10-K/A 1 a2101671z10-ka.htm 10-K/A
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K/A-1


ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended: September 30, 2002

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0- 20330

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

OREGON
(State or other jurisdiction
of incorporation or organization)		   93-0886359
(I.R.S. Employer
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    ý        No    >bal>

        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.    ý

        The aggregate market value of the voting stock held by non-affiliates of the Registrant was $2,039,863 as of December 16, 2002 based upon the average bid and asked prices as reported by the NASD's OTC Bulletin Board ($0.28).

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes    o        No    ý

        The aggregate market value of the voting and common equity held by non-affiliates of the Registrant was $8,013,746 computed by reference to the average of the bid and asked prices as reported by the NASD's OTC Bulletin Board ($1.10) as of the last business day of the Registrant's most recently completed second fiscal quarter, March 28, 2002.

        The number of shares outstanding of the Registrant's Common Stock as of December 16, 2002 was 9,002,101 shares.

Documents Incorporated by Reference

        The Registrant has incorporated into Part III of Form 10-K by reference portions of its Proxy Statement for its 2003 Annual Meeting of Shareholders.


GARDENBURGER, INC.
2002 FORM 10-K/A-1 ANNUAL REPORT
TABLE OF CONTENTS

 
   Page
PART II

Item 8. Statements and Supplementary Data
 
2

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
 
3

Signatures
 
4

Certifications
 
5

1


PART II

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 15 of Part IV of this document. Unaudited quarterly financial data for each of the eight quarters in the period ended September 30, 2002 is as follows:

In thousands, except per share data
   1st Quarter
   2nd Quarter
   3rd Quarter
   4th Quarter
  
2002                          
Net sales(1)   $ 10,847   $ 11,603   $ 17,083   $ 15,063  
Gross margin(1)     4,183     4,633     7,614     6,477  
Net income (loss)     (1,150 )   (2,788 )   221     (157 )
Basic and diluted net income (loss) per share     (0.13 )   (0.31 )   0.02     (0.02 )
2001                          
Net sales(1)   $ 10,301   $ 10,210   $ 16,530   $ 13,710  
Gross margin(1)     3,643     2,737     6,905     4,908  
Net income (loss)     (2,669 )   (3,651 )   322     (1,158 )
Basic and diluted net income (loss) per share     (0.30 )   (0.41 )   0.04     (0.13 )
(1)
Net sales and gross margin differ from amounts previously reported for the first quarter of fiscal 2002 and all four quarters of fiscal 2001 due to the reclassification of costs incurred for certain sales incentive programs and promotional costs as a reduction of revenue rather than as sales and marketing expense. See Note 2 of the Notes to Financial Statements appearing in this report as described above.

Risk Relating To Arthur Andersen LLP'S Lack Of Consent

        Arthur Andersen LLP were the independent accountants for Gardenburger, Inc. until May 16, 2002. Representatives of Arthur Andersen LLP are not available to provide the consent required for the incorporation by reference of their report on the financial statements of Gardenburger, Inc. appearing in this Annual Report on Form 10-K into registration statements filed by Gardenburger, Inc. with the Securities and Exchange Commission and currently effective under the Securities Act of 1933, and we have dispensed with the requirement to file their consent in reliance upon rule 437a under the Securities Act of 1933. Because Arthur Andersen LLP have not consented to the incorporation by reference of their report, investors will not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statements of a material fact contained in the financial statements audited by Arthur Andersen LLP that are included in this report or any omissions to state a material fact required to be stated therein.

2



PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Schedules

 
   Page
Report of KPMG LLP   F-1
Report of Arthur Andersen LLP   F-2
Balance Sheets—September 30, 2002 and 2001   F-3
Statements of Operations—Years ended September 30, 2002, 2001 and 2000   F-4
Statements of Shareholders' Equity (Deficit)—Years ended September 30, 2002, 2001 and 2000   F-5
Statements of Cash Flows—Years ended September 30, 2002, 2001 and 2000   F-6
Notes to Financial Statements   F-7
Report of Independent Public Accountants on Financial Statement Schedule   F-24
Schedule II Valuation and Qualifying Accounts   F-25

(b) Reports on Form 8-K

        There were no reports on Form 8-K filed during the quarter ended September 30, 2002.

(c) Exhibits

        The exhibits filed as a part of this report are listed below and this list is intended to comprise the exhibit index:

Exhibit No.
    
23   Consent of KPMG LLP

99.1
 
Certification of Scott C. Wallace Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

99.2
 
Certification of Lorraine Crawford Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

3


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: January 27, 2003.   GARDENBURGER, INC.

 
 
By:
/s/  SCOTT C. WALLACE      
Scott C. Wallace
 Chairman, President
and Chief Executive Officer

 
 
By:
/s/  LORRAINE CRAWFORD      
Lorraine Crawford
 Vice President of Finance, Corporate
Controller, Secretary and Treasurer
(Principal Accounting Officer)

4


CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

        I, Scott C. Wallace, certify that:

1.
I have reviewed this amended annual report on Form 10-K/A of Gardenburger, Inc.;

2.
Based on my knowledge, this amended annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this amended annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this amended annual report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this amended annual report (the "Evaluation Date"); and

c)
presented in this amended annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.
The registrant's other certifying officer and I have indicated in this amended annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 27, 2003.      

/s/  SCOTT C. WALLACE      
Scott C. Wallace
 President and Chief Executive Officer
Gardenburger, Inc.
 
 
 

5


CERTIFICATION PURSUANT TO
SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

        I, Lorraine Crawford, certify that:

1.
I have reviewed this amended annual report on Form 10-K/A of Gardenburger, Inc.;

2.
Based on my knowledge, this amended annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this amended annual report;

3.
Based on my knowledge, the financial statements, and other financial information included in this amended annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this amended annual report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this amended annual report is being prepared;

b)
evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this amended annual report (the "Evaluation Date"); and

c)
presented in this amended annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.
The registrant's other certifying officer and I have indicated in this amended annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: January 27, 2003.      

/s/  LORRAINE CRAWFORD      
Lorraine Crawford
 Vice President, Finance and Corporate Controller
Gardenburger, Inc.
 
 
 

6


Independent Auditors' Report

The Board of Directors
Gardenburger, Inc.:

        We have audited the accompanying balance sheet of Gardenburger, Inc. (an Oregon corporation) as of September 30, 2002, and the related statements of operations, shareholders' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Gardenburger, Inc. as of September 30, 2001, and for each of the two years ended September 30, 2001 were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements, before the restatement described in Note 2 to the financial statements, in their report dated November 2, 2001.

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

        In our opinion, the 2002 financial statements referred to above present fairly, in all material respects, the financial position of Gardenburger, Inc. as of September 30, 2002, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

        As discussed above, the financial statements of Gardenburger, Inc. as of September 30, 2001, and for each of the two years ended September 30, 2001 were audited by other auditors who have ceased operations. As described in Note 2 to the financial statements, those financial statements have been restated. We audited the adjustments described in Note 2 to the financial statements that were applied to restate the 2001 and 2000 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of Gardenburger, Inc. other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

/s/ KPMG LLP
Portland, Oregon
November 8, 2002, except as to Note 2 to the financial statements, which is as of November 25, 2002.

