-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QUQ9oeI/GYlHWt6XuSBI17TVYdwogezbaGf9ZyjmOVX1rzEoBmdci9BrPN9XcQRY dnyXNLs0f4ClwHsOcP1Ofg== 0000859735-99-000041.txt : 19991228 0000859735-99-000041.hdr.sgml : 19991228 ACCESSION NUMBER: 0000859735-99-000041 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GARDENBURGER INC CENTRAL INDEX KEY: 0000859735 STANDARD INDUSTRIAL CLASSIFICATION: CANNED, FROZEN & PRESERVED FRUIT, VEG & FOOD SPECIALTIES [2030] IRS NUMBER: 930886359 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20330 FILM NUMBER: 99780416 BUSINESS ADDRESS: STREET 1: 1411 SW MORRISON STREET 2: SUITE 400 CITY: PORTLAND STATE: OR ZIP: 97205 BUSINESS PHONE: 5032051500 MAIL ADDRESS: STREET 1: 1411 SW MORRISON STE 400 CITY: PORTLAND STATE: OR ZIP: 97205 10-K 1 FORM 10-K FOR TRANSITION PERIOD ENDED 09/30/99 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from January 1, 1999 to September 30, 1999 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. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant is $42,481,247 as of November 30, 1999 based upon the last closing price as reported by the Nasdaq National Market System ($7.875). The number of shares outstanding of the Registrant's Common Stock as of November 30, 1999 was 8,850,451 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 2000 Annual Meeting of Shareholders. ================================================================================ GARDENBURGER, INC. 1999 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS Page ---- PART I Item 1. Business 2 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 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 24 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 25 Item 11. Executive Compensation 25 Item 12. Security Ownership of Certain Beneficial Owners and Management 25 Item 13. Certain Relationships and Related Transactions 25 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 26 Signatures 27 1 PART I ITEM 1. BUSINESS - ------- -------- GENERAL Gardenburger, Inc. (the "Company" or "Gardenburger") was organized in 1985 as an Oregon corporation under the name Wholesome & Hearty Foods, Inc. and completed its initial public offering in 1992. The Company changed its name to Gardenburger, Inc., in October 1997. The Company's Common Stock trades on the National Market Tier of the Nasdaq Stock Market under the symbol "GBUR." COMPANY OVERVIEW Gardenburger is 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. During 1999 the Company elected to change its fiscal year to a September 30 fiscal year-end. Results for 1999 will thus be reflected in a nine-month "stub" year. Sales for the nine-month stub year were $60.1 million. The Company operates in one segment. See Note 1 to the Company's financial statements included in this report in accordance with Item 8. 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 27,000 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 September 30, 1999, there were over 169,000 retail grocery placements of the Company's products in more than 27,000 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 and 1999. - ------------------------- 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 BUSINESS STRATEGY Gardenburger's objective has been 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, Gardenburger's business strategy over the past two years has consisted of the following key elements: 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. During 1998 the Company captured over 80% of the unit volume increase in total veggie burger sales in the retail grocery channel for that year, which in total were up 55 percent for the year. During 1999, category growth slowed compared to the previous year despite Gardenburger's continued aggressive national advertising campaign, with unit volume up only 4 percent through September 30, 1999, according to A.C. Nielsen Scantrak data. For this same period, the Gardenburger brand was up 21 percent on a dollar basis and 10 percent on a unit basis. The Company believes that its success during 1998 was partially attributable to exposure it received from airing one of its television commercials during the last episode of the comedy series "Seinfeld", which was viewed by 106 million people and led to over 400 media stories. In addition, during 1998 several unusual external events transpired that likely aided the Company's sales efforts, including several beef-related e. Coli outbreaks in the U.S. and Mad Cow disease in the United Kingdom. Based on 1999 results, Gardenburger has determined to reduce its advertising and other discretionary marketing spending in fiscal 2000 as it evaluates the availability of other growth opportunities in the category. CAPTURE THE VEGGIE BURGER SEGMENT. Gardenburger's goal has been 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 has been 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. As a result of its efforts over the last two years, Gardenburger has achieved a 45 percent market share in the grocery channel at September 30, 1999 and market-leading positions in its other channels of distribution. PENETRATE MULTIPLE DISTRIBUTION CHANNELS. The Company is already the leader in the retail grocery, food service, club store and natural foods distribution channels. The Company's goal is to maintain its market leadership position in these channels. In addition, Gardenburger believes other distribution channels, such as convenience stores, present growth opportunities. 3 INTRODUCE NEW PRODUCTS TO REINFORCE BRAND AWARENESS. Gardenburger intends to continue to improve its existing products as well as develop new product varieties. The Company has introduced a number of new flavor varieties during the last two years, including four gourmet, veggie-grain based products and several soy-based hamburger analogs. Gardenburger believes that innovative product improvements and new product introductions will support its efforts to increase shelf space in retail grocery stores and reinforce the Gardenburger brand. FUTURE FOCUS ON ACHIEVING PROFITABILITY. During fiscal 2000, Gardenburger's management plans to shift from a strategy of rapid growth to one focused on achieving near-term profitability. To achieve this goal, Gardenburger intends to spend substantially less on product advertising. This business model is expected to result in slower growth and could even lead to a reduction in sales revenue. There can be no assurance that Gardenburger will be able to successfully execute its shift in strategy to one of maintaining sales levels while significantly reducing discretionary spending on advertising. PRODUCTS Gardenburger 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. Gardenburger also offers specialized products in certain channels, including Gardenburger Sub(R), GardenSausage(R) and GardenVegan(R). Gardenburger's recipes for its products are proprietary although they contain commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms, brown rice, onions, rolled oats, low-fat cheeses, bulgur wheat, 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 The Company's products are as follows:
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 Santa Fe(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 Vegetable(TM) sun-dried tomatoes Gardenburger Classic Greek(TM) Gourmet burger Kalamata olives, feta Low fat 120 cheese Gardenburger Tayburn Smoked Gourmet burger Hardwood smoked cheddar Low fat 120 Cheddar(TM) 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) Hamburger analog Soy, wheat gluten, Low fat 110 Sauteed Onion burger sauteed onions
- -------------------------- 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 containing four patties. Gardenburger veggie burgers sold in the food service channel are available in both 3.4-ounce and 5-ounce sizes. Gardenburger veggie burgers are distributed to club stores in packages of 12 or 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. 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 27,000 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 September 30, 1999, 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 169,000 as of September 30, 1999. 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. Currently, these stores carry the Gardenburger Original veggie burger in the 3.4 ounce food service size. 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 would 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 to their frozen storage warehouses in principal cities throughout the United States and Canada for distribution to food service outlets. The Company has no long-term contracts with its food brokers and distributors and occasionally 6 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 (CONTINUED) - ------ ------------------------ GROCERY RESTAURANTS A&P Applebee's Albertsons Arctic Circle Burris Foods Wholesale A&W C&S Wholesale Burgerville Dominick's BW3 Fleming Wholesale Carrows Food Lion Coco's Fred Meyer Dairy Queen Giant Eagle Damon's Giant Food Denny's HEB Flamers Hannaford Foster Freeze Jewel Fuddruckers Kroger IHOPruckers Meijers Lyons Nash Finch Wholesale Marie Callendars Publix Super Markets Red Robin Raley's Sizzler Ralph's Subway Safeway T.G.I. Friday's Shaw's Supervalu Wholesale Thriftway HOTELS Von's Holiday Inn Wakefern Marriott Wal-Mart Sheraton White Rose Wholesale Winn-Dixie UNIVERSITIES Stanford NATURAL FOODS UCLA Wild Oats University of California, Berkeley Whole Foods Harvard MIT CLUB STORES DePaul Costco Princeton Sam's Club USC University of Chicago FOOD SERVICE Purdue DISTRIBUTORS Indiana University Sysco Johns Hopkins University U.S. Food Service (formerly Rykoff-Sexton) SPORTS/ENTERTAINMENT CONTRACT MANAGEMENT COMPANIES Dodger Stadium ARAMARK Yankee Stadium Bon Apetit Rose Garden Compass Six Flags Gukenheimer Universal Studios Sodexho/Marriott 7 Prior to 1997, the Company focused primarily on distribution of its products in the Western United States. However, in connection with the Company's penetration into the retail grocery channel, product sales have become increasingly broad-based: % OF NET SALES -------------- REGION FY 1999 FY 1998 FY 1997 - ------ ------- ------- ------- Northeast 27% 32% 26% Southwest 9% 9% 9% Midwest 14% 14% 11% Northwest 34% 28% 38% Southeast 13% 14% 11% Canada 3% 3% 5% ---- ---- ---- 100% 100% 100% To date, the Company has focused its sales efforts primarily in North America, and international sales have not been material. The Company believes, however, that opportunities exist for international distribution of Gardenburger products. SALES AND MARKETING SALES. Gardenburger's sales objective is to 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. Gardenburger'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. Gardenburger's regional sales force, located strategically in the Company's primary geographic sales regions and in proximity to its brokers, is divided into a food service division and a retail grocery division. The regional sales managers, who joined the Company from major food products companies such as Campbell's, Nestle, Quaker Oats and Sara Lee, have substantial sales and industry experience. These regional sales managers coordinate the efforts of the food brokers and distributors. MARKETING. Gardenburger's primary marketing objective has been 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. Gardenburger spent approximately $14.6 million on media advertising in 1998 and approximately $11.8 million in 1999. 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 has advertised through a wide variety of media, including television, print, restaurant menus and point-of-sale displays. Gardenburger's marketing efforts have been timed to take advantage of seasonal increases in demand attributable to the summer grilling season and the tendency of Americans to renew their commitment to a healthy life style each January. Gardenburger's plan to reduce advertising and other discretionary marketing expenses in fiscal 2000 could adversely affect the Company's ability to continue increasing sales and brand awareness. 8 In 1998 and 1999, Gardenburger 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. There was no print advertising during 1999. During 1999, Gardenburger's marketing included four free-standing newspaper inserts with coupons, which appeared throughout the United States. Gardenburger also invested heavily in grocery trade programs including product demonstrations, introductory allowances and temporary price reductions to support its rapid distribution gains and to encourage trial of the Company's products. The Company expects investment in trade programs to continue, especially in the short-term, as advertising and coupon programs will likely be scaled back due to the Company's move to a profit-driven business model. RESEARCH AND DEVELOPMENT Gardenburger'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. Gardenburger's R&D staff developed the Gardenburger Hamburger Style(R) and the gourmet flavors of veggie burgers introduced during the last two years. The Company is also working on expanding its line of soy-based hamburger analogs as soy continues to garner positive national attention. Recently, the Company introduced into the natural foods channel the Gardenburger LifeBurgerTM, which is a burger high in soy protein. In promoting the LifeBurger (and its other soy-based products), Gardenburger is relying on the October 1999 announcement by the U.S. Food and Drug Administration ("FDA") that certain amounts of soy consumed as part of a healthy diet may reduce the risk of heart disease. The Company conducts its research and development activities at its facilities in both Portland, Oregon and Clearfield, Utah. In 1999, 1998 and 1997, the Company spent approximately $553,000, $1,121,000 and $565,000, respectively, on research and development activities. MANUFACTURING The Company historically produced its line of veggie burgers using a batch process in its Portland, Oregon plant. The Portland facility was shut down in March 1999, and all manufacturing was moved to the Clearfield, Utah plant. 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 began producing in June 1999. The Company believes the Clearfield facility 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. Gardenburger's manufacturing process at its Clearfield facility is highly automated, mixing and baking products in assembly-line fashion with minimal human interaction. The Clearfield facility also utilizes newly-developed, proprietary ovens that quickly cook the products. Products are shipped fully cooked, frozen and packaged via temperature controlled truck to distributors throughout North America 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. If Gardenburger veggie burgers became less available, consumers may switch to another brand of veggie burger and grocery stores may reduce shelf space allocated to Gardenburger's products. Any significant disruption in manufacturing would likely have a material adverse effect on the Company's results of operations and financial condition. 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. Gardenburger 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. In January 1999, 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. On October 1, 1999, Worthington Foods, Inc. announced that it had entered into an agreement to be acquired by The Kellogg Company. 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 For the nine months ended September 30, 1999, one customer, Norpac Food Sales, accounted for approximately 11 percent of revenue and 5 percent of the accounts receivable balance at September 30, 1999. SOURCES OF SUPPLY Gardenburger 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, Gardenburger uses packaging and other materials that are common in the food industry. As a result, the Company believes, but cannot assure, that its sources of supply are reasonably reliable and that the Company is at no greater risk regarding supply issues than other similar food processors and producers. EMPLOYEES As of November 30, 1999, the Company had approximately 205 full-time equivalent employees, including 54 employees at its headquarters in Portland and 127 at its Clearfield facility. None of the Company's employees is subject to a collective bargaining agreement, and the Company considers its relations with its employees to be excellent. 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. 11 MANAGEMENT INFORMATION SYSTEMS The Company has utilized a number of computer systems in its business. In March 1999, the Company upgraded its existing systems by replacing its Cimpro, general ledger, and EDI systems with a single Baan enterprise resource planning system. This upgrade is expected to meet the Company's information systems needs for the next several years. In addition to integrating manufacturing, sales and accounting functions, the new Baan system 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. Gardenburger's Clearfield, 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 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 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. 12 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 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 has been renewed on a month-to-month basis with 60 days' notice required for termination beginning January 1, 2000. The Company leases 120,000 square feet of production space at Freeport Center, Building A-16, in Clearfield, Utah, pursuant to a five-year lease that terminates on December 31, 2002. The Company has the option to renew the lease for two successive five-year terms. The Company began utilizing such space for production in the first quarter of 1998. The monthly rent on this facility is currently $28,000. 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. The Company previously owned approximately 18 acres of land near the Portland International Airport. The property was originally purchased as a site for expansion of the Company's manufacturing capabilities, but the Company decided in 1997 to lease the Clearfield facility rather than build a new manufacturing plant in Portland. The Company sold this property in November 1999. The Company also owns and previously utilized a 40,000 square foot production facility at 1005 S.E. Washington Street, Portland, Oregon, and a 1,200 square foot annex at the same location. 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, 1999. 13 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 September 30, 1999 were as follows: Fiscal 1998 High Low ------------------------------------------- ---------- -------- Quarter 1 $12.00 $ 8.13 Quarter 2 13.88 8.00 Quarter 3 16.13 10.13 Quarter 4 15.13 9.25 Fiscal 1999 High Low ------------------------------------------- ---------- -------- Quarter 1 $13.75 $ 8.63 Quarter 2 12.50 9.50 Quarter 3 10.25 7.50 Quarter 4 9.00 5.00 The number of shareholders of record and approximate number of beneficial owners of the Company's Common Stock at December 10, 1999 were 833 and 10,500, respectively. There were no cash dividends declared or paid in 1999 or 1998 on the Company's Common Stock. The Company does not anticipate declaring cash dividends on its Common Stock in the foreseeable future. The Company may not, without the consent of Dresdner Kleinwort Benson Private Equity Partners, LP ("Dresdner"), declare or pay any cash dividends or make any distributions with respect to its capital stock or other equity securities to the extent that at least $5,000,000 in principal amount remains outstanding under the Company's convertible senior subordinated notes and Dresdner owns a majority of the then outstanding principal amount. In addition, no cash dividends may be paid on the Company's Common Stock unless dividends have been paid on all outstanding shares of the Company's Series A and Series B Convertible Preferred Stock in an amount equal to 12% cumulative dividends accrued on such preferred shares through the record date for the common stock dividend (or, if greater, the amount of the common stock dividend payable on the preferred shares on an as-converted basis). The quarterly dividend accruing on the preferred shares is $975,000. 14 ITEM 6. SELECTED FINANCIAL DATA - ------- -----------------------
NINE MONTHS ENDED YEAR ENDED DECEMBER 31, ----------------------------------------------------- IN THOUSANDS, SEPTEMBER 30, EXCEPT PER SHARE AMOUNTS 1999 1998 1997 1996 1995 - ------------------------------------------ ----------------- ---------- --------- ---------- ---------- STATEMENT OF OPERATIONS DATA(1) Net sales $ 60,106 $100,120 $ 56,837 $ 40,527 $ 36,818 Gross margin 25,772 49,550 29,601 20,621 18,720 Sales and marketing expense 48,021 58,513 26,191 13,583 11,151 General and administrative expense 5,064 5,387 5,471 4,963 3,871 Restructuring and other charges 2,684 - - 612 - Operating income (loss) (29,997) (14,350) (2,061) 1,463 3,698 Preferred dividends 1,980 - - - - Net income (loss) available for common shareholders $(22,146) $(10,042) $ (1,393) $ 1,063 $ 2,510 Basic net income (loss) per share $ (2.51) $ (1.16) $ (0.16) $ 0.13 $ 0.33 Diluted net income (loss) per share $ (2.51) $ (1.16) $ (0.16) $ 0.12 $ 0.29 BALANCE SHEET DATA Working capital $ 11,741 $ 7,354 $ 11,504 $ 13,393 $ 11,978 Total assets 52,702 55,048 26,470 24,934 19,325 Long-term convertible notes payable 15,000 15,000 - - - Convertible redeemable preferred stock 32,147 - - - - Shareholders' equity (deficit) (10,319) 10,926 19,839 20,979 16,955
(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. 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. 15 GENERAL The Company's net sales are attributable almost entirely to the Gardenburger(R) veggie burger (and related veggie patty products). If demand for the Gardenburger veggie burger declines or does not increase at the rate currently anticipated, whether as a result of competition, lower consumer demand or other unforeseen events, the Company's business will be adversely affected to a greater degree than if it had multiple product lines. Any decrease in the Company's net sales levels may lead to reductions in the amount of shelf space allocated to the Company's products at grocery stores, or menu space devoted to such products at food service outlets. RESULTS OF OPERATIONS The following table is derived from the Company's Statements of Operations for the periods indicated and presents the results of operations as a percentage of net sales.
