 30, 2000. The $887,000 increase in cash and cash equivalents is primarily due to $1.8 million provided by operations and $675,000 in proceeds from the sale of property, offset by $683,000 used for the purchase of property and equipment and $902,000 of payments on the Company's line of credit.

    Accounts receivable decreased $585,000 to $3.5 million at September 30, 2001 from $4.1 million at September 30, 2000. Days sales outstanding decreased to 24 days at September 30, 2001 from 28 days at September 30, 2000. The decrease in accounts receivable is primarily a result of decreased sales in the fourth quarter of fiscal 2001 compared to the fourth quarter of fiscal 2000.

17

    Inventories decreased slightly to $7.3 million at September 30, 2001 compared to $7.5 million at September 30, 2000, primarily as a result of lower inventory requirements due to lower sales, offset by a broader product range. Inventory turned 4.9 times on an annualized basis in the fourth quarter of fiscal 2001 compared to 4.5 times in the fourth quarter of fiscal 2000.

    Prepaid expenses decreased $1.0 million to $1.1 million at September 30, 2001 from $2.1 million at September 30, 2000 due to lower slotting fees during fiscal 2001 compared to fiscal 2000. Slotting fees are paid to retail customers up front for the initial placement of product on their shelves. The slotting fees are amortized over a 12 month period.

    Payroll and related liabilities decreased $752,000 to $659,000 at September 30, 2001 from $1.4 million at September 30, 2000 due to the reduction in personnel in fiscal 2001 and the January 2001 payment of certain retention bonus contracts.

    Other current liabilities decreased $1.1 million to $815,000 at September 30, 2001 from $1.9 million at September 30, 2000 due to lower accrued interest and commissions and other sales related liabilities.

    Capital expenditures of $683,000 during fiscal 2001 primarily resulted from expenditures for production equipment. Capital expenditures are estimated to total approximately $900,000 in fiscal 2002, primarily for equipment to support new products at the Company's production facility.

    The Company has outstanding $17.4 million of 7 percent Convertible Senior Subordinated Notes (the "Notes") held by Dresdner. The Notes were amended in December 2000 to permit the Company to pay interest, with Dresdner's prior consent, by adding the amount of the interest due to the principal amount, provided that such interest payment is calculated at 10 percent rather than 7 percent. The Notes are convertible into shares of the Company's Common Stock at the option of the holder until maturity in 2003, at which time they will be due in full if not previously converted. The Company may also elect to redeem the Notes, if not previously converted, at any time beginning March 27, 2000. The conversion price of the Notes at September 30, 2001 was $10.16 per share, as adjusted to reflect the issuance of convertible preferred stock and the adjustment of the conversion price of the Company's Series B convertible preferred stock, as well as stock option grants. Under the terms of the Note Purchase Agreement, as amended, relating to the Notes, the Company must comply with the following financial covenant:

The Company must not have a cumulative cash loss in excess of $5.0 million from December 23, 1999 through December 23, 2002.

    At September 30, 2001, the Company was in compliance with this covenant.

    In April 1999, the Company closed a stock purchase agreement selling $32.5 million of convertible preferred stock to several investors. Under the terms of the agreement, the Company sold an aggregate of 2,762,500 shares of Series A convertible preferred stock and 487,500 shares of Series B convertible preferred stock to members of the investor group, at a price of $10 per share for each series, or an aggregate consideration of $32.5 million, and received net proceeds of $30.2 million. The difference between the aggregate consideration and the net proceeds of the convertible preferred stock is being accreted as additional preferred dividends over the period until redemption. At September 30, 2001, the Series A preferred shares were convertible at a price of $10 per share and the Series B preferred shares were convertible at $3.75 per share (subject to antidilution adjustments) at any time at the discretion of the holder. Both series of preferred stock are entitled to a 12 percent cumulative annual dividend payable upon redemption of the stock or in the event of a sale or liquidation of the Company. Shares may not be redeemed until December 31, 2004, at which time they may be redeemed at the election of the holders or, under certain conditions, at the discretion of the Company.