F-1

THIS REPORT IS A CONFORMED COPY
OF THE REPORT PREVIOUSLY ISSUED BY
ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY THAT FIRM.


Report of Independent Public Accountants

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

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

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

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

/s/Arthur Andersen LLP
Portland, Oregon,
November 2, 2001

        ARTHUR ANDERSEN LLP WERE THE INDEPENDENT ACCOUNTANTS FOR GARDENBURGER, INC. UNTIL MAY 16, 2002. REPRESENTATIVES OF ARTHUR ANDERSEN LLP ARE NOT AVAILABLE TO PROVIDE THE CONSENT REQUIRED FOR THE INCORPORATION BY REFERENCE OF THEIR REPORT ON THE FINANCIAL STATEMENTS OF GARDENBURGER, INC. APPEARING IN THIS ANNUAL REPORT INTO REGISTRATION STATEMENTS FILED BY GARDENBURGER, INC. WITH THE SECURITIES AND EXCHANGE COMMISSION AND CURRENTLY EFFECTIVE UNDER THE SECURITIES ACT OF 1933. BECAUSE ARTHUR ANDERSEN LLP HAVE NOT CONSENTED TO THE INCORPORATION BY REFERENCE OF THEIR REPORT, THE INVESTOR WILL NOT BE ABLE TO RECOVER AGAINST ARTHUR ANDERSEN LLP UNDER SECTION 11 OF THE SECURITIES ACT OF 1933 FOR ANY UNTRUE STATEMENTS OF A MATERIAL FACT CONTAINED IN THE FINANCIAL STATEMENTS AUDITED BY ARTHUR ANDERSEN LLP THAT ARE CONTAINED IN THIS REPORT OR ANY OMISSIONS TO STATE A MATERIAL FACT REQUIRED TO BE STATED THEREIN.

F-2


GARDENBURGER, INC.

BALANCE SHEETS

(In thousands, except share amounts)

 
   September 30,
  
 
   2002
   2001
  
Assets              
Current Assets:              
  Cash and cash equivalents   $ 2,760   $ 3,065  
  Accounts receivable, net of allowances of $200 and $266     3,127     3,513  
  Inventories, net     9,093     7,331  
  Prepaid expenses     1,566     1,070  
   
 
 
      Total Current Assets     16,546     14,979  
Property, Plant and Equipment, net of accumulated depreciation of $8,311 and $5,696     13,033     5,520  
Other Assets, net of accumulated amortization of $1,902 and $1,612     1,483     1,562  
   
 
 
      Total Assets   $ 31,062   $ 22,061  
   
 
 
Liabilities and Shareholders' Equity (Deficit)              
Current Liabilities:              
  Short-term note payable   $ 1,116   $ 1,689  
  Current portion of long-term debt     1,901     —  
  Accounts payable     2,340     1,959  
  Payroll and related liabilities payable     722     659  
  Other current liabilities     222     815  
   
 
 
      Total Current Liabilities     6,301     5,122  
Long-Term Debt, less current maturities     6,540     —  
Other Long-Term Liabilities     —     126  
Convertible Notes Payable     17,596     17,364  
Convertible Redeemable Preferred Stock, liquidation preference of $50,304 at September 30, 2002     45,835     40,880  
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: 9,002,101 and 9,002,101     11,189     11,189  
  Additional paid-in capital     12,500     12,405  
  Retained deficit     (68,899 )   (65,025 )
   
 
 
      Total Shareholders' Equity (Deficit)     (45,210 )   (41,431 )
   
 
 
      Total Liabilities and Shareholders' Equity (Deficit)   $ 31,062   $ 22,061  
   
 
 

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

F-3


GARDENBURGER, INC.

STATEMENS OF OPERATIONS

(In thousands, except per share amounts)

 
   For the Year Ended September 30,
  
 
   2002
   2001
   2000
  
Net sales   $ 54,596   $ 50,751   $ 61,113  
Cost of goods sold     31,689     32,558     36,137  
   
 
 
 
Gross margin     22,907     18,193     24,976  
Operating expenses:                    
  Sales and marketing     13,711     13,586     18,358  
  General and administrative     4,210     4,997     7,304  
  Legal settlement     (108 )   —     —  
  Other general (income) expense, net     (424 )   57     303  
   
 
 
 
      17,389     18,640     25,965  
   
 
 
 
Operating income (loss)     5,518     (447 )   (989 )
Other income (expense):                    
  Interest income     33     91     125  
  Interest expense     (3,754 )   (2,433 )   (1,823 )
  Debt restructuring costs     (716 )   —     —  
   
 
 
 
      (4,437 )   (2,342 )   (1,698 )
   
 
 
 
Income (loss) before income taxes     1,081     (2,789 )   (2,687 )
Provision for income taxes     —     —     17,474  
   
 
 
 
Income (loss) before preferred dividends     1,081     (2,789 )   (20,161 )
Preferred dividends     4,955     4,367     12,492  
   
 
 
 
Net loss available for common shareholders   $ (3,874 ) $ (7,156 ) $ (32,653 )
   
 
 
 
Net loss per share—basic and diluted   $ (0.43 ) $ (0.80 ) $ (3.67 )
   
 
 
 
Weighted average shares used in per share calculations     9,002     9,000     8,891  
   
 
 
 

The accompanying notes are an integral part of these statements.

F-4


GARDENBURGER, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)

For the Years Ended September 30, 2002, 2001 and 2000

(In thousands, except share amounts)

 
   Common Stock
    
    
    
  
 
   Additional
Paid-In
Capital
   Retained
Deficit
   Total
Shareholders'
Equity (Deficit)
  
 
   Shares
   Amount
  
Balance at September 30, 1999   8,841,451   $ 10,619   $ 4,277   $ (25,215 ) $ (10,319 )

Exercise of common stock options
 
55,600
 
 
115
 
 
—
 
 
—
 
 
115
 
Income tax benefit of non-qualified stock option exercises and disqualifying dispositions   —     —     3     —     3  
Issuance of shares in exchange for interest on convertible notes payable   75,550     419     —     —     419  
Reset of conversion price of Series B preferred stock   —     —     8,125     —     8,125  
Accrual of preferred dividends   —     —     —     (12,492 )   (12,492 )
Foreign currency translation   —     —     —     (1 )   (1 )
Loss before preferred dividends   —     —     —     (20,161 )   (20,161 )
   
 
 
 
 
 
Balance at September 30, 2000   8,972,601     11,153     12,405     (57,869 )   (34,311 )

Exercise of common stock options
 
29,500
 
 
36
 
 
—
 
 
—
 
 
36
 
Accrual of preferred dividends   —     —     —     (4,367 )   (4,367 )
Loss before preferred dividends   —     —     —     (2,789 )   (2,789 )
   
 
 
 
 
 
Balance at September 30, 2001   9,002,101     11,189     12,405     (65,025 )   (41,431 )

Issuance of warrants
 
—
 
 
—
 
 
95
 
 
—
 
 
95
 
Accrual of preferred dividends   —     —     —     (4,955 )   (4,955 )
Income before preferred dividends   —     —     —     1,081     1,081  
   
 
 
 
 
 
Balance at September 30, 2002   9,002,101   $ 11,189   $ 12,500   $ (68,899 ) $ (45,210 )
   
 
 
 
 
 

The accompanying notes are an integral part of these statements.