Year ended (1) September 30, 1999 December 31, 1998 December 31, 1997 - ------------------------------- ----------------------- --------------------- --------------------- Net sales 100.0% 100.0% 100.0% Cost of goods sold 57.1 50.5 47.9 ----------------------- --------------------- --------------------- Gross margin 42.9 49.5 52.1 Sales and marketing expense 79.9 58.4 46.1 General and administrative expense 8.4 5.4 9.6 Restructuring charges 4.5 -- -- ----------------------- --------------------- --------------------- Operating loss (49.9) (14.3) (3.6) Other expense (2.3) (1.5) -- ----------------------- --------------------- --------------------- Loss before income taxes (52.2) (15.8) (3.6) Income tax benefit 18.7 5.8 1.1 ----------------------- --------------------- --------------------- Income before preferred dividends (33.5) (10.0) (2.5) Preferred dividends (3.3) -- -- ----------------------- --------------------- --------------------- Net loss (36.8)% (10.0)% (2.5)% ======================= ===================== =====================
(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. 1999 COMPARED TO 1998 GENERAL During 1999, the Company changed its fiscal year end to September 30 from December 31. Accordingly, the following discussion compares the nine-month period ended September 30, 1999 (herein referred to as "fiscal 1999") with the twelve-month period ended December 31, 1998, herein referred to as the change in the Company's fiscal year. NET SALES Net sales for fiscal 1999 decreased to $60.1 million from $100.1 million for 1998. The decrease is attributable to both the change in the Company's fiscal year and a decrease in unit sales. During the 1998 period external events, such as e. coli outbreaks in the U.S. and mad cow disease in the U.K., brought attention to the dangers of eating red meat. Management believes that these events worked synergistically with the Company's advertising campaign during 1998 to increase unit sales. No similar events occurred during 1999. In addition, the Company experienced lower than anticipated new consumer trial during 1999 and unfavorable weather conditions adversely affected the 1999 grilling season. In addition, to a lesser extent, the lower sales figures in fiscal 1999 reflect the impact of the Company's strong December 1998 sales, as 16 customers, especially in the grocery channel, stocked up on product in anticipation of extensive January 1999 consumer promotions. The Company's market share in the grocery channel averaged 46 percent during 1999 compared to 42 percent during 1998. During 1999, the Company maintained its U.S. All Commodity Volume ("ACV") at 89 percent. ACV compares the total sales volume of the stores carrying the Company's products to the total sales volume throughout the retail grocery channel. GROSS MARGIN Gross margin decreased to $25.8 million (42.9 percent of net sales) for fiscal 1999 from $49.6 million (49.5 percent of net sales) for 1998. The decrease in the gross margin is a result of the reduction in sales discussed above as well as a lower gross margin percentage. The decrease in the gross margin percentage is primarily a result of start-up costs related to bringing up the second production line at the Clearfield facility and of operating manufacturing facilities at less than 100 percent of capacity in order to reduce product inventories due to lowered sales expectations for 1999. The Company expects its gross margin percentage to return to 48% to 50% during fiscal 2000. SALES AND MARKETING EXPENSE Sales and marketing expense decreased to $48.0 million (79.9 percent of net sales) for fiscal 1999 from $58.5 million (58.4 percent of net sales) for 1998. The decrease in spending in fiscal 1999 is primarily a result of the change in fiscal year. Of the $48.0 million spent in fiscal 1999, approximately $35.8 million was for discretionary spending such as television advertising, couponing and trade programs. The Company expects to substantially reduce sales and marketing expenses going forward as it changes to a more profit driven business model. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("g&a") decreased to $5.1 million (8.4 percent of net sales) for fiscal 1999 from $5.4 million (5.4 percent of net sales) for 1998. The decrease is due primarily to the change in the Company's fiscal year, offset in part by costs related to implementing a new year 2000 compliant management information system and the associated depreciation expense. RESTRUCTURING CHARGE The Company incurred a restructuring charge of $2.7 million during fiscal 1999 related to the closure of its Portland, Oregon production facility, a fair market value adjustment for one of the Company's Portland, Oregon area properties and the write-off of an older information system. At September 30, 1999, no amounts remained in accrued liabilities related to these charges. In November 1999, the Company sold the 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 the first quarter of fiscal 2000. OPERATING LOSS Operating loss was $30.0 million in fiscal 1999 compared to an operating loss of $14.4 million for 1998 as a result of the individual line item changes discussed above, including in particular the decreased gross margin percentage and increased sales and marketing expense as a percentage of net sales. 17 INCOME TAXES Income taxes are based on an estimated rate of approximately 36 percent for fiscal 1999 compared to the approximately 37 percent rate used for 1998. PREFERRED DIVIDENDS The Company accrues a 12 percent cumulative annual dividend on its convertible preferred stock payable upon redemption of the stock. The convertible preferred stock was issued in April 1999. The quarterly dividend is $975,000. In addition, the $2.3 million of related issuance costs are being accreted over five years, the life of the preferred stock, and total approximately $117,000 per quarter. NET LOSS AVAILABLE FOR COMMON SHAREHOLDERS Net loss available for common shareholders was $22.1 million in fiscal 1999 compared to a net loss of $10.0 million in 1998 as a result of the individual line item changes discussed above. The Company believes that the impact of inflation was not material for fiscal years 1999 and 1998. 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 increased its sales levels in its retail grocery, food service and club store channels during 1998. 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. ACV to 89 percent from 68 percent at the end of 1997. 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 was primarily a result of declining start-up costs and increased manufacturing efficiencies at the Clearfield 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 was 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. 18 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 was 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 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 in 1998. 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 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. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, the Company had working capital of $11.7 million, which included $7.0 million of cash and cash equivalents, compared to $7.4 million in working capital at December 31, 1998, including $2.3 million of cash and cash equivalents. The $4.3 million increase in available working capital is primarily due to the issuance of $30.2 million of convertible preferred stock, net of issuance costs, offset by $14.9 million used in operations, $10.0 million net payments on the Company's line of credit and purchases of $1.0 million of property and equipment. Accounts receivable decreased $8.8 million to $6.1 million at September 30, 1999 from $15.0 million at December 31, 1998, due primarily to significantly higher sales during the fourth quarter of 1998 compared to the quarter ended September 30, 1999. Days sales outstanding decreased to 32 at September 30, 1999 from 43 at December 31, 1998. Inventories decreased $5.2 million to $7.3 million at September 30, 1999 from $12.5 million at December 31, 1998 as a result of efforts to reduce finished goods inventories in order to bring them in line with current sales expectations. Inventory turned 5.5 times on an annualized basis during the quarter ended September 30, 1999, compared to 5.3 times on an annualized basis during the fourth quarter of 1998. 19 Deferred taxes increased to $17.5 million at September 30, 1999 from $6.2 million at December 31, 1998 primarily as a result of tax benefits relating to net operating loss carryforwards. The Company has tax net operating loss carryforwards (NOLs) totaling approximately $41.2 million, which expire as follows: 2018 - $11.8 million and 2019 - $29.4 million. Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109) requires that the tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be "more likely than not". Otherwise, a valuation allowance is required to be recorded. Management has determined, based primarily on a strategic shift in the third quarter of fiscal 1999 to a more profit driven business model, as outlined below, that taxable income of the Company will more likely than not be sufficient to utilize fully the $41.2 million of NOLs in the next three to five years. Accordingly, no valuation allowance has been recorded. The NOLs available for future utilization were generated principally as a result of the Company's strategic initiative, begun in 1997, to penetrate the retail grocery channel, which is the largest channel of distribution. The Company began a more aggressive advertising and marketing program, including a national television advertising program in 1998 and 1999, in order to expand distribution and grow the veggie burger category. The Company invested over $40 million in discretionary marketing spending during fiscal 1998 and an additional $35.8 million in discretionary marketing spending during fiscal 1999. Prior to this strategic initiative, the Company had historically been profitable, but had spent very little on discretionary advertising and marketing. The increased advertising and marketing spending resulted in more than doubling the sales levels that existed back in 1996. The Company plans to adjust its rapid growth strategy during fiscal 2000 to a lower expense, more profit driven business model. This will be accomplished primarily by a substantial reduction in the discretionary advertising and marketing spending that has occurred during the last three years. Management does not believe that such reductions will have a significant impact on recent historical sales levels. Additionally, the Company has already begun streamlining its operations at its Clearfield plant, through reductions in workforce of approximately 25% along with workforce reductions at its corporate headquarters of 20%. At the same time, the Company anticipates achieving greater operating efficiencies at its Clearfield plant as a result of the consolidation of manufacturing locations and the automation of the Company's manufacturing processes. Operating efficiencies gained by the changes in operations are expected to result in improved performance, measured primarily by gross margin dollars. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period. Management anticipates that increases in taxable income, as a result of the changes in operating strategy outlined above, will be sufficient to utilize fully the NOLs prior to their ultimate expiration date. Future levels of operating income are dependent upon general economic conditions, including continued growth of the meatless burger category, competitive pressures on sales and gross margins and other factors beyond the Company's control, and no assurance can be given that sufficient taxable income will be generated for full utilization of the NOLs. Management has considered the above factors in reaching its conclusion that it is likely that taxable income will be sufficient to utilize fully the NOLs in the near term and prior to their ultimate expiration date. However, the Company may be required to record a valuation allowance against the deferred tax asset for net operating losses in future periods if its revised business goals are not achieved. 20 Accounts payable decreased to $6.7 million at September 30, 1999 from $9.7 million at December 31, 1998 primarily as a result of lower expenditures for inventories as a result of the Company's efforts to reduce inventory levels. Payroll and related liabilities decreased to $0.9 million at September 30, 1999 from $1.8 million at December 31, 1998 primarily as a result of bonus accruals at December 31, 1998 that did not exist at September 30, 1999. Capital expenditures of $1.0 million during 1999 primarily resulted from expenditures for the Company's new management information system and for production equipment in Clearfield not covered under the Company's operating leases. Capital expenditures are estimated to be approximately $2.4 million in fiscal 2000 primarily for information systems and production equipment. The Company has outstanding $15 million of 7 percent Convertible Senior Subordinated Notes (the "Notes") held by Dresdner Kleinwort Benson Private Equity Partners L.P. ("Dresdner"). The Notes are convertible into shares of the Company's Common Stock at the option of the holder until maturity in 2003, at which time they will be due in full if not previously converted. The Company may also elect to redeem the Notes, if not previously converted, at any time after March 27, 2000. The conversion price of the Notes at September 30, 1999 was $12.10 per share, as adjusted to reflect the issuance of convertible preferred stock as discussed below and stock option grants. Upon adjustment of the conversion price of the Company's Series B convertible preferred stock as discussed below, the conversion price of the Notes will likely decrease to $11.49 per share. 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: 1. current assets to current liabilities of at least 1.575 to 1.0, measured monthly; 2. total liabilities, exclusive of the Notes and convertible redeemable preferred stock, to tangible net worth, inclusive of the Notes and convertible redeemable preferred stock, not to exceed 1.1 to 1.0, measured monthly; and 3. a minimum fixed charge coverage ratio, as defined in the Note Purchase Agreement, of 1.08 to 1.0, measured annually. At September 30, 1999, the Company was in compliance with all of its financial ratio covenants under the Notes. 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 2,763,000 shares of Series A convertible preferred stock and 487,000 shares of Series B convertible preferred stock to members of the investor group, at a price of $10 per share for each series, or an aggregate consideration of $32.5 million, and received net proceeds of $30.2 million. At September 30, 1999, the preferred shares were convertible at a price of $10 per share (subject to antidilution adjustments) at any time following issuance at the discretion of the holder. The Company is required to meet certain performance targets for the twelve months ending December 31, 1999 under the Series B preferred stock agreement. These targets are: 1) $135.0 million in net sales, and 2) an operating loss of not more than $1.0 million. It is anticipated that the Series B conversion price will be adjusted to $3.75 per share due to the likelihood that the Company will not meet the specified performance targets for calendar 1999. If the conversion price is 21 adjusted, the Company will be required to record approximately $8.1 million of additional preferred dividends to account for this beneficial conversion feature. Such non-cash charge represents the implied value of the beneficial conversion feature and would be recorded in the first quarter of fiscal 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 time they may be redeemed at the election of the holders or, under certain conditions, at the discretion of the Company. The redemption value of the Series A and Series B convertible preferred stock is $27.6 million and $4.9 million, respectively. The difference between the carrying amount and the redemption value of the convertible preferred stock is being accreted as additional preferred dividends over the period until redemption. In April 1999, the Company entered into an Amended and Restated Business Loan Agreement (the "Agreement") with Bank of America NT & SA. The Agreement provides for a credit line of up to $20 million with interest at the Bank's Reference Rate or, at the option of the Company, at LIBOR plus 1.25 percentage points or at the Offshore Rate plus 1.25 percentage points. The line of credit is available until June 1, 2000. The Agreement also provides for a standby letter of credit of up to $400,000 (included in the $20 million limit) with a maximum maturity of March 31, 2001. The Agreement provides that the line of credit is to be secured by all machinery, equipment, inventory, receivables and intangible assets of the Company. At September 30, 1999, the Company had $5.0 million outstanding under this line of credit at a per annum interest rate of 6.65 percent. The Company is required to meet certain financial covenants under the Agreement as follows: 1. to maintain a current ratio of at least 1.5:1.0 measured monthly; 2. not to incur an operating loss of more than $5 million for the year ending December 31, 1999; and 3. to maintain a minimum fixed charge coverage ratio of at least 1.25:1.00 measured on a rolling four-quarter basis, beginning December 31, 2000. At September 30, 1999, the Company anticipated being out of compliance with the operating loss covenant at December 31, 1999. In December 1999, the Company signed a letter of commitment for a new line of credit. See "Note 14. Subsequent Events" of the Notes to Financial Statements. 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 under each lease agreement. If any 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 term, which terms range from five to seven years, depending upon the equipment. 22 Management believes that the Company's existing working capital, in combination with cash flow from operations and funds available under credit facilities, will be sufficient to support working capital requirements in the near term. YEAR 2000 INFORMATION SYSTEMS The Company utilizes 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 performed various component tests to verify full year 2000 operational readiness and modification was completed on all non-compliant equipment. In addition to the information system component testing, the Company has conducted a system wide test, including 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 was to assure that the Company's business processes will run end-to-end with no year 2000 errors or issues. SUPPLIER AND CUSTOMER BASE The Company has completed a year 2000 supplier and customer audit program. As a part of this program, the Company contacted all of its critical suppliers and significant customers to inform them of the Company's year 2000 expectations and requested copies of their compliance programs. Although the Company discovered a number of non-compliant products and vendors, none of these vendors or products were key to the Company's operations. COST The Company incurred approximately $20,000 of incremental costs to assess year 2000 readiness of its information systems. All system hardware and software upgrades were budgeted in the normal course of business regardless of the year 2000 issue. 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. 23 CONTINGENCY PLANS The Company intends to have two weeks of inventory on hand to support a possible interruption in production. The Company is also scheduling work and projects so that an interruption of either the information system or production would not cause a work stoppage. An emergency call list will be in place when the system comes up on January 2, 2000 in case of an emergency. NEW ACCOUNTING PRONOUNCEMENT 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 establishes accounting and reporting standards for all derivative instruments. SFAS 137 is effective for fiscal years beginning after June 15, 2000. The Company does not currently have any derivative instruments and, accordingly, does not expect the adoption of SFAS 137 to have an impact on its financial position or results of operations. 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, 1999, the Company had $5.0 million outstanding under this credit line at an annual interest rate of 6.65 percent. A hypothetical 10 percent change in interest rates would not have a material impact on the Company's cash flows. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------- ------------------------------------------- The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 14 of Part IV of this document. Unaudited quarterly financial data for each of the seven quarters in the period ended September 30, 1999 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER(1) - ----------------------------------- ----------- ----------- ----------- -------------- 1999 Net sales $ 13,563 $ 22,228 $ 24,315 n/a Gross margin 6,210 9,177 10,385 n/a Net loss (2) 5,456) (11,428) (5,262) n/a Basic and diluted net loss per share (0.62) (1.29) (0.60) n/a 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