18

    In December 1999, the Company entered into a Loan and Security Agreement with Banc of America Commercial Finance Corporation (the "Agreement"). Effective October 2, 2000, Banc of America sold the loan under the existing agreement to Wells Fargo Business Credit, Inc. The Agreement provides for a line of credit based on eligible accounts receivable and inventories of up to $25.0 million (assuming 30 percent participation by another lender) and expires on December 23, 2002. The interest rate on the line is prime plus 0.125%, or 6.125%, at September 30, 2001. The Company had $1.7 million outstanding under this line at September 30, 2001. There is one financial covenant under the Agreement as follows: the Company must not have a cumulative cash loss in excess of $5.0 million from the origination date of the Agreement through the expiration date of the Agreement. At September 30, 2001, the Company was in compliance with this covenant.

    The Company leases various food processing, production and other equipment in use at its Clearfield, Utah production facility pursuant to two lease agreements between the Company and BA Leasing & Capital Corporation ("BA Capital"), an affiliate of Bank of America. Each lease agreement contains a cross-default provision stating that any default under any other borrowing or credit agreement that includes a failure to make payment when due or gives the holder a right of acceleration constitutes an event of default. If an event of default by the Company occurred under the lease agreements with BA Capital, the Company's manufacturing capacity would be significantly curtailed or even eliminated if BA Capital were to exercise its right to sell the equipment. In addition, neither lease agreement contains express provisions giving the Company a right to purchase the equipment at the end of the lease terms, which range from five to seven years, depending upon the equipment.

New Accounting Pronouncements

    In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities—an amendment of FASB Statement No. 133" ("SFAS 138"). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 137 and 138 establish accounting and reporting standards for all derivative instruments. SFAS 137 and 138 are effective for fiscal years beginning after June 15, 2000. The Company adopted SFAS 137 and 138 for its fiscal year beginning October 1, 2000. The Company does not currently have any derivative instruments, nor does it participate in hedging activities, and therefore the adoption of these standards did not have any impact on its financial position or results of operations.

    In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarized certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. In June 2000, SAB 101B was issued which deferred the implementation date of SAB 101 until the fourth quarter of the first fiscal year beginning after December 15, 1999. The adoption of SAB 101 in the fourth quarter of fiscal 2001 did not have a significant impact on the Company's financial condition or results of operations.

    In May 2000, the Emerging Issues Task Force ("EITF"), a subcommittee of the Financial Accounting Standards Board, issued EITF No. 00-14 "Accounting for Certain Sales Incentives." The EITF subsequently amended the transition provisions of EITF 00-14 in November 2000 and in April 2001. EITF 00-14 prescribes guidance regarding timing of recognition and income statement classification of costs incurred for certain sales incentive programs. This guidance requires certain coupons, rebate offers and free products offered concurrently with a single exchange transaction to be recognized at the later of when the revenue is recognized or when the sales incentive is offered, and reported as a reduction of revenue. The Company is required to adopt EITF 00-14 in the second quarter of fiscal 2002. Upon application of EITF 00-14, comparative financial statements for prior periods will be reclassified to comply with the classification guidelines of EITF 00-14. While it is

19

expected that EITF 00-14 will have an impact on the Company's financial statements, the impact is expected to be limited to the classification of revenue and expense items within the statements of operations. Currently, given the guidance of EITF 00-14, the Company anticipates reclassifying certain of its sales incentives, primarily consisting of coupon expense and other trade promotions, as a reduction of sales rather than as a sales and marketing expense.

    In April 2001, the EITF issued EITF No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF No. 00-25 addresses the timing, recognition and classification in the income statement of certain promotional costs paid to a retailer or wholesaler by a vendor in connection with the sale of the vendor's products or promotion of sales of the vendor's products by the retailer or wholesaler. This guidance generally requires these costs to be recognized when incurred and reported as a reduction of revenue. The Company is required to adopt EITF 00-25 in the second quarter of fiscal 2002. Upon application of EITF 00-25, comparative financial statements for prior periods will be reclassified to comply with the classification guidelines of EITF 00-25. While it is expected that EITF 00-25 will have an impact on the Company's financial statements, the impact is expected to be limited to the classification of revenue and expense items within the statements of operations. Currently, given the guidance of EITF 00-25, the Company anticipates reclassifying slotting expense, third party rebates and certain other trade promotion discounts as a reduction of sales rather than as a sales and marketing expense.

    The Company believes the adoption of EITF No. 00-14 and EITF No. 00-25 will result in a reclassification that will decrease previously reported net sales and previously reported sales and marketing expense by approximately $7.5–$10 million in 2001 and $8.5–$12 million in 2000. The Company does not believe that the adoption of EITF No. 00-14 and EITF No. 00-25 will otherwise have a material net effect on the results of operations of the Company.