F-5


GARDENBURGER, INC.

STATEMENTS OF CASH FLOWS

(In thousands)

 
   For the Year Ended September 30,
  
 
   2002
   2001
   2000
  
Cash flows from operating activities:                    
  Income (loss) before preferred dividends   $ 1,081   $ (2,789 ) $ (20,161 )
  Effect of exchange rate on operating accounts     —     —     (1 )
  Adjustments to reconcile income (loss) before preferred dividends to net cash flows provided by (used in) operating activities:                    
    Depreciation and amortization     3,403     2,068     2,235  
    Other non-cash expenses     798     1,840     421  
    (Gain) loss on sale of fixed assets     (119 )   131     339  
    Deferred income taxes     —     —     17,466  
    (Increase) decrease in:                    
      Accounts receivable, net     386     585     2,035  
      Inventories, net     (1,762 )   168     (231 )
      Prepaid expenses     (496 )   1,009     128  
    Increase (decrease) in:                    
      Accounts payable     381     83     (4,793 )
      Payroll and related liabilities     63     (752 )   470  
      Other accrued liabilities     (593 )   (578 )   (1,147 )
   
 
 
 
        Net cash provided by (used in) operating activities     3,142     1,765     (3,239 )
Cash flows from investing activities:                    
  Payments for purchase of property and equipment     (10,109 )   (683 )   (855 )
  Proceeds from sale of property and equipment     211     675     1,580  
  Other assets, net     —     (4 )   (47 )
   
 
 
 
        Net cash provided by (used in) investing activities     (9,898 )   (12 )   678  
Cash flows from financing activities:                    
  Payments on line of credit, net     (573 )   (902 )   (2,409 )
  Proceeds from long-term debt     8,000     —     —  
  Payments on long-term debt     (333 )   —     —  
  Capitalized financing fees     (643 )   —     —  
  Proceeds from exercise of common stock options and warrants     —     36     115  
   
 
 
 
        Net cash provided by (used in) financing activities     6,451     (866 )   (2,294 )
   
 
 
 
Increase (decrease) in cash and cash equivalents     (305 )   887     (4,855 )
Cash and cash equivalents:                    
  Beginning of period     3,065     2,178     7,033  
   
 
 
 
  End of period   $ 2,760   $ 3,065   $ 2,178  
   
 
 
 

The accompanying notes are an integral part of these statements.

F-6


GARDENBURGER, INC.
NOTES TO FINANCIAL STATEMENTS

1.    ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

        Gardenburger, Inc. was incorporated in Oregon in 1985 to provide a line of meatless food products in response to the public's awareness of the importance of diet to overall health and fitness. Toward this end, the Company developed and now produces and distributes frozen, meatless food products, consisting of veggie burgers and soy-based chicken, pork, and meatball products. The Company's products are sold principally to retail and food service customers throughout the United States.

Estimates

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management believes that the estimates used are reasonable.

Cash Equivalents

        Cash equivalents consist of highly liquid investments with maturities at the date of purchase of 90 days or less.

Inventories

        Inventories are valued at standard cost, which approximates the lower of cost (using the first-in, first-out (FIFO) method), or market, and include materials, labor and manufacturing overhead.

Property, Plant and Equipment

        Property, plant and equipment are stated at cost. Significant improvements are capitalized and maintenance and repairs are expensed. 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

Other Assets

        Other assets primarily include deferred financing fees, goodwill and trademarks. Deferred financing fees are being amortized over the maturity period of the related debt, goodwill is being amortized using the straight-line method over ten years, and trademarks are being amortized using the straight-line method over forty years. See also Note 2 New Accounting Pronouncements regarding the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 and the cessation of amortization of goodwill beginning October 1, 2002.

F-7


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. See also Note 2 New Accounting Pronouncements.

Segment Reporting

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

Concentrations of Credit Risk and Significant Customers

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

        For fiscal 2002, three customers accounted for approximately 12 percent, 11 percent and 10 percent of revenue, respectively, and 14 percent, 7 percent and 13 percent of the accounts receivable balance at September 30, 2002, respectively.

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

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

        Historically, the Company has not incurred significant losses related to accounts receivable.

Revenue Recognition and Sales Incentives

        Revenue from the sale of products is generally recognized at time of shipment to the customer. The Company's revenue arrangements with its customers often include sales incentives and other promotional costs such as coupons, volume based discounts and off invoice discounts. These costs are typically referred to collectively as "trade spending." Pursuant to EITF No. 00-14, EITF No. 00-25 and EITF No. 01-09, these costs are recorded at the later of when revenue is recognized or when the sales incentive is offered and are generally classified as a reduction of revenue.

Advertising Costs

        Advertising costs, including media advertising, design and printing of coupons, and other advertising, which are included in sales and marketing expense, are expensed when the advertising first takes place. Advertising expense was approximately $1.1 million in 2002, $232,000 in 2001 and $(31,000) in 2000. The $31,000 of income in fiscal 2000 was due to a refund of approximately $211,000 for advertising space that was expensed in fiscal 1999.

Slotting Fees

        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. Slotting fees associated with a new product or a new territory are initially recorded as a prepaid asset and the related expense is recognized ratably over the 12-month period beginning with the initial introduction of the product as an offset to sales. The Company believes that 12 months is the minimum period

F-8


during which a retailer agrees to allocate shelf space. If a slotting fee agreement were breached, the Company would pursue available legal remedies to enforce the agreement as appropriate. Total slotting included in prepaid assets at September 30, 2002 and 2001 was $934,000 and $460,000, respectively.

Research and Development Costs

        Research and development costs are expensed as incurred. Research and development expense was approximately $222,000 in 2002, $188,000 in 2001 and $319,000 in 2000 and is included in sales and marketing expenses in the accompanying statements of operations.

Net Loss Per Share

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

        Basic EPS and diluted EPS are the same for all periods presented since the Company was in a loss position in all periods. Potentially dilutive securities that are not included in the diluted EPS calculation because they would be antidilutive are as follows (in thousands):

 
   September 30,
 
   2002
   2001
   2000
Stock options and warrants   5,651   4,113   2,778
Convertible notes   1,775   1,709   1,313
Convertible preferred stock   4,062   4,062   4,062
   
 
 
  Total   11,488   9,884   8,153
   
 
 

Comprehensive Income Reporting

        SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. The objective of SFAS No. 130 is to report a measure of all changes in the equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive loss did not differ from currently reported net loss in the periods presented.

Reclassifications

        Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation.

2.    NEW ACCOUNTING PRONOUNCEMENTS

Pronouncements Resulting in a Reclassification

EITF 00-14 and EITF 00-25

        In May 2000, the Emerging Issues Task Force ("EITF"), a subcommittee of the Financial Accounting Standards Board, issued EITF No. 00-14 "Accounting for Certain Sales Incentives." EITF 00-14 prescribes guidance regarding timing of recognition and income statement classification of costs incurred for certain sales incentive programs. This guidance requires certain coupons, rebate offers and free products offered concurrently with a single exchange transaction to be recognized at the later of when the revenue is recognized or when the sales incentive is offered, and reported as a reduction of revenue.

F-9


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

        The Company adopted EITF 00-14 and EITF 00-25 in the second quarter of fiscal 2002. Comparative financial statements for prior periods have been reclassified to comply with the classification guidelines of EITF 00-14 and 00-25.

        The Company also adopted EITF No. 01-9 "Accounting for Consideration Given by a Vendor to a Customer or a Reseller of the Vendor's Products" in the second quarter of fiscal 2002, which consolidates and clarifies guidance given under EITF No. 00-14 and EITF No. 00-25, but does not change the accounting prescribed above for the Company.

        A reconciliation of prior period net revenues is as follows (in thousands):

 
   Year Ended September 30,
  
 
   2001
   2000
  
Net revenues as previously reported   $ 59,557   $ 71,043  
Sales incentives     (8,806 )   (9,930 )
   
 
 
Net revenues as adjusted   $ 50,751   $ 61,113  
   
 
 

        Sales and marketing expense for the years ended September 30, 2001 and 2000 also decreased by the respective sales incentive amounts indicated in the above table.

Pronouncements Not Resulting in a Reclassification

SFAS No. 141 and SFAS No. 142

        In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of this Statement. The Company will adopt SFAS No. 142 in the first quarter of fiscal 2003. At the end of fiscal 2002, the Company's unamortized goodwill balance was $411,000. The Company anticipates its evaluation of this asset for impairment in accordance with SFAS No. 142 will result in its writing off its goodwill balance in its entirety in the first quarter of fiscal 2003. Had the Company adopted SFAS No. 142 at the beginning of fiscal 2002, assuming no impairment charge, it would not have recorded amortization expense of $123,000 for the year ended September 30, 2002.

SFAS No. 144

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business." SFAS No. 144 becomes effective for fiscal years beginning after December 15,

F-10


2001. The Company will adopt SFAS No. 144 in the first quarter of fiscal 2003 and anticipates writing off its unamortized goodwill at that time.

SFAS No. 146

        In July 2002, the FASB approved SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses the financial accounting and reporting for obligations associated with an exit activity, including restructuring, or with a disposal of long-lived assets. Exit activities include, but are not limited to, eliminating or reducing product lines, terminating employees and contracts and relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a cost associated with an exit or disposal activity only when that liability is incurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expresses only management's intended future actions and, therefore, does not meet the requirement for recognizing a liability and the related expense. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. The Company does not anticipate that the adoption of SFAS No. 146 will have a material effect on its financial position or results of operations.

3.    INVENTORIES

        Detail of inventories at September 30, 2002 and 2001 is as follows (in thousands):

 
   2002
   2001
Raw materials   $ 1,761   $ 1,243
Packaging and supplies     290     309
Finished goods     7,042     5,779
   
 
    $ 9,093   $ 7,331
   
 

F-11

4.    PROPERTY, PLANT AND EQUIPMENT

        Detail of property, plant and equipment at September 30, 2002 and 2001 is as follows (in thousands):

 
   2002
   2001
  
Building and improvements   $ 1,346   $ 1,290  
Machinery and equipment     15,696     5,665  
Office furniture and equipment     4,302     4,261  
   
 
 
      21,344     11,216  
Less accumulated depreciation     (8,311 )   (5,696 )
   
 
 
    $ 13,033   $ 5,520  
   
 
 

5.    LEASE COMMITMENTS

        Future minimum lease payments under operating leases at September 30, 2002 and including lease amounts due under the renewal of our Clearfield lease subsequent to September 30, 2002 (see Note 13), are as follows:

Year Ended September 30,
    
2003   $ 588,623
2004     522,238
2005     526,639
2006     533,082
2007     529,020
Thereafter     132,255
   
  Total   $ 2,831,857
   

        Rental expense for the years ended September 30, 2002, 2001 and 2000 was $1.6 million, $3.8 million and $3.7 million, respectively.

6.    REVOLVING CREDIT AND TERM LOAN AND AMENDMENTS TO SUBORDINATED CONVERTIBLE NOTES AND CONVERTIBLE REDEEMABLE PREFERRED STOCK

        On January 10, 2002, the Company entered into a Revolving Credit and Term Loan Agreement (as amended, the "Loan Agreement") with CapitalSource Finance LLC ("CapitalSource"). It also completed extensions to the maturity date of its subordinated convertible notes and the earliest mandatory redemption date applicable to its outstanding convertible redeemable preferred stock.

        The Loan Agreement provides for an $8.0 million term loan and a $7.0 million line of credit (together, "the Loans"). The $8.0 million proceeds from the term loan and $1.05 million of proceeds from the line of credit were applied to purchase the Company's food processing, production and other equipment used at its Clearfield, Utah, production facility, which had been leased under operating leases with Bank of America ("BA") Leasing & Capital Corporation. An additional $1.85 million of proceeds from the line of credit were used to repay the Company's existing revolving credit facility, which was terminated, and certain fees of Wells Fargo Bank. The remaining balance available on the line of credit is being used as needed for working capital. The Company paid a closing fee of $300,000 to CapitalSource (the "Closing Fee").

        As a condition to obtaining the new financing, the Company negotiated extensions to the maturities of its Convertible Senior Subordinated Notes ("Convertible Notes") held by Dresdner Kleinwort Benson Private Equity Partners LP ("Dresdner") and the earliest mandatory redemption

F-12


date of its Series A Convertible Preferred Stock ("Series A Stock") and Series B Convertible Preferred Stock ("Series B Stock") then held by various investors.

        In order to obtain the extension of maturity of its Convertible Notes from April 1, 2003, to March 31, 2005, the Company agreed to increase the interest rate on the notes from 7 to 10 percent, to pay a 20 percent premium at repayment or maturity of such notes, and to issue to Dresdner a warrant to purchase 557,981 shares of the Company's common stock at an exercise price of $0.28 per share.

        To achieve the extension of the earliest mandatory redemption date of the Company's outstanding Series A and Series B preferred stock from December 31, 2004, to March 31, 2006, the Company agreed to pay a 10 percent premium on the accumulated liquidation preference and redemption price applicable to its preferred stock, payable upon redemption or any liquidation or deemed liquidation of the Company. In addition, the Company issued to preferred shareholders, pro rata in accordance with their holdings of preferred stock, warrants to purchase an aggregate of 557,981 shares of common stock at an exercise price of $0.28 a share. The Company accomplished the agreed changes to its preferred stock by creating two new series of preferred stock designated as Series C Convertible Preferred Stock ("Series C Stock") and Series D Convertible Preferred Stock ("Series D Stock") and exchanging shares of its outstanding Series A Stock and Series B Stock for such newly created Series C Stock and Series D Stock, respectively, on a five-for-one basis. Other than the modifications mentioned above, there were no substantive changes to the rights and privileges of the Series A and Series B compared to Series C and Series D.

        Farallon Partners, L.L.C., and its affiliates, which together own approximately 30.8% of the Company's Series C and Series D Stock, have a substantial equity interest in CapitalSource Holdings LLC, which controls CapitalSource. An affiliate of Rosewood Capital III, L.P., which also owns approximately 30.8% of the Series C and Series D Stock, has a small (less than 2%) equity interest in CapitalSource Holdings LLC. Two of the Company's directors are employed by an affiliate of Rosewood Capital III, L.P. Jason Fish, a director of the Company until his resignation on January 8, 2002, is President of CapitalSource Holdings LLC and was a managing member of Farallon Partners, L.L.C., until June 2000.

Terms of the Loan Agreement

        The Loan Agreement permits the Company to request advances under the $7.0 million line of credit up to the sum of 85 percent of eligible receivables and 60 percent of eligible inventory. The Company must maintain a minimum balance under the line of credit of $1.0 million. Advances will bear interest at an annual rate of the greater of i) prime plus 2.50 percent, or 7.25 percent at September 30, 2002; or ii) 8 percent. The line of credit expires December 15, 2004. At September 30, 2002, the Company had $1.1 million outstanding under the line of credit at an interest rate of 8 percent.

        The $8.0 million term loan bears interest at an annual rate of prime plus 4.50 percent; however, in no event will the interest rate be less than 10 percent. Interest under the term loan is payable monthly.

        Under the terms of the Loan Agreement, proceeds from a sale of assets outside the ordinary course of business, from certain insurance recoveries, or from other listed events must be used to prepay the Loans. Also, the Company must apply a portion of all excess cash flow (see definition below) it receives to reduce the outstanding balance of the term loan. As of September 30, 2002, the Company was obligated to pay Capital Source approximately $184,000 under the excess cash flow obligation during fiscal 2003, which is reflected on the balance sheet in current portion of long-term debt. Upon a change of control (see definition below) affecting the Company, it must prepay the Loans in full.

F-13


        Principal payments, including the $750,000 exit fee, due under the term loan over the next five years are as follows:

Year Ended September 30,
    
2003   $ 1,350,668
2004     1,833,336
2005     2,000,004
2006     2,000,004
2007     1,232,668
   
  Total   $ 8,416,680
   

        Amounts due but not paid under the term loan will be automatically drawn from the line of credit, subject to availability. At September 30, 2002, the Company had $7.7 million outstanding under this term loan at an interest rate of 10 percent.

        The Loans are secured by the Company's assets, including, without limitation, its accounts receivable, inventory, equipment, intellectual property, and bank deposits. The Loan Agreement contains cross default provisions with respect to the Company's other indebtedness, including the Convertible Notes.

        The Company must pay to CapitalSource and any participating lenders an unused line of credit fee equal to 0.083 percent per month of unused amounts under the line of credit, which totaled $35,044 in fiscal 2002. In addition, it must pay to CapitalSource, as agent under the Loan Agreement, a collateral management fee of $4,167 per month. Upon the earlier of prepayment in full of the term loan or its expiration date, the Company will pay a $750,000 exit fee. The Company may not elect to prepay the Loans until July 10, 2003, except in the event of a sale of the Company. The $750,000 exit fee is being amortized as additional interest expense over the life of the Loans, increasing the effective interest rate on the Loans.

        Pursuant to the Loan Agreement, the Company is required to maintain compliance with the following financial covenants:

    •
    a ratio of long-term indebtedness to earnings (as defined in the Loan Agreement) of not more than 2.5 to 1.00;

    •
    minimum earnings (as defined) of at least $6.0 million for the prior twelve months calculated as of each quarter;

    •
    a ratio of earnings (as defined) to fixed charges, such as debt service payments, capital expenditures and taxes, of not less than 1.25 to 1.00; and

    •
    excluding the $9.05 million buyout of its equipment capital leases during fiscal 2002, the Company's capital expenditures may not exceed in the aggregate i) $2.2 million during fiscal 2002 and ii) $1.1 million during any fiscal year thereafter.

        In addition, the Company may not, among other restrictions, (1) incur any additional indebtedness other than accounts payable, except in certain limited circumstances, (2) create any liens on its assets, (3) invest in other entities, (4) pay dividends, redeem its capital stock (including preferred stock), or make unscheduled payments under its Convertible Notes (except as expressly permitted), (5) sell assets other than in the ordinary course, except in certain limited circumstances, (6) engage in any transaction with an affiliate, (7) amend its Articles of Incorporation or Bylaws in a manner that would be adverse to CapitalSource, or (8) enter into any contingent obligations or guarantee the obligations of another.

        The Company was in compliance with the above covenants and other restrictions in the Loan Agreement as of September 30, 2002.

F-14


Amendment to Convertible Notes and Warrant Agreement with Dresdner

        The Company and Dresdner entered into a Second Amendment to Note Purchase Agreement, an Amended and Restated Convertible Senior Subordinated Note (the "Restated Convertible Note"), and a Warrant Agreement, each dated January 10, 2002, in connection with the extension of the maturity date under the Convertible Notes from April 1, 2003, to March 31, 2005. In addition, under the terms of the Restated Convertible Note, the Company agreed to (i) increase the interest rate on the Convertible Notes from 7 to 10 percent and (ii) pay a 20 percent premium on the principal plus accrued but unpaid interest on the Convertible Notes at repayment or maturity. The Restated Convertible Note remains convertible into common stock at the election of the holder; the conversion price at September 30, 2002 was $9.78 per share, which was not affected by the amendment. Interest is payable in cash semi-annually to the extent of availability under the CapitalSource line of credit. At September 30, 2002, there was approximately $17.3 million of principal and $0.8 million of accrued exit fees on the balance sheet. The exit fees are being amortized as additional interest expense over the life of the loan, increasing the effective interest rate on the loan.

        The Company is required to apply a portion of excess cash flow (as defined) to repay accrued interest and the outstanding principal amount of the Restated Convertible Note, subject to certain specified exceptions. The Company must, at all times, pay 50 percent of excess cash flow to pay down indebtedness to CapitalSource and to Dresdner in specified proportions. As of September 30, 2002, the Company was obligated to pay approximately $550,000 to Dresdner during fiscal 2003 under the excess cash flow obligation, which is reflected on the balance sheet in the current portion of long-term debt balance.

        The Note Purchase Agreement contains financial covenants which are the same as those in the Loan Agreement, but in each case slightly more favorable to the Company. The Restated Convertible Note also contains subordination provisions with respect to the Loans and cross default provisions with respect to the Company's other indebtedness, including the Loans.

        In addition, under the terms of the Warrant Agreement, the Company issued to Dresdner an immediately exercisable warrant with a ten-year term to purchase 557,981 shares of the Company's common stock at a price of $0.28 per share, subject to anti-dilution adjustments. The Company granted registration rights to Dresdner with respect to shares issuable upon exercise of its warrant.

F-15

Series C and Series D Preferred Stock

        The Company and the holders of its outstanding Series A Stock and Series B Stock entered into a Preferred Stock Exchange Agreement dated January 10, 2002 (the "Exchange Agreement") in connection with the extension of the earliest date on which the holders of the Company's preferred stock could require that their shares be redeemed, and certain other changes. This extension was a condition to funding under the Loan Agreement and closing of the Second Amendment to Note Purchase Agreement. Under the terms of the Exchange Agreement, holders of Series A Stock and Series B Stock agreed to exchange all of their outstanding shares of Series A Stock and Series B Stock for newly created Series C Stock and Series D Stock, respectively, at an exchange ratio of five shares of Series A Stock for each share of Series C Stock and five shares of Series B Stock for each share of Series D Stock. In addition, the Company issued to preferred shareholders immediately exercisable warrants with a ten-year term to purchase an aggregate of 557,981 shares of the Company's common stock, exercisable at a price of $0.28 per share, subject to anti-dilution adjustments. The Company granted holders of its preferred stock registration rights with respect to shares to be issued upon exercise of the warrants, including both demand and piggy-back registration rights.

        The terms of each new series of Preferred Stock provide participants in the exchange with identical rights, preferences, and privileges as were applicable to the prior Series A Stock and Series B Stock, except that the terms of Series C Stock and Series D Stock provide for a 10 percent premium on any liquidation or redemption and for an earliest date on which holders may require redemption of their shares of March 31, 2006, instead of December 31, 2004. The premium is being accreted over the redemption period. At September 30, 2002, the Company had accrued $741,000 in relation to the redemption premium. As a result of the exchange, the Company has outstanding 552,500 shares of its Series C Stock and 97,500 shares of its Series D Stock, which are convertible into the same number of common shares as the Series A Stock and Series B Stock prior to the exchange. No shares of Series A Stock and Series B Stock remain outstanding.

Accounting for Changes to Convertible Notes and Preferred Stock

        The Company is accounting for the term revisions, including the fair value of the common stock warrants and exit fee premiums, in accordance with SFAS No. 15 "Accounting by Debtors and Creditors for Troubled Debt Restructurings." Accordingly, the Company is accounting for the effects of the debt restructuring on a prospective basis from the date of restructuring and no gain or loss was recorded on the date of restructuring. The Company computed an effective interest rate and preferred dividend taking into consideration the imputed value of the revised terms, which is being applied as of the restructuring date through the maturity dates.

Definitions

        Previously used terms are defined as follows:

    •
    Excess Cash Flow—for any fiscal year, this is an amount equal to the sum of i) consolidated net income or loss; ii) depreciation, amortization, accrued non-cash interest expense and all other non-cash charges deducted in arriving at consolidated net income or loss; iii) net cash proceeds from the sale, lease, transfer or other disposition of assets that is not reinvested in other collateralized assets or required to be applied to mandatory prepayments or payments on the Loans; iv) the net loss on the sale, lease, transfer or other disposition of assets; and v) the amount of any tax credits or refunds received less the sum of i) non-financed capital expenditures; ii) payments required by and paid on the Loans and voluntary prepayments made on the Loans; iii) the net gain on the sale, lease, transfer or other disposition of assets, other than sales in the ordinary course of business; and iv) an amount equal to the increase in working capital during the period.

F-16

    •
    Change of Control—the occurrence of any of the following: i) a merger, consolidation, reorganization, recapitalization or share or interest exchange, sale or transfer or any other transaction or series of transactions in which any person or group of affiliated persons or persons acting together, own more than 45% of the combined voting power of the Company's then outstanding securities, calculated on a fully diluted basis; ii) a direct or indirect sale, transfer or other conveyance or disposition, in any single transaction or series of transactions, of all or substantially all of its assets; iii) any change of control or sale or disposition or similar event as defined in any document governing indebtedness of more than $50,000 of such person which gives the holder of such indebtedness the right to accelerate or otherwise require payment of such indebtedness prior to the maturity date thereof; iv) Rosewood Capital III, L.P. and Farallon Capital Partners, L.P., or their affiliates, acting together, cease to have the voting power to elect two directors to the Board of Directors of the Company; v) Scott C. Wallace ceases to be employed as Chief Executive Officer of the Company or otherwise becomes disabled and is not replaced within thirty days by an interim Chief Executive Officer, and within one hundred twenty days by a permanent Chief Executive Officer, each to the lender's satisfaction, or any such replacement Chief Executive Officer ceases such employment or otherwise becomes disabled unless replaced in the same time periods; and vi) a sale of the Company.

    •
    Earnings for the purpose of calculating financial covenants—net income or loss determined in conformity with GAAP, plus i) interest expense; ii) taxes on income, whether paid, payable or accrued; iii) depreciation expense; iv) amortization expense; v) non-cash dividends on preferred stock; vi) all other non-cash, non-recurring charges and expenses, excluding accruals for cash expenses made in the ordinary course of business; and vii) certain agreed upon adjustments, all of the foregoing determined in accordance with GAAP, less all non-cash income.

7.    INCOME TAXES

        The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." The Company realizes tax benefits as a result of the exercise of non-qualified stock options and the exercise and subsequent sale of certain incentive stock options (disqualifying dispositions). For financial reporting purposes, any reduction in income tax obligations as a result of these tax benefits is credited to additional paid-in capital. Tax benefits of $0, $0 and $3,000 were credited to additional paid-in capital in 2002, 2001 and 2000, respectively. The provision (benefit) for income taxes is as follows (in thousands):

 
   Year Ended September 30,
 
   2002
   2001
   2000
CURRENT:                  
  Federal   $ 440,702   $ —   $ —
  State     57,032     —     8
   
 
 
      497,734     —     8
DEFERRED     (497,734 )   —     17,466
   
 
 
    $ -   $ —   $ 17,474
   
 
 

F-17

        Total deferred income tax assets were $21.1 million and $21.5 million and liabilities were $935,000 and $833,000 at September 30, 2002 and 2001, respectively, prior to the consideration of any valuation allowance. Individually significant temporary differences are as follows:

 
   September 30,
 
   2002
   2001
Net operating loss carryforwards   $ 19,119   $ 19,497
Provision for trade promotions and discounts     719     642

        Total net deferred tax assets were $20.2 million and $20.7 million as of September 30, 2002 and 2001, respectively. In accordance with SFAS 109, the Company has recorded a valuation allowance against the entire amount of net deferred tax assets as of September 30, 2002 and 2001 as a result of recurring operating losses in recent years.

        The Company has tax net operating loss carryforwards, totaling $49.8 million, which expire as follows: 2013: $10.8 million, 2019: $31.6 million, 2020: $3.0 million and 2021: $4.4 million.

        The reconciliation between the effective tax rate and the statutory federal income tax rate is as follows:

 
   Year Ended September 30,
  
 
   2002
   2001
   2000
  
Statutory federal income tax rate   (34.0 )% (34.0 )% (34.0 )%
State taxes, net of federal income tax benefit   (4.4 ) (4.4 ) (2.7 )
Trademark and goodwill amortization   0.9   0.5   0.9  
Meals and entertainment   0.4   0.2   1.1  
Effect of change in valuation allowance   36.2   37.6   685.3  
Other   0.9   0.1   (0.3 )
   
 
 
 
Effective tax rate   0.0 % 0.0 % 650.3 %
   
 
 
 

8.    CONVERTIBLE REDEEMABLE PREFERRED STOCK

        The Company has outstanding 552,500 shares of its Series C Stock and 97,500 shares of its Series D Stock, which are convertible into 2,762,500 and 1,300,000 shares (subject to antidilution adjustments) of the Company's common stock, respectively, at any time at the discretion of the holder.

        The Series C and Series D Stock may be redeemed at any time after March 31, 2006 at the election of the holders or, under certain conditions, at the discretion of the Company. A 10 percent premium will be paid on any liquidation or redemption of the Series C and Series D Stock. In addition, 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.

        The difference between the aggregate consideration of $32.5 million and the net proceeds of $30.2 million received upon the original sale of the Series A and Series B Stock is being accreted, in addition to the 10 percent premium that will be paid upon redemption, as additional preferred dividends over the period until redemption (March 31, 2006).

        See Note 6 for additional information.

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9.
SHAREHOLDERS' EQUITY

Preferred Stock

        The Company has authorized 5,000,000 shares of preferred stock, of which 650,000 shares have been issued (see Note 8). 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 an Acquiring Person has acquired 15 percent or more of the outstanding common stock.

Restrictions on Dividends

        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 C and Series D 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. In addition, the Company is prohibited from paying cash dividends or redeeming any of its capital stock under the terms of the Loan Agreement and the Restated Convertible Note held by Dresdner.

Stock Plan Options

        In February 2001, the Company's shareholders approved the 2001 Stock Incentive Plan (the "2001 Plan") to replace the Company's 1992 First Amended and Restated Combination Stock Option Plan (the "1992 Plan"), which was scheduled to expire in January 2002. The 2001 Plan provides for stock-based awards to employees, officers, directors and consultants of the Company. Awards that may be granted under the 2001 Plan include stock options, in the form of incentive stock options ("ISOs") and non-statutory stock options ("NSOs"), stock appreciation rights, restricted awards, performance awards, and other stock-based awards. The exercise price per share generally must be at least 100 percent of the fair market value of a share of common stock on the date the option is granted for ISOs, 75 percent for NSOs and 25 percent for deferred compensation options. The Stock-Based Awards Committee of the Company's Board of Directors determines the vesting and other terms of the awards under the 2001 Plan. Vesting for certain options may accelerate upon a change in control of the Company.

        The 2001 Plan permits the issuance of up to 1.4 million shares of the Company's common stock plus shares available under the 1992 Plan. In addition, if awards granted under the 1992 Plan are forfeited or expire, shares of common stock reserved for such forfeited or expired awards become available for issuance under the 2001 Plan. As of September 30, 2002, the Company had 1,990,298 shares of common stock reserved for issuance under the 2001 Plan.

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        Prior to the approval of the 2001 Plan, the Company's 1992 Plan provided for the issuance of ISOs to employees and officers of the Company and NSOs to employees, officers, directors and consultants of the Company. Under the 1992 Plan, the exercise price of an ISO could not be less than the fair market value on the date of grant and the exercise price of an NSO could not be less than 85 percent of fair market value on the date of grant.

        Options granted under the 1992 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. As a result of approval of the 2001 Plan in February 2001, no additional awards will be made under the 1992 Plan, all shares available for grant have been added to the shares available under the 2001 Plan, and cancellations under the 1992 Plan are being added to the pool of available shares under the 2001 Plan. The Company had 1,360,725 shares of common stock reserved for issuance under the 1992 Plan at September 30, 2002.

        Activity under the 1992 Plan and the 2001 Plan is summarized as follows (in thousands, except per share amounts):

 
   Shares Available
for Grant
   Shares Subject to
Options
   Weighted Average
Exercise Price
Balances, September 30, 1999   119   1,842   $ 9.51
Options granted   (246 ) 246     6.40
Options canceled   673   (673 )   9.80
Options exercised   —   (10 )   6.50
   
 
 
Balances, September 30, 2000   546   1,405     8.86
Additional shares reserved   1,400   —     —
Options granted   (1,943 ) 1,943     0.80
Options canceled   535   (535 )   7.33
   
 
 
Balances, September 30, 2001   538   2,813     3.58
Options granted   (645 ) 645     0.68
Options canceled   216   (216 )   2.84
   
 
 
Balances, September 30, 2002   109   3,242   $ 3.05
   
 
 

Non-Plan Options

        On March 10, 1992, the Company granted a non-statutory stock option to its then Chief Executive Officer exercisable for 1,650,000 shares of the Company's common stock. Such option was 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. On May 8, 2001, the Company extended the exercise period of the non-statutory stock option period for an additional two years. Portions of the option have been exercised as follows:

Fiscal Year
   Shares
Received Upon
Exercise
1996   625,000
2000   45,000
2001   30,000

        At September 30, 2002, an option to purchase 950,000 shares of common stock remained outstanding and exercisable in full and 950,000 shares of the Company's common stock were reserved for issuance under this option grant.

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        On April 14, 1996, the Company granted an option to its then Chief Executive Officer exercisable for 300,000 shares of the Company's common stock. Pursuant to the terms of the original grant, such option is exercisable for a period of five years from the Chief Executive Officer's termination date of August 4, 2000 at an exercise price of $8.69 per share. At September 30, 2002, the entire option remained outstanding and the Company had 300,000 shares of common stock reserved for issuance under this option grant.

        During 1999, the Company granted options to certain employees and two consultants covering a total of 80,000 shares of the Company's common stock at an average exercise price of $11.16 per share. Activity related to these options is as follows:

Fiscal Year
   Shares
Cancelled
   Average
Exercise Price
2000   15,332   $ 11.63
2001   22,001     11.35
2002   6,667     11.63

        At September 30, 2002, options covering 36,000 shares of common stock were outstanding at an average exercise price of $10.76 and 36,000 shares of the Company's common stock were reserved for issuance under these options. The fair value of options granted to non-employees was not material.

        On March 1, 2000, the Company granted options to the members of its Board of Directors covering a total of 14,500 shares of the Company's common stock. Such options are exercisable for a period of ten years from the date of grant at an exercise price of $5.69 per share, subject to a one-year vesting period. During fiscal 2001, options covering 7,000 shares of common stock were canceled and at September 30, 2002, options covering 7,500 shares of common stock were outstanding and reserved for issuance under these option grants.

Warrants

        In January 2002, in conjunction with amendments to the Company's Convertible Subordinated Debt and Convertible Redeemable Preferred Stock, the Company issued warrants exercisable for a total of 1,115,962 shares of its common stock at an exercise price of $0.28 per share. The warrants are immediately exercisable and expire 10 years from the date of grant.

Statement of Financial Accounting Standards No. 123

        During 1995, the Financial Accounting Standards Board issued SFAS No. 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 No. 123 had been adopted.

F-21

        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 fiscal 2002, 2001 and 2000 using the Black-Scholes option pricing model as prescribed by SFAS 123 using the following weighted average assumptions for grants:

 
   2002
   2001
   2000
  
Risk-free interest rate   4.50 % 5.00 % 6.50 %
Expected dividend yield   0 % 0 % 0 %
Expected lives   6.0 years   6.0 years   6.5 years  
Expected volatility   96.53 % 78.26 % 80.77 %

        Using the Black-Scholes methodology, the total value of options granted during 2002, 2001 and 2000 was $336,000, $1.1 million and $1.1 million, respectively, which would be amortized on a pro forma basis over the vesting period of the options (typically three to five years). The weighted average per share fair value of options granted during 2002, 2001 and 2000 was $0.52, $0.54 and $4.30, respectively.