(1) Quarterly statement of operations data for 1999 includes only three quarters of activity due to the Company's change in its fiscal year during 1999 from a calendar year to a fiscal year ended September 30. (2)Included in net loss in the first and second quarters of 1999, respectively, is a restructuring charge totaling $1,100 and $1,584 on a pre-tax basis. 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - ------- --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. 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 2000 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 2000 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 2000 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 2000 Annual Meeting of Shareholders and is incorporated herein by reference. 25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - -------- --------------------------------------------------------------- (a) FINANCIAL STATEMENTS AND SCHEDULES Page ---- Report of Arthur Andersen LLP F-1 Balance Sheets - September 30, 1999 and December 31, 1998 F-2 Statements of Operations - nine months ended September 30, 1999 and years ended December 31, 1998 and 1997 F-3 Statements of Shareholders' Equity (Deficit) - nine months ended September 30, 1999 and years F-4 ended December 31, 1998 and 1997 Statements of Cash Flows - nine months ended September 30, 1999 and years ended December 31, 1998 and 1997 F-5 Notes to Financial Statements F-6 Report of Independent Public Accountants on Financial Statement Schedule F-17 Schedule II Valuation and Qualifying Accounts F-18 (b) REPORTS ON FORM 8-K There was one report on Form 8-K filed during the quarter ended September 30, 1999 under Item 8. Change in Fiscal Year, dated July 13, 1999 and filed July 23, 1999. (c) EXHIBITS Exhibits are listed on the Index to Exhibits following the financial statements included in this report. 26 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 24, 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 December 24, 1999. Signature Title - --------- ----- /s/ Lyle G. Hubbard Director, President and Chief Executive Officer - ------------------------ (Principal Executive Officer) Lyle G. Hubbard /s/ Richard C. Dietz Executive Vice President, - ------------------------ Chief Financial Officer, Secretary and Treasurer Richard C. Dietz (Principal Financial and Accounting Officer) /s/ Kyle A. Anderson Director - ------------------------ Kyle A. Anderson /s/ Alexander P. Coleman Director - ------------------------ Alexander P. Coleman /s/ Jason M. Fish Director - ------------------------ Jason M. Fish /s/ Ronald C. Kesselman 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 27 Exhibit Index Exhibit No. Description - ----------- ----------- 3.1 Restated Articles of Incorporation, as amended April 14, 1999 (18) 3.2 1995 Restated Bylaws, as amended July 13, 1999 (20) 10.1 Amended and Restated Rights Agreement between the Company and First Chicago Trust Company of New York, dated July 15, 1999 (20) 10.2 Purchase and Sale Agreement and Receipt For Earnest Money between the Iseli Family Partnership (Seller) and the Company (Buyer), as amended, dated May 8, 1995 (5) 10.3 Purchase and Sale Agreement and Receipt for Earnest Money between the Company and Ironwood Investments, dated August 11, 1999 10.4 Amended and Restated Business Loan Agreement, dated April 14, 1999, between Bank of America NT & SA and Gardenburger, Inc. (18) 10.5 Amendment No. 1, dated May 21, 1999, to Business Loan Agreement, dated April 14, 1999, between the Company and Bank of America NT & SA (19) 10.6 Amendment No. 2, dated July 9, 1999, to Business Loan Agreement, dated April 14, 1999, between the Company and Bank of America NT & SA (19) 10.7 Plant Lease-1416 S.E. 8th, Portland, Oregon (1) 10.8 First Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon (11) 10.9 Second Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon (12) 10.10 Third Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon, dated January 1, 1999 (17) 10.11 Consent to Assignment and Option to purchase 1005 S.E. Washington, Portland, Oregon (1) 10.12 Morrison Plaza Office Lease, dated October 29, 1996 (10) 10.13 First Amendment to Morrison Plaza Office Lease, dated December 9, 1997 (11) 10.14 Lease extension for Morrison Plaza Office Building, dated September 11, 1998 (14) 10.15 Facility Lease by and between Freeport Center Associates, a Utah general partnership and the Company, dated May 28, 1997 (9) 10.16 Addendum, dated August 1, 1997, to Facility Lease by and between Freeport Center Associates, and the Company (11) 10.17 Warehouse Lease between Freeport Center Associates and the Company, dated January 25, 1999 (17) 10.18 Lease Agreement between BA Leasing & Capital Corporation and the Company, dated as of December 17, 1997 (11) 10.19 First Amendment, dated June 4, 1998, to Lease Agreement, dated December 17, 1997 between BA Leasing & Capital Corporation and the Company (13) E-1 Exhibit No. - ----------- 10.20 Lease Agreement between BA Leasing & Capital Corporation and the Company, dated as of May 28, 1998 (14) 10.21 First Amendment, dated January 14, 1999, to Lease Agreement between BA Leasing & Capital Corporation and the Company, dated as of May 28, 1998 (17) 10.22 Purchase Agreement Assignment, dated June 23, 1999, between Gardenburger, Inc. and BA Leasing & Capital Corporation (19) 10.23 Note Purchase Agreement, dated as of March 27, 1998, between the Company and Dresdner Kleinwort Benson Private Equity Partners L.P. (12) 10.24 Convertible Senior Subordinated Note, dated March 27, 1998 (12) 10.25 Registration Rights Agreement, dated as of March 27, 1998, between the Company and Dresdner Kleinwort Benson Private Equity Partners L.P. (12) 10.26 Stock Purchase Agreement, dated March 29, 1999, by and between Gardenburger, Inc. and Rosewood Capital III, L.P., Farallon Capital Management LLC, Gruber & McBaine Capital Management, LLC, BT Capital Investors LP and certain other purchasers identified therein (16) 10.27 Amendment and Waiver of Stock Purchase Agreement, dated April 14, 1999, by and between Gardenburger, Inc., and the Purchasers identified on Exhibit A thereto (18) 10.28 Investor Rights Agreement, dated April 14, 1999, by and between Gardenburger, Inc., and the investors identified on Exhibit A thereto (18) 10.29 1992 First Amended and Restated Combination Stock Option Plan, as amended (15)(19) 10.30 Form of Incentive Stock Option Agreement for Option grants to executive officers after May 24, 1995 (15)(17) 10.31 Form of Non-Statutory Stock Option Agreement for Option grants to executive officers after May 24, 1995 (15)(17) 10.32 Paul F. Wenner Stock Option Agreement (2)(15) 10.33 Lyle Hubbard Employment Agreement, dated April 14, 1996 (10)(15) 10.34 Agreement to Extend and Amend Employment Agreement, dated November 16, 1998, to Lyle Hubbard Employment Agreement, dated April 14, 1996 (15)(17) 10.35 Agreement to Extend and Amend Employment Agreement, dated March 5, 1999, to Lyle Hubbard Employment Agreement, dated April 14, 1996 (15)(17) 10.36 Third Amendment to Employment Agreement, dated December 9, 1999, between the Company and Lyle Hubbard (15) 10.37 Paul F. Wenner Employment Agreement and Amendment thereto (1)(15) 10.38 Form of Severance Agreement for Executive Officers (10)(15) 10.39 Form of Indemnification Agreement between the Company and its Officers and Directors (15)(17) 10.40 2000 Executive Annual Incentive Plan (15) E-2 Exhibit No. - ----------- 10.41 Retention Incentive Agreement, dated December 9, 1999, between the Company and Lyle Hubbard (15) 10.42 Form of Retention Incentive Agreement between the Company and nine senior executives (15) 10.43 Form of Change in Control Agreement between the Company and nine senior executives (15) 23 Consent of Arthur Andersen LLP 27 Financial Data Schedule 99 Description of Common Stock of Gardenburger, Inc. (18) (1) Incorporated by reference to the Company's Form S-1 Registration Statement (Commission File No. 33-46623), filed May 6, 1992. (2) Incorporated by reference to the Company's 1992 Form 10-K Annual Report, filed March 23, 1993. (3) Incorporated by reference to the Company's 1993 Form 10-K Annual Report, filed March 23, 1994. (4) Incorporated by reference to the Company's 1994 Form 10-K Annual Report, filed March 30, 1995. (5) Incorporated by reference to the Company's 1995 Form 10-K Annual Report, filed March 29, 1996. (6) Incorporated by reference to the Company's Form 10-Q Quarterly Report for the quarter ended September 30, 1996, filed November 4, 1996. (7) Incorporated by reference to the Company's Form 8-K Current Report, filed May 8, 1996. (8) Incorporated by reference to the Company's Form 10-Q Quarterly Report for the quarter ended September 30, 1997, filed November 4, 1997. (9) Incorporated by reference to the Company's Form 10-Q Quarterly Report for the quarter ended June 30, 1997, filed August 14, 1997. (10) Incorporated by reference to the Company's 1996 Form 10-K Annual Report, filed March 25, 1997. (11) Incorporated by reference to the Company's 1997 Form 10-K Annual Report, filed March 31, 1998. (12) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1998, filed May 15, 1998. (13) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1998, filed August 12, 1998. (14) Incorporated by reference to the Company's Form 10-Q for the quarter ended September 30, 1998, filed November 5, 1998. (15) Management contract or compensatory plan or arrangement. (16) Incorporated by reference to the Company's Form 8-K Current Report, filed April 1, 1999. (17) Incorporated by reference to the Company's Form 10-K for the year ended December 31, 1998, filed March 31, 1999. (18) Incorporated by reference to the Company's Form 10-Q for the quarter ended March 31, 1999, filed May 17, 1999. (19) Incorporated by reference to the Company's Form 10-Q for the quarter ended June 30, 1999, filed August 13, 1999. (20) Incorporated by reference to the Company's Registration Statement on Form S-8 (No. 333-92665), filed December 13, 1999. E-3 Report of Independent Public Accountants To the Board of Directors and Shareholders of Gardenburger, Inc.: We have audited the accompanying balance sheets of Gardenburger, Inc. (an Oregon corporation) as of September 30, 1999 and December 31, 1998 and the related statements of operations, shareholders' equity (deficit) and cash flows for the nine months ended September 30, 1999 and for each of the two 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 audits 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 September 30, 1999 and December 31, 1998, and the results of its operations and its cash flows for the nine months ended September 30, 1999 and each of the two years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Portland, Oregon, November 5, 1999 (except for the matters discussed in Note 14, as to which the date is December 8, 1999). F-1 GARDENBURGER, INC. BALANCE SHEETS (In thousands, except share amounts)
September 30, December 31, 1999 1998 ------------------- ------------------- ASSETS Current Assets: Cash and cash equivalents $ 7,033 $ 2,320 Accounts receivable, net of allowances of $301 and $148 6,133 14,969 Inventories, net 7,268 12,457 Prepaid expenses 2,207 4,515 Deferred income taxes 4,775 1,989 ------------------- ------------------- Total Current Assets 27,416 36,250 Property, Plant and Equipment, net of accumulated depreciation of $3,960 and $3,174 10,275 12,238 Deferred Income Taxes 12,691 4,242 Other Assets, net of accumulated amortization of $804 and $534 2,320 2,318 ------------------- ------------------- Total Assets $ 52,702 $ 55,048 =================== =================== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Short-term note payable $ 5,000 $ 15,000 Accounts payable 6,669 9,708 Payroll and related liabilities payable 941 1,822 Other current liabilities 3,065 2,366 ------------------- ------------------- Total Current Liabilities 15,675 28,896 Other Long-Term Liabilities 199 226 Convertible Notes Payable 15,000 15,000 Convertible Redeemable Preferred Stock 32,147 - Shareholders' Equity (Deficit): Preferred Stock, no par value, 5,000,000 shares authorized - - Common Stock, no par value, 25,000,000 shares authorized; shares issued and outstanding: 8,841,451 and 8,733,811 10,619 9,717 Additional paid-in capital 4,277 4,275 Retained deficit (25,215) (3,066) ------------------- ------------------- Total Shareholders' Equity (Deficit) (10,319) 10,926 ------------------- ------------------- Total Liabilities and Shareholders' Equity (Deficit) $ 52,702 $ 55,048 =================== ===================
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 Nine Months Ended September 30, For the Year Ended December 31, ------------------------------------------ 1999 1998 1997 ------------------- -------------------- ------------------- Net sales $ 60,106 $ 100,120 $ 56,837 Cost of goods sold 34,334 50,570 27,236 ------------------- -------------------- ------------------- Gross margin 25,772 49,550 29,601 Operating expenses: Sales and marketing 48,021 58,513 26,191 General and administrative 5,064 5,387 5,471 Restructuring charge 2,684 - - ------------------- -------------------- ------------------- 55,769 63,900 31,662 ------------------- -------------------- ------------------- Operating loss (29,997) (14,350) (2,061) Other income (expense): Interest income 197 115 185 Interest expense (1,596) (1,404) (40) Other, net 7 (200) (136) ------------------- -------------------- ------------------- (1,392) (1,489) 9 ------------------- -------------------- ------------------- Loss before benefit from income taxes (31,389) (15,839) (2,052) Benefit from income taxes 11,223 5,797 659 ------------------- -------------------- ------------------- Loss before preferred dividends (20,166) (10,042) (1,393) Preferred dividends (1,980) - - =================== ==================== =================== Net loss available for common shareholders $ (22,146) $ (10,042) $ (1,393) =================== ==================== =================== Net loss per share - basic and diluted $ (2.51) $ (1.16) $ (0.16) =================== ==================== =================== Shares used in per share calculations 8,812 8,659 8,584 =================== ==================== ===================
The accompanying notes are an integral part of these statements. F-3 GARDENBURGER, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Nine Months Ended September 30, 1999 and the Years Ended December 31, 1998 and 1997 (In thousands, except share amounts)
Common Stock Additional Retained Total --------------------------- Paid-In Earnings Shareholders' Shares Amount Capital (Deficit) Equity (Deficit) ------------ ------------ ------------- ------------- ---------------- 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 Exercise of common stock options 55,660 377 - - 377 Income tax benefit of non-qualified stock option exercises and disqualifying dispositions - - 2 - 2 Issuance of shares in exchange for interest on convertible notes payable 51,980 525 - - 525 Accrual of preferred dividends - - - (1,980) (1,980) Foreign currency translation - - - (3) (3) Loss before preferred dividends - - - (20,166) (20,166) ------------ ------------ ------------- ------------- ---------------- Balance at September 30, 1999 8,841,451 $ 10,619 $ 4,277 $ (25,215) $ (10,319) ============ ============ ============= ============= ================
The accompanying notes are an integral part of these statements. F-5 GARDENBURGER, INC. STATEMENTS OF CASH FLOWS (In thousands)
For the Nine Months Ended For the Year Ended December 31, September 30, ------------------------------------ 1999 1998 1997 ---------------- ---------------- ----------------- Cash flows from operating activities: Loss before preferred dividends $ (20,166) $ (10,042) $ (1,393) Effect of exchange rate on operating accounts (3) (9) 6 Adjustments to reconcile loss before preferred dividends to net cash flows used in operating activities: Depreciation and amortization 1,600 1,637 977 Non-cash portion of restructuring charge 1,584 - - Other non-cash expenses 212 409 - Loss on sale of fixed assets 19 75 145 Deferred income taxes (11,235) (5,956) (307) (Increase) decrease in: Accounts receivable, net 8,836 (6,896) (5,273) Inventories, net 5,189 (9,254) 1,587 Prepaid expenses 2,308 (2,194) (1,943) Income taxes receivable, net - 475 178 Increase (decrease) in: Accounts payable (3,039) 6,543 992 Payroll and related liabilities (881) 206 937 Other accrued liabilities 699 1,264 501 ---------------- ---------------- ----------------- Net cash used in operating activities (14,877) (23,742) (3,593) Cash flows from investing activities: Payments for purchase of property and equipment (1,031) (11,282) (12,141) Proceeds from sale of equipment 33 5,355 10,477 Other assets, net 42 (102) (143) ---------------- ---------------- ----------------- Net cash used in investing activities (956) (6,029) (1,807) Cash flows from financing activities: Proceeds from (payments on) line of credit, net (10,000) 15,000 - Proceeds from issuance of convertible notes payable - 15,000 - Financing fees from issuance of convertible notes payable - (1,124) - Issuance of preferred stock, net of issuance costs 30,167 - - Proceeds from exercise of common stock options and warrants 377 541 183 Income tax benefit of non-qualified stock option exercises and disqualifying dispositions 2 72 64 ---------------- ---------------- ----------------- Net cash provided by financing activities 20,546 29,489 247 ---------------- ---------------- ----------------- Increase (decrease) in cash and cash equivalents 4,713 (282) (5,153) Cash and cash equivalents: Beginning of period 2,320 2,602 7,755 ---------------- ---------------- ----------------- End of period $ 7,033 $ 2,320 $ 2,602 ================ ================ =================
The accompanying notes are an integral part of these statements. F-5 GARDENBURGER, INC. NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------- ORGANIZATION AND NATURE OF OPERATIONS Gardenburger, Inc. was incorporated in Oregon in 1985 to provide a line of meatless food products in response to the public's awareness of the importance of diet to overall health and fitness. Toward this end, the Company developed and now produces and distributes frozen, meatless food products that are generally low in cholesterol and fat, consisting primarily of various flavors and styles of veggie burgers. The Company's products are principally sold to retail and food service customers throughout the United States. CHANGE IN REPORTING PERIOD In July 1999, the Company changed its fiscal year end to September 30. Fiscal 1999 ended on September 30, 1999 and fiscal 2000 began October 1, 1999. For purposes of these footnotes, the nine month period ended September 30, 1999 will be referred to herein as the year ended September 30, 1999. See Note 8. Unaudited Fiscal Year Operating Results. Summary operating results for the nine months ended September 30, 1998 are as follows: Net sales $ 71,409 Cost of goods sold 36,762 Gross margin 34,647 Operating expenses 50,031 Operating loss (15,384) Net loss available for common shareholders (10,362) Net loss per share - basic and diluted $ (1.20) Shares used in per share calculations 8,639 ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates used are reasonable. CASH EQUIVALENTS Cash equivalents consist of highly liquid investments with maturities at the date of purchase of 90 days or less. INVENTORIES Inventories are valued at standard cost, which approximates the lower of cost (using the first-in, first-out (FIFO) method), or market, and include materials, labor and manufacturing overhead. F-6 OTHER ASSETS Other assets consist principally of $1,151 and $1,085 in deferred financing fees, net of accumulated amortization, as of September 30, 1999 and December 31, 1998, respectively. Other assets also includes $780 and $873 in goodwill, net of accumulated amortization, as of September 30, 1999 and December 31, 1998, respectively. Deferred financing fees are being amortized over the maturity period of the related debt and goodwill is being amortized using the straight-line method over ten years. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the lease term or the estimated useful life of the asset, whichever is shorter. Estimated useful lives are as follows: BUILDINGS AND IMPROVEMENTS 3-40 YEARS MACHINERY AND EQUIPMENT 7-30 YEARS OFFICE FURNITURE AND EQUIPMENT 3-10 YEARS VEHICLES 5 YEARS LONG-LIVED ASSETS In accordance with SFAS 121, long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows of the asset. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS 131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION for the year ended December 31, 1998. Based upon definitions contained within SFAS 131, the Company has determined that it operates in one segment. In addition, virtually all sales are domestic. CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company invests its excess cash with high credit quality financial institutions, which bear minimal risk, and, by policy, limits the amount of credit exposure to any one financial institution. For the year ended September 30, 1999, one customer accounted for approximately 11 percent of revenue and 5 percent of the accounts receivable balance at September 30, 1999. For the year ended December 31, 1998, one customer accounted for approximately 14 percent of revenue and 8 percent of the accounts receivable balance at December 31, 1998. 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. Historically, the Company has not incurred significant losses related to its accounts receivable. F-7 REVENUE RECOGNITION Revenue from the sale of products is generally recognized at time of shipment to the customer. Promotional and other discounts are accrued at time of shipment based on historical experience. ADVERTISING COSTS Advertising costs, including media advertising, couponing and other advertising, which are included in sales and marketing expense, are expensed when the advertising first takes place. Advertising expense was approximately $17,313, $19,904 and $3,844 in 1999, 1998 and 1997, respectively. 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 $553 in 1999, $1,121 in 1998 and $565 in 1997. NET LOSS PER SHARE Basic earnings per share (EPS) is calculated using the weighted average number of common shares outstanding for the period and diluted EPS is computed using the weighted average number of common shares and dilutive common equivalent shares outstanding. Basic EPS and diluted EPS are the same for all periods presented since the Company was in a loss position in all periods. Potentially dilutive securities that are not included in the diluted EPS calculation because they would be antidilutive are as follows:
DECEMBER 31, SEPTEMBER 30, ------------------------------ 1999 1998 1997 ------------------- ----------- ------------ Stock options 3,247 2,768 2,447 Convertible notes 1,237 1,163 - Convertible preferred stock 3,250 - - =================== =========== ============ Total 7,734 3,931 2,447 =================== =========== ============
RECLASSIFICATIONS Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. F-8 2. INVENTORIES - ---------------- Detail of inventories at September 30, 1999 and December 31, 1998 is as follows: 1999 1998 ---------------- ----------------- Raw materials $ 2,672 $ 2,843 Packaging and supplies 538 275 Finished goods 4,058 9,339 ================ ================= $ 7,268 $12,457 ================ ================= 3. PROPERTY, PLANT AND EQUIPMENT - ---------------------------------- Detail of property, plant and equipment at September 30, 1999 and December 31, 1998 is as follows: 1999 1998 ------------------ -------------------- Land 721 $ 787 Building and improvements 2,504 3,104 Machinery and equipment 6,807 7,320 Office furniture and equipment 4,203 4,201 ------------------ -------------------- 14,235 15,412 Less accumulated depreciation (3,960) (3,174) ================== ==================== $10,275 $12,238 ================== ==================== 4. LINE OF CREDIT - ------------------- In April 1999, the Company entered into an Amended and Restated Business Loan Agreement (the "Agreement") with Bank of America NT & SA. The Agreement provides for a credit line of up to $20 million with interest at the Bank's Reference Rate or, at the option of the Company, at LIBOR plus 1.25 percentage points or at the Offshore Rate plus 1.25 percentage points. The line of credit is available until June 1, 2000. The Agreement also provides for a standby letter of credit of up to $400 (included in the $20 million limit) with a maximum maturity of March 31, 2001. The Agreement provides that the line of credit is to be secured by all machinery, equipment, inventory, receivables and intangible assets of the Company. At September 30, 1999, the Company had $5,000 outstanding under the line of credit at an annual interest rate of 6.65 percent. The Company is required to meet certain financial covenants under the Agreement as follows: - - To maintain a current ratio of at least 1.5:1.0 measured monthly; - - Not to incur an operating loss of more than $5 million for the year ending December 31, 1999; and - - To maintain a minimum fixed charge coverage ratio of at least 1.25:1.00 measured on a rolling four-quarter basis, beginning December 31, 2000. At September 30, 1999, the Company anticipated being out of compliance with the operating loss covenant at December 31, 1999. In December 1999, the Company signed a letter of commitment for a new line of credit. See Note 14. Subsequent Events. F-9 5. LEASE COMMITMENTS - ---------------------- Future minimum lease payments at September 30, 1999 are as follows: YEAR ENDED SEPTEMBER 30, - -------------------------------------- 2000 $ 3,714 2001 3,473 2002 3,558 2003 3,345 2004 3,244 Thereafter 3,589 ------------ Total $20,923 ============ Rental expense for the years ended September 30, 1999, December 31, 1998 and 1997 was $2,355, $2,613 and $601, respectively. 6. CONVERTIBLE NOTES PAYABLE - ------------------------------ The Company has outstanding $15 million of 7 percent Convertible Senior Subordinated Notes (the "Notes") held by Dresdner Kleinwort Benson Private Equity Partners L.P. ("Dresdner"). The Notes are convertible into shares of the Company's Common Stock at the option of the holder until maturity in 2003, at which time they will be due in full if not previously converted. The Company may also elect to redeem the Notes, if not previously converted, at any time after March 27, 2000. The conversion price of the Notes at September 30, 1999 was $12.10 per share, as adjusted to reflect the issuance of convertible preferred stock as discussed in Note 9 and stock option grants. Upon adjustment of the conversion price of the Company's Series B convertible preferred stock as discussed in Note 9, the conversion price of the Notes will likely decrease to $11.49 per share. 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 and convertible redeemable preferred stock, to tangible net worth, inclusive of the Notes and convertible redeemable preferred stock, not to exceed 1.1 to 1.0, measured monthly; and - - a minimum fixed charge coverage ratio, as defined in the Note Purchase Agreement, of 1.08 to 1.0, measured annually. At September 30, 1999, the Company was in compliance with all of its financial ratio covenants under the Notes. 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 F-10 benefits of $2, $72 and $64 were credited to additional paid-in capital in 1999, 1998 and 1997, respectively. The provision for (benefit from) income taxes is as follows: 1999 1998 1997 ------------ ----------- ---------- CURRENT: Federal $ - $ 129 $ (352) State 12 30 - ------------ ----------- ---------- 12 159 (352) DEFERRED (11,235) (5,956) (307) ============ =========== ========== $(11,223) $ (5,797) $ (659) ============ =========== ========== Total deferred income tax assets were $17,907 and $6,751 and liabilities were $441 and $520 at September 30, 1999 and December 31, 1998, respectively. Individually significant temporary differences are as follows: 1999 1998 ------------ ------------ Net operating loss carryforwards $15,055 $ 4,602 Provision for trade promotions and discounts 558 1,046 The Company recorded a benefit from income taxes of $15.0 million related to $41.2 million of net operating loss carryforwards. No valuation allowance has been recorded against the deferred tax asset for the Company's net operating losses because the Company believes it is more likely than not that the net operating losses will be recognized as a result of future operating profits. The Company's basis for such assertion is due to its expectation that the high level of discretionary expenses incurred in recent years will decline substantially as the Company moves to a more profit driven business model. In addition, the Company believes its recent workforce downsizing and production facility consolidation will have a significant positive impact on future results of operations. However, the Company may be required to record a valuation allowance against the deferred tax asset for net operating losses in future periods if its revised business goals are not achieved. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this document for additional information regarding the Company's strategy and assertions regarding the realization of the net operating loss carryforwards. At September 30, 1999, the Company had available federal and state income tax carryforwards, net of tax, of $14,116 and $939, respectively. The federal and state income tax carryforwards expire through the fiscal years 2019 and 2014, respectively. The reconciliation between the effective tax rate and the statutory federal income tax rate is as follows:
1999 1998 1997 ---------- ------------ ---------- Statutory federal income tax rate (34.0)% (34.0) % (34.0) % State taxes, net of federal income tax benefit (1.3) (3.9) (3.5) Tax exempt interest and dividends -- (0.1) (1.7) Trademark and goodwill amortization 0.1 0.2 1.5 Meals and entertainment 0.1 0.4 1.8 Revision of prior year estimates -- -- 1.6 Other (0.7) 0.8 2.2 ---------- ------------ ---------- Effective tax rate (35.8)% (36.6) % (32.1) % ========== ============ ==========
F-11 8. UNAUDITED FISCAL YEAR OPERATING RESULTS - -------------------------------------------- The following statement of operations data is included for informational purposes only and is unaudited.
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995 - --------------------------------------- ----------- ----------- --------- ----------- ---------- Net sales $ 88,817 $ 88,406 $48,144 $ 40,258 $ 36,141 Cost of goods sold 48,141 44,295 23,888 19,924 17,339 Gross margin 40,676 44,111 24,256 20,334 18,802 Operating expenses 69,639 57,755 28,465 18,247 14,521 Operating income (loss) (28,963) (13,644) (4,209) 2,087 4,281 Net income (loss) available for common shareholders (21,826) (9,384) (2,667) 1,675 2,913
9. CONVERTIBLE PREFERRED STOCK - -------------------------------- 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 2,763 shares of Series A convertible preferred stock and 487 shares of Series B convertible preferred stock to members of the investor group, at a price of $10 per share for each series, or an aggregate consideration of $32.5 million, and received net proceeds of $30.2 million. At September 30, 1999, the preferred shares were convertible at a price of $10 per share (subject to antidilution adjustments) at any time following issuance at the discretion of the holder. The Company is required to meet certain performance targets for the twelve months ending December 31, 1999 under the Series B preferred stock agreement. These targets are: 1) $135.0 million in net sales, and 2) an operating loss of not more than $1.0 million. It is anticipated that the Series B conversion price will be adjusted to $3.75 per share due to the likelihood that the Company will not meet the specified performance targets for calendar 1999. If the conversion price is adjusted, the Company will be required to record approximately $8.1 million of additional preferred dividends to account for this beneficial conversion feature. Such non-cash charge represents the implied value of the beneficial conversion feature and would be recorded in the first quarter of fiscal 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 time they may be redeemed at the election of the holders or, under certain conditions, at the discretion of the Company. The redemption value of the Series A and Series B convertible preferred stock is $27.6 million and $4.9 million, respectively. The difference between the carrying amount and the redemption value of the convertible preferred stock is being accreted as additional preferred dividends over the period until redemption. 10. RELATED PARTY TRANSACTIONS - ------------------------------- The Company leases its S.E. 8th Avenue plant facility from a shareholder of the Company for $3 per month. The lease is for a one-year term ending December 31, 1999, which has been renewed on a month-to-month basis terminable upon 60 days' notice. F-12 11. SHAREHOLDERS' EQUITY - ------------------------- PREFERRED STOCK The Company has authorized 5,000 shares of preferred stock, of which 3,250 shares have been issued (see Note 9). Such stock may be issued by the Board of Directors in one or more series, with the preferences, limitations and rights of each series to be determined by the Board of Directors. PREFERRED SHARE PURCHASE RIGHTS In April 1996, the Company declared a dividend distribution of one preferred share purchase right on each outstanding share of the Company's Common Stock. Each right, when exercisable, will entitle shareholders to buy one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company at an exercise price of $47 per share. The rights will become exercisable if a person or group (an "Acquiring Person") acquires 15 percent or more of the Company's Common Stock (with certain exceptions) or announces a tender offer for 15 percent or more of the Common Stock. With the exception of certain cash tender offers, if a person becomes an Acquiring Person, or in the event of certain mergers of the Company with an Acquiring Person, the rights will become exercisable for shares of Common Stock with a market value of two times the exercise price of the right. The Company's Board of Directors is entitled to redeem the rights at $.01 per right at any time before a person has acquired 15 percent or more of the outstanding Common Stock. STOCK OPTIONS PLAN OPTIONS - ------------ The Company has a 1992 First Amended and Restated Combination Stock Option Plan (the "Plan"), which provides for the issuance of incentive stock options ("ISOs") to employees and officers of the Company and non-statutory stock options ("NSOs") to employees, officers, directors and consultants of the Company. Under the Plan, the exercise price of an ISO cannot be less than the fair market value on the date of grant and the exercise price of an NSO cannot be less than 85 percent of fair market value on the date of grant. Options granted under the Plan generally vest three to five years from the date of grant and generally expire ten years from the date of grant. Vesting may accelerate upon a change in control of the Company. At September 30, 1999, the Company had 1,961 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, 1996 761 1,373 $ 8.87 Options granted (172) 172 7.17 Options canceled 60 (60) 9.12 Options exercised -- (42) 4.37 --------------------- --------------------- ---------------------- BALANCES, DECEMBER 31, 1997 649 1,443 8.78 Options granted (172) 172 11.50 Options canceled 101 (101) 8.12 Options exercised -- (75) 7.27 --------------------- --------------------- ---------------------- BALANCES, DECEMBER 31, 1998 578 1,439 9.24 Options granted (516) 516 9.96 Options canceled 57 (57) 8.90 Options exercised -- (56) 7.18 ===================== ===================== ====================== BALANCES, SEPTEMBER 30, 1999 119 1,842 $ 9.51 ===================== ===================== ======================
F-13 NON-PLAN OPTIONS - ---------------- On March 10, 1992, the Company granted a non-statutory stock option to its then Chief Executive Officer exercisable for 1,650 shares of the Company's Common Stock. Such option is exercisable for a period of ten years from the date of grant at an exercise price of $1.00 per share, the fair market value of the Company's Common Stock on the date of grant. During 1996, an option covering 625 of the shares was exercised. At September 30, 1999, an option to purchase 1,025 shares of Common Stock was outstanding and exercisable in full. At September 30, 1999, 1,025 shares of the Company's Common Stock were reserved for issuance under this option grant. On April 14, 1996, the Company granted an option to its Chief Executive Officer exercisable for 300 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 $8.69 per share, subject to vesting provisions over a four year period. At September 30, 1999, the entire option remained outstanding and the Company had 300 shares reserved for issuance under this option grant. 240 of the shares covered by this option were exercisable at September 30, 1999. During 1999, the Company granted options to certain employees and two consultants covering a total of 80 shares of the Company's Common Stock at an average exercise price of $11.16, all of which were outstanding at September 30, 1999. The Company had 80 shares of its Common Stock reserved for issuance under these options. The fair value of options granted to non-employees was not material. 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 1999, 1998 and 1997 using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants: 1999 1998 1997 --------------- -------------- -------------- Risk-free interest rate 6.00% 5.50% 6.25% Expected dividend yield 0% 0% 0% Expected lives 6.5 years 6.5 years 6.5 years Expected volatility 61.49% 60.77% 58.11% Using the Black-Scholes methodology, the total value of options granted during 1999, 1998 and 1997 was $3,816, $1,058 and $760, respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically three to four years). The weighted average per share fair value of options granted during 1999, 1998 and 1997 was $6.41, $4.92 and $4.45, respectively. F-14 If the Company had accounted for its stock-based compensation plans in accordance with SFAS 123, the Company's net loss available to common shareholders and net loss per share would approximate the pro forma disclosures below:
1999 1998 1997 ------------------------- ------------------------ -------------------------- As Pro As Pro As Pro Reported Forma Reported Forma Reported Forma ---------- ---------- ---------- ---------- ----------- ---------- Net loss available to common shareholders $(22,146) $(24,404) $(10,042) $(11,870) $(1,393) $(3,518) Basic and diluted net loss per share $(2.51) $(2.77) $(1.16) $(1.37) $(0.16) $(0.41)
The following table summarizes information about all stock options outstanding at September 30, 1999:
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 9/30/99 Life - Years Price 9/30/99 Price - -------------------- ---------------- ---------------- -------------- ---------------- -------------- $ 1.00 1,025 2.3 $1.00 1,025 $1.00 3.08 1 4.3 3.08 1 3.08 6.12 - 6.78 206 7.2 6.54 109 6.64 6.87 - 7.94 331 7.2 7.52 232 7.45 8.69 - 8.97 695 6.9 8.78 434 8.75 9.56-10.41 312 9.2 10.05 34 9.89 10.90 - 11.75 589 6.1 11.58 351 11.60 12.31 - 13.56 88 7.5 12.79 71 12.74 ==================== ================ ================ ============== ================ ============== $ 1.00 - 13.56 3,247 5.6 $ 6.79 2,257 $ 5.58 ==================== ================ ================ ============== ================ ==============
At December 31, 1998 and 1997, 2,010 and 1,783 options, respectively, were exercisable at weighted average exercise prices of $5.08 per share and $4.54 per share, respectively. 12. 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 $112 in 1999, $137 in 1998 and $106 in 1997. F-15 13. SUPPLEMENTAL CASH FLOW INFORMATION - --------------------------------------- Supplemental disclosure of cash flow information is as follows:
1999 1998 1997 ------------- ------------- --------------- Cash paid during the period for interest $ 637 $ 552 $ -- Cash paid during the period for income taxes 10 11 13 Issuance of Common Stock in exchange for interest expense on Convertible Notes 525 525 -- Preferred dividends 1,980 -- --