    In July 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement. SFAS No. 142 becomes effective for fiscal years beginning after December 15, 2001, with early adoption permitted for entities with fiscal years beginning after March 15, 2001. The Company expects to adopt SFAS No. 142 in the first quarter of fiscal 2003. At the beginning of fiscal 2003, it is expected that the Company's goodwill balance will be approximately $411,000. The Company will evaluate this asset for impairment in accordance with SFAS No. 142 at that time. Had the Company adopted SFAS No. 142 at the beginning of fiscal 2001, assuming no impairment charge, it would not have recorded amortization expense of $123,000 for the fiscal year ended September 30, 2001.

    In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business." SFAS No. 144 becomes effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS No. 144 in the first quarter of fiscal 2003 and is currently reviewing the effects of adopting SFAS No. 144 on its financial position and results of operations.

20

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

    The Company's only financial instrument with market risk exposure is its variable rate line of credit. At September 30, 2001, the Company had $1.7 million outstanding under this credit line at an annual interest rate of 6.125 percent. A hypothetical 10 percent change in interest rates would not have a material impact on the Company's cash flows or results of operations.

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 period ended September 30, 2001 is as follows:

(1)

Included in net loss in the first quarter of fiscal 2000 is an $8.1 million non-cash charge related to the implied value of the Series B preferred stock beneficial conversion feature. Included in net loss in the fourth quarter of fiscal 2000 is a $17.5 million non-cash income tax valuation allowance against net deferred tax assets.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

    None.

21

PART III

Item 10. Directors and Executive Officers of the Registrant

    Information required by this item is included under the captions Election of Directors, Executive Officers and Section 16(a) Beneficial Ownership Reporting Compliance, in the Company's Proxy Statement for its 2002 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 2002 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 2002 Annual Meeting of Shareholders and is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

    Information required by this item is included under the caption Compensation Committee Interlocks and Insider Participation in Compensation Decisions and Management Transactions in the Company's Proxy Statement for its 2002 Annual Meeting of Shareholders and is incorporated herein by reference.

22

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)

Financial Statements and Schedules

(b)

Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended September 30, 2001.

(c)

Exhibits

Exhibits are listed on the Index to Exhibits following the financial statements included in this report.

23

SIGNATURES

    Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: December 5, 2001

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 5, 2001.

24

Report of Independent Public Accountants

To the Board of Directors and Shareholders of
Gardenburger, Inc.:

    We have audited the accompanying balance sheets of Gardenburger, Inc. (an Oregon corporation) as of September 30, 2001 and 2000 and the related statements of operations, shareholders' equity (deficit) and cash flows for the years ended September 30, 2001 and 2000 and the nine months ended September 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gardenburger, Inc. as of September 30, 2001 and 2000, and the results of its operations and its cash flows for the years ended September 30, 2001 and 2000 and the nine months ended September 30, 1999, in conformity with accounting principles generally accepted in the United States.

Portland, Oregon,
  November 2, 2001

GARDENBURGER, INC.
BALANCE SHEETS
(In thousands, except share amounts)

The accompanying notes are an integral part of these balance sheets.

F–2

GARDENBURGER, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

The accompanying notes are an integral part of these statements.

F–3

GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Years Ended September 30, 2001 and 2000 and the Nine Months Ended September 30, 1999
(In thousands, except share amounts)

The accompanying notes are in integral part of these statements.

F–4

GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)

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, consisting of veggie burgers and soy-based chicken, pork, and meatball products. The Company's products are principally sold to retail and food service customers throughout the United States.

Change in Reporting Period

    In July 1999, the Company changed its fiscal year end to September 30. Fiscal 1999 ended on September 30, 1999 and fiscal 2000 began October 1, 1999. For purposes of these footnotes, the nine month period ended September 30, 1999 will be referred to herein as the year ended September 30, 1999 or fiscal 1999. See Note 8, Unaudited Fiscal Year Operating Results.

Estimates

    The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

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:

F–6

Other Assets

    Other assets primarily include deferred financing fees, goodwill and trademarks. Deferred financing fees are being amortized over the maturity period of the related debt, goodwill is being amortized using the straight-line method over ten years and trademarks are being amortized using the straight-line method over forty years.

Long-Lived Assets

    In accordance with SFAS 121, long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the asset.