        If the Company had accounted for its stock-based compensation plans in accordance with SFAS No. 123, the Company's net loss available to common shareholders and net loss per share would approximate the pro forma disclosures below (net loss in thousands):

 
   2002
   2001
   2000
  
 
   As
Reported
   Pro
Forma
   As
Reported
   Pro
Forma
   As
Reported
   Pro
Forma
  
Net loss available to common shareholders   $ (3,874 ) $ (4,865 ) $ (7,156 ) $ (8,859 ) $ (32,653 ) $ (34,279 )
Basic and diluted net loss per share   $ (0.43 ) $ (0.54 ) $ (0.80 ) $ (0.98 ) $ (3.67 ) $ (3.86 )

        The following table summarizes information about all stock options outstanding at September 30, 2002 (shares in thousands):

Options Outstanding
   Options Exercisable
Range of Exercise
Prices
   Number
Outstanding at
9/30/02
   Weighted
Average
Remaining
Contractual
Life—Years
   Weighted
Average
Exercise
Price
   Number of
Shares
Exercisable at
   Weighted
Average
Exercise
Price
$0.4150-$  1.3563   2,906   6.6   $ 0.7006   1,248   $ 0.8920
1.3564-    2.7125   338   8.4     1.6589   88     1.7185
5.4251-    6.7813   241   6.0     6.4608   211     6.4732
6.7814-    8.1375   230   3.2     7.5822   230     7.5822
8.1376-    9.4938   516   3.1     8.7241   516     8.7241
9.4939-  10.8500   47   6.5     10.0625   47     10.0625
10.8501-  12.2063   217   3.2     11.5165   217     11.5165
12.2064-  13.5625   40   3.8     12.7188   39     12.7239
 
 
 
 
 
$0.4150-$13.5625   4,535   5.9   $ 3.0609   2,596   $ 4.7566
 
 
 
 
 

        At September 30, 2001 and 2000, options covering 2,182,675 and 2,350,642 shares of the Company's common stock, respectively, were exercisable at weighted average exercise prices of $5.40 per share and $5.77 per share, respectively.

10.  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

F-22


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 $115,000 in 2002, $124,000 in 2001 and $137,000 in 2000.

11.  SUPPLEMENTAL CASH FLOW INFORMATION

        Supplemental disclosure of cash flow information is as follows (in thousands):

 
   2002
   2001
   2000
Cash paid during the period for interest   $ 2,371   $ 322   $ 455
Cash paid during the period for income taxes     12     5     6
Issuance of common stock in exchange for interest expense on Convertible Notes     —     —     419
Issuance of additional Convertible Notes in lieu of cash payment of interest expense on Convertible Notes     —     2,364     —
Non-cash preferred dividends     4,955     4,367     12,492

12.  RELATED PARTY TRANSACTIONS

        Farallon Partners, L.L.C., and its affiliates, which together own approximately 30.8% of the Company's Series C and Series D Stock, have a substantial equity interest in CapitalSource Holdings LLC, which controls CapitalSource (see Note 6). An affiliate of Rosewood Capital III, L.P., which also owns approximately 30.8% of the Series C and Series D Stock, has a small (less than 2%) equity interest in CapitalSource Holdings LLC. Two of the Company's directors are employed by an affiliate of Rosewood Capital III, L.P. Jason Fish, a director of the Company until his resignation on January 8, 2002, is President of CapitalSource Holdings LLC and was a managing member of Farallon Partners, L.L.C., until June 2000.

        Richard L. Mazer, a director of the Company, is Director and Chief Operating Officer of Ventura Foods, LLC. Beginning in the latter part of fiscal 2001, the Company began purchasing barbecue sauce from Ventura Foods and, during fiscal 2002 and 2001, paid Ventura Foods $380,000 and $22,000, respectively, for the barbecue sauce.

13.  SUBSEQUENT EVENT—LEASE RENEWAL

        In November 2002, the Company signed a five-year renewal for its Freeport Center manufacturing facility in Clearfield, Utah, which commences January 1, 2003 and expires December 31, 2007. The Company has one additional five-year renewal option on this facility. Monthly rent under this lease renewal is $33,500 for the first thirty-six months and $36,600 thereafter.

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Independent Auditors' Report

The Board of Directors
Gardenburger, Inc.:

        Under date of November 8, 2002, we reported on the balance sheet of Gardenburger, Inc. (an Oregon corporation) as of September 30, 2002, and the related statement of operations, shareholders' deficit, and cash flows for the year ended September 30, 2002, which is included in this Form 10-K for the period ended September 30, 2002. In connection with our audit of the aforementioned financial statements, we also audited the related financial statement schedule in this Form 10-K for the period ended September 30, 2002. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit.

        In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth herein.

        As described in Note 2 to the financial statements, the financial statements of Gardenburger, Inc. as of September 30, 2001, and for each of the two years ended September 30, 2001 were audited by other auditors who have ceased operations. We audited the adjustments described in Note 2 to the financial statements that were applied to restate the 2001 and 2000 financial statements. In our opinion, such adjustments are appropriate and have been properly applied. However, we were not engaged to audit, review, or apply any procedures to the 2001 and 2000 financial statements of Gardenburger, Inc. other than with respect to such adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2001 and 2000 financial statements taken as a whole.

/s/ KPMG LLP
Portland, Oregon
November 8 2002, except as to Note 2 to the financial statements, which is as of November 25, 2002.

F-24

SCHEDULE II


GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000
(In thousands)

Column A
   Column B
   Column C
   Column D
   Column E
Description
   Balance
at Beginning
of Period
   Charged
to Costs and
Expenses
   Charged to
Other Accounts—
Describe
   Deductions—
Describe(a)
   Balance
at End
of Period
Year Ended September 30, 2000:                              

Reserves deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Allowance for uncollectible accounts
 
$
301
 
$
20
 
$
—
 
$
57
 
$
264

Year Ended September 30, 2001:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reserves deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Allowance for uncollectible accounts
 
$
264
 
$
40
 
$
—
 
$
38
 
$
266

Year Ended September 30, 2002:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Reserves deducted from asset accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Allowance for uncollectible accounts
 
$
266
 
$
—
 
$
—
 
$
66
 
$
200
(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-25



QuickLinks

GARDENBURGER, INC. 2002 FORM 10-K/A-1 ANNUAL REPORT TABLE OF CONTENTS
PART II
PART IV
SIGNATURES
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002
Independent Auditors' Report
Report of Independent Public Accountants
GARDENBURGER, INC. BALANCE SHEETS (In thousands, except share amounts)
GARDENBURGER, INC. STATEMENS OF OPERATIONS (In thousands, except per share amounts)
GARDENBURGER, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) For the Years Ended September 30, 2002, 2001 and 2000 (In thousands, except share amounts)
GARDENBURGER, INC. STATEMENTS OF CASH FLOWS (In thousands)
GARDENBURGER, INC. NOTES TO FINANCIAL STATEMENTS
Independent Auditors' Report
GARDENBURGER, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED SEPTEMBER 30, 2002, 2001 AND 2000 (In thousands)