14. SUBSEQUENT EVENTS - ---------------------- In November 1999, the Company sold approximately 18 acres of land it owned in Portland, Oregon for net proceeds to the Company of approximately $1,500, resulting in a gain of $174, which will be reflected in other income in the first quarter of fiscal 2000. In December 1999, the Company signed a letter of commitment for a new line of credit. The new line of credit is expected to have a $25 million limit with similar provisions to the existing line of credit. The Company expects the only financial covenant to be a limitation on cumulative net cash losses (as defined) of $5 million during the three-year term of the agreement. F-16 Report of Independent Public Accountants on Financial Statement Schedule We have audited in accordance with generally accepted auditing standards, the financial statements included in Gardenburger, Inc.'s Form 10-K, and have issued our report thereon dated November 5, 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-18 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Portland, Oregon, November 5, 1999 F-17 SCHEDULE II GARDENBURGER, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997 AND 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999 (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, 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 Nine Months Ended September 30, 1999: Reserves deducted from asset accounts: Allowance for uncollectible accounts $ 148 $ 190 $ - $ 37 $ 301
(a) Charges to the account included in this column are for the purposes for which the reserve was created as well as a reduction in the reserve to levels estimated to be appropriate by the Company. F-18 EX-10.3 2 PURCHASE AND SALE AGREEMENT WITH IRONWOOD INVEST. EXHIBIT 10.3 THE GREATER PORTLAND/VANCOUVER COMMERCIAL ASSOCIATION OF REALTORS(R) PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY (OREGON-COMMERCIAL FORM) Dated: August 11, 1999 BETWEEN: Gardenburger, Inc. ("Seller") AND: Ironwood Investments ("Buyer") Buyer agrees to buy and Seller agrees to sell, on the following terms, the real property and all improvements thereon ("the Property") commonly known as approximately 15.47 acres of industrial land -- See attached Exhibit "A"-- and located at NE 166th and Airport Way in the City of Portland, County of Multnomah, Oregon legally described as follows: 1 North, 3 East, 19B Tax Lots 1400, 1500 and 1700 (which description shall be replaced by a metes and bounds legal description after the preliminary commitment has been issued). 1. PURCHASE PRICE. The total purchase price is One Million Five Hundred Seventy Nine Thousand Nine Hundred Twenty and no/100 Dollars ($1,579,920.00) payable as follows: All cash at closing Any earnest money paid to Seller shall be credited against the purchase price. 2. EARNEST MONEY RECEIPT. Upon execution of this Agreement, Buyer shall pay Twenty Five Thousand and no/100 Dollars ($25,000.00) as earnest money (the "Earnest Money") in the form of / / cash or / / check or /x/ promissory note. If the Earnest Money is in the form of a promissory note, it is due and payable: / / upon execution of this Agreement by Buyer and Seller or /x/ upon satisfaction or waiver by Buyer of the conditions to Buyer's obligation to purchase the Property set forth in this Agreement or / /other: N/A. The Earnest Money shall be deposited with /x/ First American Title Company (the "Title Company") at the following branch: 1700 S.W. Fourth Avenue, Portland, OR, 97201-5512 or / / other: N/A 3. CONDITIONS TO PURCHASE. Buyer's obligation to purchase the Property is conditioned on the following: See Addendum "A" and/or Buyer's approval of the results of its property inspection described in Section 4 below. If Buyer has not approved the results of Buyer's property inspection by notice given to Seller within _____ twenty (20) days after the Execution Date (defined below), the Agreement shall be terminated, and the Earnest Money shall be promptly returned to Buyer. 4. PROPERTY INSPECTION. Seller shall permit Buyer and its agents, at Buyer's sole expense and risk, to enter the Property, at reasonable times after reasonable prior notice to Seller and after prior notice to the tenants of the Property as required by the tenants' leases, to conduct inspections, tests, and surveys concerning the structural condition of the improvements, all mechanical, electrical and plumbing systems, hazardous materials, pest infestation, soils conditions, wetlands, American with Disabilities Act compliance, and other matters affecting the suitability of the Property for Buyer's intended use and/or otherwise reasonably related to the purchase of the Property. Buyer shall indemnify, hold harmless, and defend Seller from all liens, costs, and expenses, including reasonable attorneys' fees and experts fees, arising from or relating to Buyer's entry on and inspection of the Property. This agreement to indemnify, hold harmless, and defend Seller shall survive closing or any termination of this Agreement. 5. SELLER'S DOCUMENTS. Within ten (10) days after the Execution Date, Seller shall deliver to Buyer, at Buyer's address shown below, legible and complete copies of the following documents and other items relating to the ownership, operation, and maintenance of the Property, to the extent now in existence and to the extent such items are within Seller's possession or control: Surveys, easements, environmental reports, agreements with city or state government, building plans, engineering studies, wetland reports and soil reports. All applicable information that is available that will aid in developing the subject property. 6. TITLE INSURANCE. Within ten (10) days after the Execution Date, Seller shall deliver to Buyer a preliminary title report from the Title Company (the "Preliminary Commitment"), together with complete and legible copies of all documents shown therein as exceptions to title, showing the status of Seller's title to the Property. Buyer shall have not less than five (5) days after receipt of a copy of the Preliminary Commitment within which to give notice in writing to Seller of any objection to such title or to any liens or encumbrances affecting the Property. Within five (5) days after the date of such notice from Buyer, Seller shall give Buyer written notice of whether it is willing and able to remove the objected-to exceptions. Within five (5) days after the date of such notice from Seller, Buyer shall elect whether to purchase the Property subject to the objected-to exceptions which Seller is not willing or able to remove or terminate this Agreement. On or before the Closing Date (defined below), Seller shall remove all exceptions to which Buyer objects and which Seller agrees Seller is willing and able to remove. All remaining exceptions set forth in the Preliminary Commitment and agreed to by Buyer shall be "Permitted Exceptions." The title insurance policy to be delivered by Seller to Buyer at closing shall contain no exceptions other than the Permitted Exceptions and the usual preprinted exceptions in an owner's standard form title insurance policy. 7. DEFAULT: REMEDIES. If the conditions, if any, to Buyer's obligation to close this transaction are satisfied or waived by Buyer and Buyer nevertheless fails, through no fault of Seller, to close the purchase of the Property, Seller's sole remedy shall be to retain the Earnest Money paid by Buyer. In the event Seller fails, through no fault of Buyer, to close the sale of the Property, Buyer shall be entitled to pursue any remedies available at law or in equity, including without limitation, the remedy of specific performance. 8. CLOSING OF SALE. The sale shall be closed /x/ on or before See Addendum "A" or / / N/A days after the Execution Date (the "Closing Date") in escrow at the Title Company. The sale shall be "closed" when the document conveying title is recorded and funds are disbursed to Seller. At closing, Buyer and Seller shall deposit with the Title Company all documents and funds required to close the transaction in accordance with the terms of this Agreement. At closing, Seller shall deliver a certification in a form approved by Buyer that Seller is not a "foreign person" as such term is defined in the Internal Revenue Code and the Treasury Regulations promulgated under the Internal Revenue Code. If Seller is a foreign person and this transaction is not otherwise exempt from FIRPTA regulations, the Title Company shall be instructed by the parties to withhold and pay the amount required by law to the Internal Revenue Service. At closing, Seller shall convey lee simple title to the Property to Buyer by /x/ statutory warranty deed or / / N/A (the "Deed"). If this Agreement provides for the conveyance by Seller of a vendee's interest in the Property by a contract of sale, Seller shall deposit with the Title Company (or other mutually acceptable escrow) the executed and acknowledged Deed, together with written instructions to deliver such deed to Buyer upon payment in full of the purchase price. At closing, Seller shall pay for and deliver to Buyer a standard form owner's policy of title insurance in the amount of the purchase price insuring fee simple title to the Property in Buyer subject only to the Permitted Exceptions and the standard preprinted exceptions in a standard form policy. 9. CLOSING COSTS: PRORATES. Unless otherwise provided in a separate written agreement, the real estate commission is due on the Closing Date. Seller shall pay the premium for the title insurance policy which Seller is required to deliver pursuant to the above paragraph. Seller and Buyer shall each pay one-half of the escrow fees charged by the Title Company, any excise tax, and any transfer tax. Real property taxes for the tax year in which the transaction is closed, assessments (if a Permitted Exception), personal property taxes, rents on existing tenancies paid for the month of closing, interest on assumed obligations, and utilities shall be prorated as of the Closing Date. Prepaid rents, security deposits, and other unearned refundable deposits regarding the tenancies shall be assigned and delivered to Buyer at closing. The Property / / does /x/ does not qualify for a special tax assessment or deferral program as follows: N/A. /x/ Seller / / Buyer / / N/A shall be responsible for payment of all taxes, interest, and penalties, if any, upon removal of the Property from such special assessment or program. 10. POSSESSION. Buyer shall be entitled to exclusive possession of the Property, subject to tenancies existing as of the Closing Date, /x/ on the Closing Date / / or N/A. 11. CONDITION OF PROPERTY. Seller represents that, to the best of Seller's knowledge and except as described in Addendum "A" attached hereto, there are no pending or threatened notices of violation of any laws, codes, rules, or regulations applicable to the Property ("Laws"), and Seller is not aware of any such violations. Risk of loss or damage to the Property shall be Seller's until closing and Buyer's at and after closing. No agent of Seller nor any agent of Buyer has made any representations regarding the Property. The real estate licensees named in this Agreement have made no representations to any party regarding the condition of the Property, the operations on or income from the Property, or whether the Property or the use thereof complies with Laws. Except for Seller's representations set forth in this Section 11 Buyer shall acquire the Property "AS IS" with all faults and Buyer shall rely on the results of its own inspection and investigation in Buyer's acquisition of the Property. 12. PERSONAL PROPERTY. This sale includes the following personal property: /x/ None or / / the personal property located on and used in connection with the Property and owned by Seller which Seller shall itemize in a schedule. Seller shall deliver to Buyer such schedule within N/A days after the Execution Date. 13. AGENCY DISCLOSURE. The following agency relationship(s) in this transaction is (are) hereby consented to and acknowledged: (a) / / John E. Fettig, Trammell Crow Company (selling real estate licensee) is the agent of (check one): / / Buyer exclusively as an agent of Buyer; /x/ Seller exclusively as an agent of Seller; / / both Seller and Buyer as set out in the in-company agreement. (b) / / Steven T. Klein, Trammell Crow Company (listing agent if not the same as selling agent) is the agent of (check one): /x/ Seller exclusively as Seller's agent; / / both Seller and Buyer as set out in the in-company agreement. (c) / / ___________________________________________ (real estate licensee) is the agent of both Seller and Buyer in a limited dual agency relationship pursuant to separate agreement. ACKNOWLEDGED Buyer /s/ Steve Morrison Date 8/13/99 Seller______________ Date__________ -------------------- ------- Buyer /s/ Richard Dietz Date 8/16/99 Seller______________ Date__________ -------------------- ------- Designated Designated Broker(s) Initials _____ Date________ Broker(s) Initials_____ Date__________ 14. NOTICES. Unless otherwise specified, any notice required or permitted in, or related to, this Agreement must be in writing and signed by the party to be bound. Any time limit in or applicable to a notice shall commence on the day following mailing of the notice in the U.S. mails, postage prepaid. by the applicable party to the address of the other party shown in this Agreement, unless that day is a Saturday. Sunday, or legal holiday, in which event it will commence on the next following business day. 15. ASSIGNMENT. Buyer may assign / / may not assign /x/ may assign, if the assignee is an entity owned and controlled by Buyer (MAY NOT, IF NO BOX IS CHECKED) this Agreement or Buyer's rights under this Agreement without Seller's prior written consent. 16. ATTORNEYS' FEES. In the event a suit, action, arbitration, or other proceeding of any nature whatsoever, including without limitation any proceeding under the U.S. Bankruptcy Code, is instituted, or the services of an attorney are retained, to interpret or enforce any provision of this Agreement or with respect to any dispute relating to this Agreement, the prevailing party shall be entitled to recover from the losing party its attorneys', paralegals', accountants', and other experts' fees and alt other fees, costs, and expenses actually incurred and reasonably necessary in connection therewith. In the event of suit, action, arbitration, or other proceeding, the amount thereof shall be determined by the judge or arbitrator, shall include fees and expenses incurred on any appeal or review, and shall be in addition to all other amounts provided by law. 17. STATUTORY LAND USE DISCLAIMER. THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY NOT BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT TO LAND USE LAWS AND REGULATIONS, WHICH, IN FARM AND FOREST ZONES, MAY NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN ORS 30.930 IN ALL ZONES. BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING DEPARTMENT TO VERIFY APPROVED USES AND THE EXISTENCE OF FIRE PROTECTION FOR STRUCTURES. 18. MISCELLANEOUS. Time is of the essence of this Agreement. The facsimile transmission of any signed document including this Agreement shall be the same as delivery of an original. At the request of either party, the party delivering a document by facsimile will confirm facsimile transmission by signing and delivering a duplicate original document. This Agreement may be executed in two or more counterparts, each of which shall constitute an original and all of which together shall constitute one and the same Agreement. This Agreement contains the entire agreement and understanding of the parties with respect to the subject matter of this Agreement and supersedes all prior and contemporaneous agreements between them with respect thereto. Without limiting the provisions of Section 15 of this Agreement. this Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. The person signing this Agreement on behalf of Buyer and the person signing this Agreement on behalf of Seller each represents. covenants and warrants that such person has full right and authority to enter into this Agreement and to bind the party for whom such person signs this Agreement to the terms and provisions of this Agreement. This Agreement shall not be recorded unless the parties otherwise agree. 19. ADDENDUMS: EXHIBITS. The following named addendums and exhibits are attached to this Agreement and incorporated within this Agreement; / / none or /x/ Addendum "A" and Exhibit "A". 20. TIME FOR ACCEPTANCE. Seller has until 5:00 p.m. Pacific Time on August 18, 1999 to accept this offer. Acceptance is not effective until a copy of this Agreement which has been signed and dated by Seller is actually received by Buyer. If this offer is not so accepted, it shall expire and the Earnest Money shall be promptly refunded to Buyer. 21. SELLER'S ACCEPTANCE AND BROKERAGE AGREEMENT. Seller agrees to sell the Property on the terms and conditions in this Agreement and further agrees to pay a commission in the total amount computed in accordance with the listing agreement or other commission agreement. 22. EXECUTION DATE. The Execution Date is the later of the two dates shown beneath the parties' signatures below. CONSULT YOUR ATTORNEY. THIS DOCUMENT HAS BEEN PREPARED FOR SUBMISSION TO YOUR ATTORNEY FOR REVIEW AND APPROVAL PRIOR TO SIGNING. NO REPRESENTATION IS MADE BY THE REAL ESTATE LICENSEES NAMED IN THIS AGREEMENT AS TO THE LEGAL SUFFICIENCY OR TAX CONSEQUENCES OF THIS AGREEMENT. Buyer: Ironwood Investments Seller: Gardenburger, Inc. By /s/ Steve Morrison By /s/ Richard C. Dietz ----------------------------- -------------------------- Title Partner Title Chief Financial Officer ----------------------------- -------------------------- Execution Date 8/13/99 Execution Date 8/16/99 ------------------ ------------------- Home Phone _____________________ Home Phone ___________________ Office Phone 503-653-2514 Office Phone 503-205-1515 Fax Phone 503-653-9199 Fax Phone 503-205-1650 Address P.O. Box 1250 Address 1411 SW Morrison St. 9160 SE Lawnfield Road Suite 400 Clackamas, Oregon 97015 Portland, Oregon 97205 ADDENDUM "A" TO PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY DATED AUGUST 11, 1999 BETWEEN GARDENBURGER, INC., SELLER AND IRONWOOD INVESTMENTS, BUYER 1) EARNEST MONEY: Buyer's earnest money note shall be converted into cash upon the satisfaction of waiver of Buyer's contingencies as outlined herein. The earnest money at that time will be non-refundable to Buyer and applicable to the purchase price. 2) CONTINGENCIES: This Purchase and Sale Agreement is contingent upon the following terms and conditions: A. Buyer's satisfaction with the result of a pre-construction meeting with the City of Portland. B. Review of Seller's documents as outlined in Section 5. 3) SATISFACTION OR WAIVER OF CONTINGENCIES: If either of the contingencies (the "Contingencies") described in paragraph 2 of this Addendum is not satisfied or waived by Buyer within twenty (20) days after the Execution Date of this Agreement, Buyer may terminate this Agreement by written notice to Seller given on or before the twentieth (20th) day following the Execution Date. If Buyer gives Seller such written notice of termination, Seller shall refund the Promissory Note Earnest Money to Buyer. If Buyer fails to provide such written notice of termination on or before the twentieth (20th) day following the Execution Date, (1) the Contingencies shall be deemed to have been satisfied or waived by Buyer, (2) the Promissory Note Earnest Money shall be converted to cash, and (3) Seller shall have no obligation to refund the Earnest Money or any portion thereof to Buyer. This transaction shall be closed within five (5) business days after the date on which the Contingencies have been or are deemed to have been waived or satisfied. 4) STREET VACATION: Buyer understands and acknowledges the following: On March 13, 1996, the City of Portland City Council passed Ordinance No. 169858 approving the vacation of N.E. Airport Way east of N.E. 166th Avenue, subject to certain conditions. Among the conditions of approval were conditions requiring the owner of the Property to grant to the City of Portland a 40-foot wide access easement to Well Site No. 9 of the City of Portland's Bureau of Water Works, and grant to the City of Portland a 40-foot wide public water facility easement. Ordinance No. 169858 provides that the conditions of approval, including the granting of the above-referenced easements, must be complied with within two years after the effective date of the ordinance, which was March 13, 1996. The easements have not yet been granted to the City of Portland. EX-10.36 3 THIRD AMENDENT TO LYLE HUBBARD AGREEMENT EXHIBIT 10.36 THIRD AMENDMENT TO EMPLOYMENT AGREEMENT This Third Amendment to Employment Agreement is entered into as of this 9th day of December, 1999, by and between Gardenburger, Inc. (the "Company"), and Lyle G. Hubbard ("Hubbard"). RECITALS A. On or about May 23, 1996, the Company and Hubbard executed an Employment Agreement dated as of April 14, 1996, pursuant to which the Company agreed to employ Hubbard as its Chief Executive Officer. The employment agreement was extended and amended pursuant to an Agreement to Extend and Amend Employment Agreement dated November 16, 1998 (the "First Amendment"), and a second Agreement to Extend and Amend Employment Agreement dated as of March 5, 1999 (the "Second Amendment"). The employment agreement, as amended by the First Amendment and Second Amendment, shall hereinafter be referred to as the "Employment Agreement." B. The Company and Hubbard desire to further amend the Employment Agreement in the manner set forth below. AGREEMENTS NOW, THEREFORE, the Company and Hubbard agree as follows: 1. Section 5.5.2 of the Employment Agreement is amended to provide in its entirety as follows: 5.5.2(A) In the event of the termination of Employee's employment pursuant to Section 5.2 (Death or Disability) or Section 5.4 (termination of Employee's employment without Cause occurring in the absence of a Change in Control as that term is defined in Section 5.7), the Company shall pay to Employee: (1) The then current base compensation payable to Employee under Section 2.1 prorated through the effective date of the termination; (2) The annual target incentive bonus in effect as of the date of termination of Employee's employment prorated through the effective date of termination as if such annual target incentives had been achieved; and (3) Severance pay equal to: (i) the greater of (x) one and one-half times Employee's annual base compensation in effect -1- as of the date of termination or (y) the base compensation remaining to be paid to Employee under Section 2.1 between the effective date of such termination and the end of the employment term under this Agreement; and (ii) one and one-half times the average of the annual incentive bonuses reported as W-2 compensation to Employee for the two calendar years ending prior to the calendar year in which the termination occurs. 5.5.2(B) No other compensation, benefits or payments of any nature whatsoever shall be due and payable under this Agreement in the event of termination of Employee's employment by the Company pursuant to Section 5.2 or 5.4. 5.5.2(C) Employee agrees, as a condition to payment and receipt of such severance pay, to execute a full and complete release, in form and substance satisfactory to the Company, of any and all claims of every kind and nature whatsoever against the Company. 2. Section 5.6.1 of the Employment Agreement is amended to provide in its entirety as follows: 5.6.1 DECISION OF COMPANY NOT TO EXTEND TERM. The Company is required under Section 1.1 above to notify Employee at the end of the second year of the employment term and, in the event this Agreement is extended, at the end of each subsequent one-year period thereafter, whether the Company elects to extend this Agreement for an additional one-year term. If the Company, in its sole and absolute discretion, decides not to extend this Agreement for an additional one-year term, then the Company shall, in the event it has not already paid severance pay to Employee under Section 5.5.2(a)(3) above, pay to Employee at the end of the final year of Employee's employment, as severance pay, an amount equal to one and one-half times Employee's annual base compensation in effect as of the expiration date of Employee's employment with the Company and one and one-half times the average of the annual incentive bonuses reported as W-2 compensation to Employee for the two calendar years ending prior to the calendar year in which the termination occurs; provided, however, the Company shall have no obligation to pay such severance pay if the reason for not extending this Agreement is Employee's retirement. Employee agrees, as a condition to payment and receipt of such severance pay, to execute a full and complete release, in form and substance satisfactory to the Company, of any and all claims of every kind and nature whatsoever against the Company. The Board of Directors shall be under no obligation, in the event it elects not to extend the term of this -2- Agreement, to review Employee's performance, or offer Employee another extension, at the end of the final year of Employee's employment. 3. Section 5.7.2 of the Employment Agreement is amended to provide in its entirety as follows: 5.7.2(A) In the event that Employee's employment with the Company is terminated, either by Employee with Good Reason or by the Company without Cause, within two years after the date of occurrence of any event constituting a Change in Control (it being recognized that more than one such event may occur in which case the two-year period shall run from the date of occurrence of each such event), and provided that the condition set forth in Section 5.7.6 of this Agreement is satisfied, Employee shall be entitled to the payments described in Sections 5.5.2(a)(1) and (2) of this Agreement and, in lieu of the severance pay described in Section 5.5.2(a)(3) of this Agreement, an amount of severance pay equal to 2.99 times the sum of (i) the average of the annual base compensation paid to Employee by the Company during the "Base Period" as defined by Internal Revenue Code Section 280G(d)(2) and the regulations thereunder (hereinafter "Base Period"), and (ii) the average of the annual incentive bonuses (if any) reported as W-2 compensation to Employee during the Base Period; provided, however, for purposes of calculating the average of the annual incentive bonuses, Base Period shall not include any period ending prior to January 1, 1997. If the Base Period includes a short or incomplete taxable year, the base compensation and incentive bonuses paid in the short or incomplete year will be annualized before determining the average. 5.7.2(B) In the event that Employee's employment with the Company is terminated, either by Employee with Good Reason or by the Company without Cause, within two years after the date of occurrence of any event constituting a Change in Control (it being recognized that more than one such event may occur in which case the two-year period shall run from the date of occurrence of each such event), and if the condition set forth in Section 5.7.6 of this Agreement is not satisfied, Employee shall be entitled to the payments described in Section 5.5.2(a)(1) and (2) of this Agreement and, in lieu of the severance pay described in Section 5.5.2(a)(3) of this Agreement, the following additional amounts: (i) one and one-half times the higher of Employee's annual base compensation in effect as of the date of termination of Employee's employment or the date immediately prior to the Change in Control Date; and -3- (ii) one and one-half times the higher of Employee's annual target incentive bonus in effect as of the date of termination of Employee's employment or the date immediately prior to the Change in Control Date as if such annual target incentives had been achieved. 5.7.2(C) The severance payments described in Sections 5.7.2(a) and 5.7.2.(b) of this Agreement, which are in the alternative, shall hereinafter be referred to as the "Change in Control Severance Payment." 5.7.2(D) Except for the benefits described in Section 5.9 of this Agreement, no other compensation, benefits or payments of any nature whatsoever shall be due and payable under this Agreement in the event of termination of Employee's employment by the Company pursuant to Sections 5.7.2(a) or (b). 5.7.2(E) Employee agrees, as a condition to payment and receipt of the Change in Control Severance Payment, to execute a full and complete release, in form and substance satisfactory to the Company, of any and all claims of every kind and nature whatsoever against the Company. 4. Sections 5.7.5(a) and (b) of the Employment Agreement are amended to provide in their entirety as follows: (a) In the event that any portion of the total payments to be received by Employee in connection with a Change in Control (including the payments described in Sections 5.5.2(a)(1) and (2) of this Agreement, the Change in Control Severance Payment and any other payment or benefit payable to Employee in connection with the Change in Control pursuant to any plan, arrangement, or agreement with the Company, a person whose actions result in the Change in Control, or person affiliated with the Company or such person) (hereinafter referred to as "Total Payments") would constitute an "excess parachute payment" within the meaning of Section 280G(b) of the Code that is subject to an Excise Tax, the Total Payments otherwise payable to Employee shall be reduced to the minimum extent necessary to avoid the Excise Tax. Employee shall have the right to choose the items comprising the Total Payments to be reduced. (b) For purposes of the reduction described in Section 5.7.5(a): (1) No portion of the Total Payments, the receipt or enjoyment of which Employee has effectively waived in writing prior to the date of payment of the severance payments, shall be taken into account; (2) No portion of the Total Payments shall be taken into account which, in the opinion of Arthur Andersen LLP (or, -4- if Arthur Andersen LLP is unavailable, such tax counsel selected by Employee and reasonably acceptable to Company) ("Tax Counsel"), does not constitute a "parachute payment" within the meaning of Section 280G of the Code; (3) If Employee and the Company disagree whether any of the Total Payments will result in an Excise Tax, the matter will be conclusively resolved by an opinion of Tax Counsel; and (4) The value of any noncash benefit or any deferred payment or benefit included in the Total Payments, whether or not all or a portion of any payment or benefit is a "parachute payment" for purposes of paragraph (b)(2) above, and the amount of the reduction, if any, in the Total Payments shall be determined by Tax Counsel in accordance with the principles of Section 280G of the Code. (5) In no event shall Company be liable or responsible for the payment of or reimbursement to Employee for Employee's payment of any Excise Tax for which Employee is or may be liable in connection with any portion of the Total Payments received by Employee. 5. Section 5.7.6 of the Employment Agreement is amended to provide as follows: 5.7.6 The Change in Control Severance Payment described in Section 5.7.2(a) of this Agreement shall be paid to Employee only if the Change in Control results from an Acquiring Person acquiring control in the Company for a price per share of the Company's common stock that exceeds the applicable minimum per share price set forth below, which applicable minimum per share sale price shall be determined as of the earlier of the Change in Control Date or the date of full execution of a definitive agreement which, if consummated, will result in a Change in Control (which date shall hereinafter be referred to as the "Determination Date"): -5- Determination Date Minimum per occurring on or before share sale price ---------------------- ---------------- December 1, 1998 $10.00 March 1, 1999 $10.375 June 1, 1999 $10.75 September 1, 1999 $11.125 December 1, 1999 $11.50 March 1, 2000 $11.93 June 1, 2000 $12.36 September 1, 2000 $12.79 December 1, 2000 $13.23 March 1, 2001 $13.72 April 15, 2001 $13.96 6. Section 5.9 shall be added to the Employment Agreement and shall provide as follows: 5.9 HEALTH AND LIFE INSURANCE COVERAGE. If Employee becomes entitled to a Change in Control Severance Payment, then for a period of eighteen (18) months following the date of termination (the "Severance Period"), the Company shall pay for Employee's life, accident and health insurance benefits ("Welfare Benefits") substantially similar in all material respects to those which the Employee was receiving immediately prior to the date of termination (without giving effect to any adverse amendment to, or elimination of, such benefits made after the Change in Control). Any eligible dependent coverage Employee had as of the date of termination will continue for such period on the same terms, to the extent permitted by the applicable policies or contracts. If the terms of any benefit plan referred to in this Section 5.9 do not permit continued participation by Employee or the benefits are not substantially similar in all material respects, the Company, if possible, will arrange for other coverage at its expense providing substantially similar benefits. The coverage provided for in this Section 5.9 shall be applied against and shall reduce the period for which COBRA benefits will be provided. If Employee receives Welfare Benefits from another source during the Severance Period, then the Company's obligation to continue Welfare Benefits at the Company's expense will cease. Employee agrees to promptly report to the Company if he receives any Welfare Benefits during the Severance Period. -6- 7. No other modification or amendment to the Employment Agreement is made or intended to be made hereby. All terms, conditions, and covenants of the Employment Agreement, to the extent not inconsistent with the amendments described above, shall remain in full force and effect. GARDENBURGER, INC. By: /s/ E. Kay Stepp By: /s/ Lyle G. Hubbard ------------------------------- ------------------------------ E. Kay Stepp Lyle G. Hubbard Chair of the Board of Directors EX-10.40 4 2000 EXECUTIVE ANNUAL INCENTIVE PLAN GARDENBURGER, INC. FY2000 SENIOR MANAGEMENT TEAM INCENTIVE PROGRAM PURPOSE: Gardenburger's senior management team is compensated by three primary methods: - - market-based salary, as gauged against other targeted competitors for our talent; - - an equity opportunity that is reflected in a meaningful stock option grant program that encourages ownership and commitment to long-term goals; and - - a bonus opportunity that reflects reward for accomplishing intermediate- term goals. The incentive program is specifically designed to reward the full team when pre-determined targets are met. The business drivers are primarily GROWTH OF REVENUE and PROFITABILITY. The focus of the company today is to continue the successful evolution of the branding strategy first implemented by its CEO and to capture as large a portion of the market share as possible to reduce competition and to thwart entry by other possible competitors. At the same time, accomplishment of specific operating income levels is critical to reward both stockholders and other investors for their commitment to the strategy. The agreed approach to awards has been to acknowledge the value in team-driven, as opposed to individual, accomplishment. This fosters sharing of goals between various business components (e.g., retail grocery, club, natural, foodservice) and attainment of overall company success. This approach will continue in FY2000, with use of an individual component that allows the CEO to assess team member contribution to this broader effort. It will also reward for reaching specific, agreed goals and team participation. APPROACH AND PROCESS The key drivers that impact the business are developed in advance of the beginning of the fiscal year, and agreement is reached with all members of the team surrounding their portion of the overall goal(s). Specific targets are discussed and negotiated until the best possible business results are agreed upon, with consideration given to the needs of stockholders, investors, customers, business partners and employees. The principal drivers are growth of revenue and operating income, with the latter weighted at a higher value. Targets for FY2000 are: - - Revenue goal of $92.4 million - - Operating income target of $4.6 million 1 The bonus targets for the senior team includes 55% of base salary for CEO and 45% of base salary for all other team members. Additionally, the award is divided into two parts for the second group: - - 75% of total: Business drivers (revenue/profitability). - - 25% of total: CEO discretionary award based on individual contribution. This means that the first component may grow or shrink as a function of the calculation, while the second is fixed as a maximum amount relative to base salary. The first component would be paid for business driver accomplishment. A matrix calculation will be used to track the percent accomplishment of each driver against the other. There is no distinction between business product areas; overall sales accomplishment is used. This relationship is expressed as a geometric grid, which has been established utilizing the business plan and laying out rates of payout against the two axes. The two factors work in tandem with each other so that success in one may partially offset lack of full attainment in the other. Benchmark points for this relationship include: - - An uncapped maximum on sales growth to reward "exceptional" performance. - - A minimum threshold, with no payout, at $80.0 million in sales and no operating income. - - A "circuit-breaker" factor which provides for no payout in the event of an OI loss at any revenue level. The second component would be paid based upon the CEO's evaluation of the individual team member's contribution to the overall business success. Factors which may be used by the CEO could include (but are not limited to) completion of agreed departmental goals, leadership on company-wide tasks, or participation and leadership in senior team business processes. The award could be at any percentage between 0-25%. Benchmark points for this component include: - - An absolute maximum of 25% against base salary for the discretionary award, independent of the revenue and profitability calculation. All rewards would be paid at conclusion of the FY, and after completion and verification of the year-end results by the company's Finance team. 2 EX-10.41 5 RETENTION AGREEMENT - LYLE HUBBARD EXHIBIT 10.41 RETENTION INCENTIVE AGREEMENT THIS RETENTION INCENTIVE AGREEMENT, dated November 10, 1999, is made by and between Gardenburger, Inc., an Oregon corporation (the "Company"), and Lyle G. Hubbard ("Executive"). WHEREAS, the Board of Directors of the Company recognizes the importance to the Company of the continuity of management; and WHEREAS, the Board has determined that voluntary terminations by key management employees could occur as the result of limited retention incentives; and WHEREAS, the Board has determined that action should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their assigned duties; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company and Executive hereby agree as follows: 1. TERM OF AGREEMENT. This agreement shall commence on the date hereof and shall continue in effect through December 31, 2000, unless sooner terminated due to a Change in Control. 2. NATURE OF THE AGREEMENT. In order to induce the Executive to remain in the employ of the Company, the Company agrees, under the conditions described herein, to pay Executive a retention incentive payment in the amount of $500,000. No amount or benefit shall be payable under this Agreement unless Executive remains employed at the end of the Term of Agreement and the other conditions set forth herein are satisfied, or unless a Change in Control event, as defined in Section 3, occurs. 3. CHANGE IN CONTROL; DEFINITION. A Change in Control shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 3 are satisfied; or -1- (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person -2- (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur in the event of a Management Change in Control. A Management Change in Control shall mean a Change in Control pursuant to which Executive (alone or with others) acquires or retains, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company (whether through the ownership of voting securities, by contract, or otherwise). 4. CONDITIONS OF AWARD. (a) Employment. Executive is currently employed by the Company and, subject to (i), (ii), and (iii) below, generally must continue to be employed during the Term of Agreement in order to be eligible for this award. (i) If Executive voluntarily terminates employment before December 31, 2000, no award or prorated award will be made. (ii) If Executive's employment is terminated for Cause before December 31, 2000, no award or prorated award will be made. For the purpose of this Agreement, "Cause" shall be interpreted broadly to mean (a) failure to adequately perform job duties (other than by reason of a disability that renders him unable to perform the essential functions of his job with or without reasonable accommodation) after imposition of progressive disciplinary process; (b) any act of personal dishonesty, insubordination, breach of fiduciary duty, or willful misconduct by Executive; (c) Executive's use of illegal drugs, or use of lawful drugs or alcohol in a manner violative of the Company's written policies; (d) objective evidence of Executive's wrongful discrimination against or harassment of another person1; (e) any conduct by Executive that may significantly disparage the integrity or reputation of the Company; (f) Executive's diversion of any corporate opportunity or other similarly serious conflict of interest inuring to the Company's detriment; (g) conduct by Executive significantly endangering the life, safety, or health of self or others; (h) Executive's violation of any law, rule, or regulation (other than minor traffic violations or similar minor offenses); or (i) any act or failure to act by Executive of similar seriousness to those listed above. (iii) If Executive's employment is terminated without Cause (including by reason of death or disability) before December 31, 2000, then -3- - ------------------------- 1 Sworn statements shall satisfy this requirement of objective evidence. a prorated award will be made. The award will be prorated to reflect the number of actual days Executive was actively employed after the complete execution of this Agreement as compared to the number of days between the execution of this Agreement and December 31, 2000. (b) Change in Control. Should a Change in Control, as defined in Section 3, be finalized and completed before December 31, 2000, then provided all other eligibility criteria are satisfied, Executive will be entitled to payment in full of the award on the date the Change in Control is finalized and completed and this Agreement shall terminate. 5. PAYMENT. The payment of the $500,000 retention incentive award (or portion thereof, if applicable) will be made within five (5) business days after December 31, 2000, or the date that a Change in Control is finalized and completed, whichever occurs first. Payment will be made after statutorily required taxes and other legally authorized deductions are withheld. 6. MISCELLANEOUS. (a) Notices. All notices, consents, and other communications if required will be forwarded by U.S. Postal Service or express courier service: To the Company: Gardenburger, Inc. Suite 400 1411 S.W. Morrison Street Portland, Oregon 97205 Fax Number: (503) 205-1576 Attn: Vice President, Human Resources To Executive: Lyle G. Hubbard At the last address shown on the records of the Company (b) Assignment. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives and successors, but, except as hereinafter provided, neither this Agreement nor any right hereunder may be assigned or transferred by either party hereto, or by any beneficiary or any other person, nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy or other legal process of any kind against Executive, Executive's beneficiary or any other person. Notwithstanding the foregoing, any person or business succeeding to all or substantially all of the business of the Company by stock purchase, merger, consolidation, purchase of assets or otherwise, shall be bound by and shall adopt and assume this Agreement, and the Company shall obtain the express assumption of this Agreement by such successor. (c) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Oregon, except to the extent otherwise expressly provided in this Agreement. (d) Amendment. This Agreement may be amended only by a written instrument signed by the parties hereto, which makes specific reference to this Agreement. -4- (e) Severability. If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof. (f) Other Benefits. Nothing in this Agreement shall limit or replace the compensation or benefits payable to Executive, or otherwise adversely affect Executive's rights, under any other benefit plan, program or agreement to which Executive is a party. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by the chair of its board of directors, and Executive has set his hand, as of the date first written above. GARDENBURGER, INC. /s/ Lyle G. Hubbard By: /s/ E. Kay Stepp - ------------------------------- -------------------------------- Lyle G. Hubbard E. Kay Stepp Chair of the Board of Directors -5- EX-10.42 6 FORM OF RETENTION INCENTIVE AGREEMENT EXHIBIT 10.42 FORM OF RETENTION INCENTIVE AGREEMENT THIS RETENTION INCENTIVE AGREEMENT, dated _______________, 1999, is made by and between Gardenburger, Inc., an Oregon corporation (the "Company"), and XXXX XXXXX ("Executive"). WHEREAS, the Board of Directors of the Company recognizes the importance to the Company of the continuity of management; and WHEREAS, the Board, after reviewing financial data for the first half of the current fiscal year, and recognized the probability that there will be no incentive payments to Senior Management Team members for FY1999; and WHEREAS, the Board, after discussions with the Chief Executive Officer and the Vice President of Human Resources, determined that voluntary terminations by key management employees could occur as the result of limited retention incentives; and WHEREAS, the Board determined at its meeting of July 13, 1999, that action should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their assigned duties; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company and Executive hereby agree as follows: 1. Term of Agreement. This agreement shall commence on the date hereof and shall continue in effect through December 31, 2000, unless sooner terminated due to a Change in Control. 2. Nature of the Agreement. In order to induce the Executive to remain in the employ of the Company, the Company agrees, under the conditions described herein, to pay Executive the retention incentive payment described herein. No amount or benefit shall be payable under this Agreement unless Executive remains employed at the end of Term of Agreement, or unless a Change in Control event, as defined in Section 3, occurs. 3. Change in Control; Definition. A Change in Control shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition 1 by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 3 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or 2 (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur in the event of a Management Change in Control. A Management Change in Control shall mean a Change in Control pursuant to which Executive (alone or with others) acquires or retains, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company (whether through the ownership of voting securities, by contract, or otherwise). 4. Conditions of Award. (a) Employment. Executive is currently employed by the Company, and subject to (i), (ii) and (iii) below generally must continue to be employed during the Term of Agreement in order to be eligible for this award. (i) If Executive voluntarily terminates employment before December 31, 2000, no award or prorated award will be made. (ii) If Executive's employment is terminated for Cause before December 31, 2000, no award or prorated award will be made. For the purpose of this Agreement, "Cause" shall be interpreted broadly to mean (a) failure to adequately perform job duties (other than by reason of a disability that renders him or her unable to perform the essential functions of his or her job with or without reasonable accommodation) after imposition of progressive disciplinary process; (b) any act of 3 personal dishonesty, insubordination, breach of fiduciary duty, or willful misconduct by the Executive; (c) Executive's use of illegal drugs, or use of lawful drugs or alcohol in a manner violative of the Company's written policies; (d) objective evidence of Executive's wrongful discrimination against or harassment of another person1 (e) any conduct by Executive that may significantly disparage the integrity or reputation of the Company; (f) Executive's diversion of any corporate opportunity or other similarly serious conflict of interest inuring to the Company's detriment; (g) conduct by the Executive significantly endangering the life, safety or health of self or others; (h) Executive's violation of any law, rule or regulation (other than minor traffic violations or similar minor offenses) or (i) any act or failure to act by Executive of similar seriousness to those listed above. (iii) If Executive's employment is terminated without Cause (including by reason of death or disability) before December 31, 2000, then a pro-rated award will be made. The award will be prorated to reflect the number of actual days Executive was actively employed after the complete execution of this Agreement as compared to the number of days between the execution of this Agreement and December 31, 2000. Nothing in this Section alters or modifies the "at-will" character of Executive's employment in any manner. (b) Team Participation. Executive currently participates as a member of the Company's Senior Management Team, and must continue as an active and productive member of that group at the direction and invitation of the Chief Executive Officer in order to be eligible for this award. (c) Change in Control. Should a Change in Control, as defined in Section 3, be finalized before December 31, 2000, then provided all other eligibility criteria are satisfied, Executive will be eligible for the award on the date the Change in Control is finalized and this Agreement shall terminate. 5. Award Compensation and Process. (a) Amount of Award. The award is calculated as one (1) times the current annual base salary of $XXX,XXX.XX. This amount excludes any bonuses, other incentives or other compensation the person may be entitled to receive. (b) Payment. The payment of the award will be made within five (5) business days after December 31, 2000, or the date that a Change in Control is finalized, whichever occurs first. Payment will be made after statutorily required taxes and other legally authorized deductions are withheld. - ------------------------------- 1 Sworn statements shall satisfy this requirement of objective evidence. 4 6. Miscellaneous. (a) Notices. All notices, consents and other communications if required will be forwarded by U.S. Postal Service or express courier service: To the Company: Gardenburger, Inc. 1411 SW Morrison St., Suite 400 Portland, OR 97205 Fax Number: 503-205-1576 Attn: Vice President, Human Resources To Executive: XXXX XXXXX At the last address Shown on the records of the Company (b) Assignment. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives and successors, but, except as hereinafter provided, neither this Agreement nor any right hereunder may be assigned or transferred by either party hereto, or by any beneficiary or any other person, nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy or other legal process of any kind against Executive, Executive's beneficiary or any other person. Notwithstanding the foregoing, any person or business succeeding to all or substantially all of the business of the Company by stock purchase, merger, consolidation, purchase of assets or otherwise, shall be bound by and shall adopt and assume this Agreement, and the Company shall obtain the express assumption of this Agreement by such successor. (c) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Oregon, except to the extent otherwise expressly provided in this Agreement. (d) Amendment. This Agreement may only be amended by a written instrument signed by the parties hereto, which makes specific reference to this Agreement. (e) Severability. If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof. (f) Other Benefits. Nothing in this Agreement shall limit or replace the compensation or benefits payable to Executive, or otherwise adversely affect Executive's rights, under any other benefit plan, program or agreement to which Executive is a party. 5 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officers, and Executive has set his or her hand, as of the date first written above. XXXX XXXXXX GARDENBURGER, INC. _________________________ By: _____________________ Date: ____________________ Title: ____________________ Date: ____________________ EX-10.43 7 FORM OF CHANGE IN CONTROL AGREEMENT EXHIBIT 10.43 CHANGE IN CONTROL AGREEMENT THIS CHANGE IN CONTROL AGREEMENT, dated ________________, 1999, is made by and between Gardenburger, Inc., an Oregon corporation (the "Company"), and XXXX XXXXX (the "Executive"). WHEREAS, the Board of Directors of the Company considers it essential to the best interests of the Company to foster the continued employment of key management personnel; and WHEREAS, the Board recognizes that, as is the case with many publicly-held corporations, the possibility of a Change in Control (as defined below) exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company; and WHEREAS, the Board has determined at its meeting of July 13, 1999, that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein, the Company and the Executive hereby agree as follows: 1. Term of Agreement. This agreement shall commence on the date hereof and shall continue in effect through December 31, 2001; provided however, that commencing on January 1, 2002, and each January 1 thereafter, the term of this agreement shall automatically be extended for one additional year unless, not later than September 30 of the preceding year, the Company or the Executive shall have given notice not to extend this Agreement or a Change in Control shall have occurred prior to such January 1; and further provided, however, that if a Change in Control shall have occurred during the term of this Agreement, this Agreement shall continue in effect for a period of twenty-four (24) months beyond the date on which such Change in Control occurred. This Agreement shall automatically terminate twenty-four months after a Change in Control unless expressly extended by the Board of Directors of the Company. 2. Nature of the Agreement. In order to induce the Executive to remain in the employ of the Company, the Company agrees, under the conditions described herein, to pay the Executive the severance payments and benefits described herein. EXCEPT AS PROVIDED IN SECTION 6 HEREOF, NO AMOUNT OR BENEFIT SHALL BE PAYABLE UNDER THIS AGREEMENT UNLESS EXECUTIVE IS EMPLOYED BY THE COMPANY IMMEDIATELY PRIOR TO THE CHANGE IN CONTROL AND THERE SHALL HAVE BEEN A TERMINATION OF THE EXECUTIVE'S EMPLOYMENT WITH THE COMPANY FOLLOWING THE CHANGE IN CONTROL AND DURING THE TERM OF THIS AGREEMENT. The sole exception to this rule is that benefits will be payable prior to a Change in Control if Executive has been terminated by the Company at the request of a third party who has taken substantial steps reasonably calculated to effect a Change in Control. Hence, except in the limited circumstance set forth above, if a termination of Executive's employment occurs prior to a Change in Control, then no severance and/or other benefits shall be payable to Executive by the Company under this Agreement. 3. Change in Control. For purposes of this Agreement, a "Change in Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (i), (ii) and (iii) of subsection (c) of this Section 3 are satisfied; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (i) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding the Company, any employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (iii) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation with respect to which following such sale or other disposition, (A) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors, and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. Notwithstanding the foregoing, a Change in Control shall not be deemed to occur in the event of a Management Change in Control. A Management Change in Control shall mean a Change in Control pursuant to which Executive (alone or with others) acquires or retains, directly or indirectly, the power to direct or cause the direction of the management and policies of the Company (whether through the ownership of voting securities, by contract, or otherwise). 4. Termination. The Executive's employment with the Company may be terminated under the following circumstances: (a) Death or Disability. The Executive's employment with the Company shall terminate upon Executive's death or the occurrence of a disability that renders him/her unable to perform the essential functions of his/her job with or without reasonable accommodation. (b) Cause. The Company may terminate the Executive's employment hereunder for Cause. For purposes of this Agreement, the Company shall have "Cause" to terminate the Executive's employment with the Company upon the Executive's: (i) conviction for the commission of a felony; 1 (ii) failure to substantially perform his duties hereunder after written warning (Executive shall have at least thirty (30) days after receipt of first written warning to correct such deficiency or deficiencies) ; (iii) intentional or grossly negligent conduct that is demonstrably and significantly injurious to the Company or its affiliates; (iv) self-dealing or diversion of a corporate opportunity to the detriment of the Company; or (v) violation of a key Company policy (including, but not limited to, acts of harassment or discrimination, or use of unlawful drugs or drunkenness on Company property during normal work hours); provided that, termination will not be deemed to have been for "Cause" unless and until a copy of a resolution duly adopted by the affirmative vote of not less than two-thirds of the entire membership of the Board of Directors at a meeting called and held for that purpose (after reasonable notice to Executive and opportunity for Executive, together with counsel, to be heard by the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct constituting Cause as defined above and specifying the particulars for such finding in detail, has been delivered to Executive. The parties agree that the provisions for a Board resolution and the process called for by this paragraph do not - -------------------------- 1 In the event of Executive's arrest or indictment on felony charges, payments of severance and other benefits under this Agreement shall be withheld until guilt or innocence is determined. For the purposes of this Agreement, Executive's pleading of no lo contendre to a felony charge shall be considered a conviction. require a delay of Executive's termination; instead, the general purpose of such process is to determine whether any involuntary termination is with or without Cause and/or if reinstatement is warranted. (c) Without Cause. Either the Executive or the Company may terminate Executive's employment with the Company immediately without cause and without prior notice. (d) Good Reason. The Executive may terminate his employment with the Company for Good Reason. Good Reason shall mean the occurrence, after a Change in Control and during the term of this Agreement, (without the Executive's written consent) of any one of the following acts by the Company, or failures by the Company to act: (i) the assignment to the Executive of any duties inconsistent with Executive's status as Vice President, _____________________, or a substantial adverse alteration in the nature or status of Executive's responsibilities; or (ii) any reduction by the Company in the Executive's annual base salary as in effect immediately prior to the Change in Control or as the same may be increased from time to time; or (iii) the failure by the Company to pay to Executive any portion of Executive's current salary or incentive compensation, or to pay to Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; or (iv) (a) the failure by the Company to continue in effect any on-going compensation plan in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, including but not limited to, as applicable, stock options, restricted stock, stock appreciation rights, incentive compensation, bonus, retention bonus and other plans, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan; or (b) the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; or (v) (a) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's retirement savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediately prior to the Change in Control, (b) the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material perquisite or material fringe benefit enjoyed by the Executive immediately prior to the Change in Control, provided that no substantially similar fringe benefit or perquisite has been provided, or (c) the failure by the Company to provide the Executive with at least the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the provisions of the original employment offer, or the Company's normal vacation policy in effect immediately prior to the Change in Control, whichever is more favorable to the Executive; or (vi) the relocation of the Executive's principal place of employment to a location more than 35 miles from the Executive's principal place of employment as of the date hereof or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's business travel obligations immediately prior to the Change in Control. Notwithstanding the foregoing, no event shall constitute "Good Reason" unless the Executive shall have notified the Company in writing of the conduct allegedly constituting Good Reason and the Company shall have failed to correct such conduct within thirty (30) days of the date of its receipt of such written notice from the Executive. Moreover, unless Executive shall have notified the Company of the conduct allegedly constituting Good Reason within six months of the first occurrence of such conduct, then Executive shall have waived his/her right to claim that such conduct constitutes "Good Reason" under this Agreement. 5. Termination Procedure. (a) Notice of Termination. Any termination of the Executive's employment by the Company or by the Executive (other than termination due to the death of the Executive) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 8. For purposes of this Agreement, a "Notice of Termination" shall mean a notice that shall indicate the specific provision in this Agreement relied upon and, if applicable, shall identify in reasonable detail the reason for termination of the Executive's employment under the provision so indicated. (b) Date of Termination. "Date of Termination" shall mean: (i) if the Executive's employment is terminated by his or her death, the date of his or her death, or (ii) if the Executive's employment is terminated pursuant to any other reason or Section of this Agreement, the date of termination shall be the date that Notice of Termination is issued. 6. Compensation Upon Termination. (a) Termination Due to Death or Disability. If Executive's employment is terminated under Section 4(a), except as provided in Section 6(d) below, the Company shall have no further obligations to Executive under this Agreement. (b) Termination by Company without Cause or by Executive for Good Reason. Upon termination of Executive's employment after a Change in Control and during the term of this Agreement by the Company without Cause or by Executive for Good Reason hereunder,2 then, in lieu of any further salary, bonus, or other incentive payments for periods subsequent to the Date of Termination (with the sole exception of any retention bonus due in the future) and in lieu of any severance benefit otherwise payable to the Executive: (i) Salary. The Company shall pay to the Executive a lump sum cash severance payment, within thirty (30) days of the Date of Termination, equal to one and one-half (1 1/2) times the higher of the Executive's annual base salary as of the Date of Termination or the Executive's annual base salary in effect immediately prior to the Change in Control. (ii) Bonuses and Incentives. The Company shall pay to the Executive a lump sum in cash, within thirty (30) days of the Date of Termination, equal to one and one-half (1 1/2) times the higher of the Executive's annual target incentive bonus in effect as of the Date of Termination or the date immediately prior to the Change in Control as if such annual target incentives had been achieved. (iii) Health and Life Insurance Coverage. During a period of eighteen (18) months (the "Severance Period") the Company shall pay for Executive's life, accident and health insurance benefits ("Welfare Benefits") substantially similar in all material respects to those which the Executive is receiving immediately prior to the Date of Termination (without giving effect to any adverse amendment to, or elimination of, such benefits made after a Change in Control). Any eligible dependent coverage Executive had as of the Date of Termination will continue for such period on the same terms, to the extent permitted by the applicable policies or contracts. If the terms of any benefit plan referred to in this Section 6(b)(iii) do not permit continued participation by Executive or the benefits are not substantially similar in all material respects the Company, if possible, will arrange for other coverage at its expense providing substantially similar benefits. The coverage provided for in this Section shall be applied against and reduces the period for which COBRA benefits will be provided. If the Executive receives Welfare Benefits from another source during the Severance Period, then the Company's obligation to continue Welfare Benefits at the Company's expense will cease. The Executive agrees to promptly report to the Company if he receives any Welfare Benefits during the Severance Period. (c) Termination by the Company for Cause or by Executive Other than for Good Reason. If the Executive's employment shall be terminated after a Change in Control and during the term of this Agreement by the Company for Cause or by the Executive other than for Good Reason, then, subject to Section 6(d) below, the Company shall have no obligations to Executive under this Agreement. - ------------------------- 2 As provided in Section 2, this section 6(b) shall also apply in the event Executive is terminated prior to a Change in Control at the request of a third party who has taken substantial steps reasonably calculated to effect a Change in Control. (d) Additional Payments. Following any termination of the Executive's employment following the Change in Control and during the term of this Agreement, (i) the Company shall pay the Executive all unpaid amounts, if any, to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, if such payments are due on or before the Date of Termination, (ii) within ten (10) days of the Date of Termination, the Company shall pay the Executive, or his legal representatives or estate, as applicable, the Executive's full salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, together with all compensation and benefits normally payable to the Executive at Termination under the ordinary terms of the Company's compensation and benefit plans, programs or arrangements and (iii) the Company shall pay to the Executive the Executive's legally required post-termination compensation and benefits as such payments become due (such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's retirement savings, insurance and other compensation and benefit plans, programs and arrangements). 7. Adjustment of Benefits. (a) Maximization of Amount. Notwithstanding anything in this Agreement to the contrary, if, in the opinion of independent tax accountants or counsel selected and retained by the Company and reasonably acceptable to Executive (referred to hereinafter as "Tax Counsel"), any portion of the compensation and benefits payable, or to be provided, to Executive by the Company under this Agreement, any other agreement between Executive and the Company, or any plan or policy of the Company, are to be treated as an Excess Parachute Payment subject in whole or in part to the excise tax imposed under Internal Revenue Code Section 4999 (the "Excise Tax"), then the Company shall direct Tax Counsel to determine and compare Executive's net after-tax income under each of the following assumptions: (i) all of the compensation and benefits payable by the Company under all such arrangements are paid to Executive ("Full Severance") and Executive pays all applicable federal, state and local taxes, including, without limitation, the Excise Tax; or (ii) the total amount of the compensation and benefits payable by the Company under all such arrangements is reduced ("Reduced Severance") such that no Excess Parachute Payment results and the Excise Tax is not triggered but otherwise Executive pays all applicable federal, state and local taxes. If Tax Counsel's determination shows that payment to Executive of Full Severance provides Executive with higher net after-tax income, then the Full Severance shall be payable to Executive. If Tax Counsel's determination shows that Reduced Severance provides Executive with higher net after-tax income, the Reduced Severance shall be payable to Executive. In all cases, the parties agree that Executive shall bear the cost of the Excise Tax, if any, and all applicable federal, state, and local taxes (including penalties and interest). If a Full Severance is paid, Tax Counsel shall provide Executive with a written summary showing the amount of the Excess Parachute Payment and the estimated Excise Tax to be paid. If a Reduced Severance is paid, Tax Counsel shall provide to Executive a written opinion that the total amount of payments made to Executive do not comprise an Excess Parachute Payment and that no Excise Tax is due. (b) Reduction of Amount. In the event that the amount of any Severance Payments which would be payable to or for the benefit of Executive under this Agreement are reduced to comply with this Section, the Company and Executive jointly shall decide which Severance Payments are to be reduced; provided, however, the Company shall not unreasonably deny the requests and preferences of Executive in making this determination. (c) Cooperation of Parties. This Section 7 shall be interpreted so as to maximize the net after-tax dollar value to Executive. In determining whether any Excess Parachute Payment exists and the most advantageous outcome for Executive, the parties shall take into account all provisions of Internal Revenue Code Section 280G and the regulations thereunder, including making appropriate adjustments to such calculation for amounts established to be Reasonable Compensation pursuant to Internal Revenue Code Section 280G(b)(4) and amounts paid under qualified plans pursuant to Internal Revenue Code Section 280G(b)(6). Both the Company and Executive shall cooperate fully with Tax Counsel and provide Tax Counsel with all compensation and benefit amounts, personal tax information and other information necessary or helpful in calculating such net after-tax amounts. The parties agree that all fees and expenses of Tax Counsel shall be borne solely by the Company. If Executive disputes Tax Counsel's calculations, the dispute shall be resolved in accordance with Section 7(f) below. In connection with any Internal Revenue Service examination, audit or other inquiry related to the payment of Severance Payments, the calculation of an Excess Parachute Payment, or the amount or existence of any related tax liability (including income tax and Excise Tax), the Company and Executive agree to cooperate in providing evidence to the Internal Revenue Service (and, if applicable, to state revenue departments). Furthermore, if in the context of a tax exam, audit, or proceeding the Company plans to contest the amount or existence of an Excess Parachute Payment or the applicable Excise Tax, the Company shall promptly notify Executive in writing and Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim. The Company shall bear and pay directly all legal and administrative costs incurred in connection with such contest. (d) Correction of Determination. If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or pursuant to an opinion of Tax Counsel, that, notwithstanding the good faith of the Company and Executive in applying the terms of this Section 7, either (i) all or a portion of the amounts paid to Executive unintentionally constituted an Excess Parachute Payment and triggered the Excise Tax, although the payments to Executive were reduced in an effort to avoid such result; or (ii) the amount paid to Executive was reduced by more than was necessary to avoid triggering the Excise Tax, then the parties shall make the applicable correction that will achieve the goal described in Section 7(c) hereof. In the event the error referred to in clause (i) hereof occurs, Executive shall repay to the Company, within ten (10) days after the error is discovered, the amount necessary to avoid the Excise Tax; provided, however, that if Executive, based on advice from Tax Counsel and Executive's own tax advisor, determines that the return of such amounts will not serve to eliminate the Excess Parachute Payment and the Excise Tax, the Company shall then be obligated to pay to Executive, within ten (10) days after Executive notifies the Company of Executive's determination, the total amount by which the original amount of Executive's compensation and benefits were reduced pursuant to the terms of Section 7(a) and (b) hereof. In the event the error referred to in clause (ii) occurs, the Company shall pay to Executive, within ten (10) days after the error is discovered, the maximum amount of the compensation and benefits that were reduced pursuant to the terms of Section 7(a) and (b) hereof that Executive may receive without triggering the Excise Tax. 8. Miscellaneous. (a) Notices. All notices, consents and other communications required or authorized to be given by either party to the other under this Agreement shall be in writing and shall be deemed to have been given or submitted (i) upon actual receipt if delivered in person or by facsimile transmission with confirmation of transmission, (ii) upon the earlier of actual receipt or the expiration of two (2) business days after sending by express courier (such as U.P.S. or Federal Express), and (iii) upon the earlier of actual receipt or the expiration of seven (7) business days after mailing if sent by registered or certified mail, postage prepaid, to the parties at the following addresses: To the Company: Gardenburger, Inc. 1411 SW Morrison St., Suite 400 Portland, OR 97205 Fax Number: 503-205-1595 Attn: Chief Executive Officer With a Copy to: Gardenburger, Inc. 1411 SW Morrison St., Suite 400 Portland, OR 97205 Fax Number: 503-205-1576 Attn: Vice President, Human Resources To Executive: XXXX XXXXX At the last address and fax number Shown on the records of the Company Executive shall be responsible for providing the Company with a current address. Either party may change its address (and facsimile number) for purposes of notices under this Agreement by providing notice to the other party in the manner set forth above. (b) Assignment. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives and successors, but, except as hereinafter provided, neither this Agreement nor any right hereunder may be assigned or transferred by either party hereto, or by any beneficiary or any other person, or be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy or other legal process of any kind against Executive, Executive's beneficiary or any other person. Notwithstanding the foregoing, any person or business succeeding to all or substantially all of the business of the Company by stock purchase, merger, consolidation, purchase of assets or otherwise, shall be bound by and shall adopt and assume this Agreement, and the Company shall obtain the express assumption of this Agreement by such successor. (c) No Obligation to Fund. The agreement of the Company (or its successor) to make payments to Executive hereunder shall represent the unsecured obligation of the Company (and its successor), except to the extent (i) the terms of any other agreement, plan or arrangement pertaining to the parties provide for funding; or (ii) the Company (or its successor) in its sole discretion elects in whole or in part to fund the Company's obligations under this Agreement pursuant to a trust arrangement or otherwise. (d) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Oregon, except to the extent otherwise expressly provided in this Agreement. (e) Arbitration of Disputes; Expenses. All claims by Executive for compensation and benefits under this Agreement shall be directed to and determined by the Board of Directors and shall be in writing. Any denial by the Board of a claim for benefits under this Agreement shall be delivered to Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Board shall afford a reasonable opportunity to Executive for a review of a decision denying a claim and shall further allow Executive to appeal to the Board a decision of the Board within sixty (60) days after notification by the Board that Executive's claim has been denied. Any further dispute or controversy arising under or in connection with this agreement shall be settled exclusively by arbitration in Portland, Oregon, in accordance with the commercial arbitration rules of the American Arbitration Association then in effect. The arbitration award shall be final and binding upon the parties and judgment upon the award may be entered in any court having jurisdiction. In the event either party incurs legal fees and other expenses with relation to an action seeking to obtain or to enforce any rights or benefits provided by this Agreement and is successful, in whole or in part, in obtaining or enforcing any such rights or benefits through settlement, arbitration or otherwise, the non-prevailing party shall promptly pay the prevailing party's reasonable legal fees and expenses incurred in enforcing this Agreement and the fees of the arbitrator(s). Except to the extent provided in the preceding sentence, each party shall pay its own legal fees and other expenses associated with any dispute, provided, however, that the fee for the arbitrator(s) shall be shared equally. (f) Consulting and Subsequent Employment. Nothing in this Agreement shall preclude the Company or its successors from employing Executive in a consulting or regular employment capacity following termination of employment under the conditions of this Agreement. (g) Amendment. This Agreement may only be amended by a written instrument signed by the parties hereto, which makes specific reference to this Agreement. (h) Severability. If any court of competent jurisdiction shall hold any provision of this Agreement invalid or unenforceable, such holding shall not invalidate or render unenforceable any other provisions hereof. (i) Other Benefits. Except as set forth in Section 6(b), nothing in this Agreement shall limit or replace the compensation or benefits payable to Executive, or otherwise adversely affect Executive's rights, under any other benefit plan, program or agreement to which Executive is a party. (j) Entire Agreement. This document is the entire, final, and complete agreement and understanding of the parties with respect to the topics discussed herein and, if this Agreement directly conflicts with any other written and oral agreements made or executed by and between the parties or their representatives, this Agreement shall supersede all such agreements. 9. Release of Claims. As a precondition to receipt of the severance and other benefits provided in Section 6(b) of this Agreement, Executive acknowledges and understands that he or she must sign a Waiver and Release of Claims Agreement. Such Agreement shall be substantially similar to the Agreement attached as Exhibit A. Executive understands that he/she will not be entitled to receive any payments until he/she executes and delivers the Waiver and Release of Claims Agreement, and the revocation period set forth in the Waiver and Release of Claims Agreement has run. 10. Non-Competition. Executive understands that a desire for an amicable long-term relationship between Company and Executive, even after the termination of Executive's employment, is an important aspect of the Company's entering into this Agreement. Therefore, as a precondition of receipt of any benefits under Section 6(b) of this Agreement, Executive agrees that within fifteen (15) days after the termination of his/her employment with the Company, he/she will execute the Non-Competition Agreement attached to this Agreement as Attachment B. He/She acknowledges that the Non-Competition Agreement will be entered into by both parties after his/her employment with the Company is concluded. Executive shall not be entitled to receive any benefits under this Agreement until he/she has executed and returned such Non-Competition Agreement to the Company without alteration. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officers, and Executive has set his or her hand, as of the date first written above. XXXX XXXXX GARDENBURGER, INC. ________________________________ By:______________________________________ Date:___________________________ Title:___________________________________ Date:____________________________________ EX-23 8 ARTHUR ANDERSEN CONSENT EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As Independent public accountants, we hereby consent to the incorporation of our reports dated November 5, 1999, included in this Form 10-K into the Company's previously filed Registration Statements Nos. 33-64622, 33-64624, 33-76764, 333-79451, 333-79455 and 333-92665 on Form S-8 and Nos. 333-56775 and 333-79653 on Form S-3. ARTHUR ANDERSEN LLP Portland, Oregon, December 23, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Company's balance sheets and related statements of operations for the nine month period ended September 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS SEP-30-1999 JAN-01-1999 SEP-30-1999 7,033 0 6,434 301 7,268 27,416 14,235 3,960 52,702 15,675 20,000 0 32,147 10,619 (20,938) 52,702 60,106 60,106 34,334 34,334 55,769 190 1,596 (31,389) 11,223 (22,146) 0 0 0 (22,146) (2.51) (2.51)
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