Segment Reporting

    The Company discloses segment information in accordance with Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information." Based upon definitions contained within SFAS 131, the Company has determined that it operates in one segment. In addition, virtually all sales are domestic.

Concentrations of Credit Risk and Significant Customers

    The Company invests its excess cash with high credit quality financial institutions, which bear minimal risk, and, by policy, limits the amount of credit exposure to any one financial institution.

    For fiscal 2001, two customers each accounted for approximately 10 percent of revenue and 18 percent and 13 percent of the accounts receivable balance at September 30, 2001, respectively.

    For fiscal 2000, one customer accounted for approximately 9 percent of revenue and 17 percent of the accounts receivable balance at September 30, 2000.

    For fiscal 1999, one customer accounted for approximately 11 percent of revenue and 5 percent of the accounts receivable balance at September 30, 1999.

    Historically, the Company has not incurred significant losses related to 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 and recorded as a sales and marketing expense.

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 $1,065 in 2001, $316 in 2000, and $17,313 in 1999.

Slotting Fees

    Slotting fees associated with a new product or a 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 as a component of sales and marketing expense. Slotting agreements refer to oral arrangements pursuant to which the retail grocer allows the Company's products to be placed

F–7

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 $188 in 2001, $319 in 2000, and $553 in 1999 and is included in sales and marketing expenses in the accompanying statements of operations.

Net Loss Per Share

    Basic earnings (loss) per share (EPS) is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding.

    Basic EPS and diluted EPS are the same for all periods presented since the Company was in a loss position in all periods.

    Potentially dilutive securities that are not included in the diluted EPS calculation because they would be antidilutive are as follows:

New Accounting Pronouncements

    In May 2000, the Emerging Issues Task Force ("EITF"), a subcommittee of the Financial Accounting Standards Board, issued EITF No. 00-14 "Accounting for Certain Sales Incentives." The EITF subsequently amended the transition provisions of EITF 00-14 in November 2000 and in April 2001. EITF 00-14 prescribes guidance regarding timing of recognition and income statement classification of costs incurred for certain sales incentiveprograms. This guidance requires certain coupons, rebate offers and free products offered concurrently with a single exchange transaction to be recognized at the later of when the revenue is recognized or when the sales incentive is offered, and reported as a reduction of revenue. The Company is required to adopt EITF 00-14 in the second quarter of fiscal 2002. Upon application of EITF 00-14, comparative financial statements for prior periods will be reclassified to comply with the classification guidelines of EITF 00-14. While it is expected that EITF 00-14 will have an impact on the Company's financial statements, the impact is expected to be limited to the classification of revenue and expense items within the statements of operations. Currently, given the guidance of EITF 00-14, the Company anticipates reclassifying certain of its sales incentives, primarily consisting of coupon expense and other trade promotions, as a reduction of sales rather than as a sales and marketing expense.

    In April 2001, the EITF issued EITF No. 00-25 "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF No. 00-25 addresses the timing, recognition and classification in the income statement of certain promotional costs paid to a retailer or wholesaler by a vendor in connection with the sale of the vendor's products or promotion of sales of the vendor's products by the retailer or wholesaler. This guidance generally requires these costs to be recognized when incurred and reported as a reduction of revenue. The Company is required to adopt EITF 00-25 in the second quarter of fiscal 2002. Upon application of EITF 00-25, comparative financial

F–8

statements for prior periods will be reclassified to comply with the classification guidelines of EITF 00-25. While it is expected that EITF 00-25 will have an impact on the Company's financial statements, the impact is expected to be limited to the classification of revenue and expense items within the statements of operations. Currently, given the guidance of EITF 00-25, the Company anticipates reclassifying slotting expense, third party rebates and certain other trade promotion discounts as a reduction of sales rather than as a sales and marketing expense.

    The Company believes the adoption of EITF No. 00-14 and EITF No. 00-25 will result in a reclassification that will decrease previously reported net sales and previously reported sales and marketing expense by approximately $7.5–$10 million in 2001 and $8.5–$12 million in 2000. The Company does not believe that the adoption of EITF No. 00-14 and EITF No. 00-25 will otherwise have a material net effect on the results of operations of the Company.

2.  INVENTORIES

    Detail of inventories at September 30, 2001 and 2000 is as follows:

3.  PROPERTY, PLANT AND EQUIPMENT

    Detail of property, plant and equipment at September 30, 2001 and 2000 is as follows: