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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
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(Mark One)
AMENDMENT NO. 1 TO
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number 0-20330
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GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0886359
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1411 SW Morrison Street, Suite 400 Portland, Oregon 97205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-205-1500
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock without par value 8,640,920
(Class) (Outstanding at May 8, 1998)
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The undersigned registrant hereby amends Part I, Item 2, and Part II, Item 2, of
its Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, as
follows:
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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Results of Operations
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Net sales increased 26.6 percent to $13.0 million for the first quarter of 1998
from $10.3 million for the first quarter of 1997. The increase is primarily
related to a 9 percent increase in sales in the Company's club store channel and
a 148 percent in the Company's grocery channels as a result of the Company's
marketing emphasis. This increase was partially offset by a 24 percent decrease
in sales to food service outlets. The Company believes that the increase in
grocery channel sales is attributable to its marketing campaign. Sales gains
were achieved primarily as a result of increased volume, as prices for products
were unchanged from prior periods.
Gross margins increased to $6.2 million (47.2 percent of net sales) for the
first quarter of 1998 from $5.1 million (49.7 percent of net sales) for the
first quarter of 1997. The decrease in the gross margin percentage is primarily
a result of start-up costs associated with the Company's new manufacturing
facility in Clearfield, Utah.
Sales and marketing expenses increased to $11.4 million (87.6 percent of net
sales) for the first quarter of 1998 from $4.7 million (45.3 percent of net
sales) for the first quarter of 1997, primarily as a result of costs associated
with the Company's aggressive 1998 advertising plan and the introduction of new
products into the retail grocery channel.
General and administrative expenses increased to $1.4 million (11.0 percent of
net sales) for the first quarter of 1998 compared to $1.1 million (10.8 percent
of net sales) for the first quarter of 1997, primarily as a result of an
insurance settlement received in the first quarter of 1997 that effectively
lowered that period's expenses.
Operating loss increased to $6.7 million for the first quarter of 1998 from
$661,000 for the first quarter of 1997 as a result of the individual line item
changes discussed above.
Income taxes are based on an estimated rate of 35.9 percent for the quarter
ended March 31, 1998 compared to the 32.1 percent rate used throughout 1997.
Net loss was $4.3 million for the first quarter of 1998 compared to net loss of
$355,000 for the first quarter of 1997. Loss per share, both basic and diluted,
was $0.50 (on 8,612,973 shares) for the first quarter of 1998 compared to loss
per share, both basic and diluted, of $0.04 (on 8,566,456 shares) for the first
quarter of 1997.
Liquidity and Capital Resources
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At March 31, 1998 working capital was $17.2 million, including $9.3 million of
cash and cash equivalents. In the first quarter of 1998, working capital
increased by $5.7 million compared to December 31, 1997 and the current ratio
decreased to 2.6:1 from 2.7:1.
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Cash and cash equivalents increased $6.7 million from December 31, 1997
primarily due to the issuance of $15.0 million of convertible senior
subordinated debt and receipt of $2.0 million in proceeds from the Company's
line of credit, offset by $7.4 million used in operations and $1.9 million used
for the purchase of property and equipment.
Accounts receivable decreased $1.0 million to $7.8 million at March 31, 1998
from $8.8 million at December 31, 1997 due primarily to significant sales at the
end of 1997 that were collected during the first quarter of 1998, offset by an
increase in days sales outstanding to 49 at March 31, 1998 from 34 at December
31, 1997.
Inventories increased $3.5 million to $6.7 million at March 31, 1998 from $3.2
million at December 31, 1997 in order to support the increased level of sales
expected in the second quarter of 1998. Inventory turned 5.6 times on an
annualized basis for the first quarter of 1998 compared to 9.6 times on an
annualized basis for the fourth quarter of 1997.
Capital expenditures of $1.9 million during the first quarter of 1998 primarily
resulted from expenditures for equipment for the Company's new Clearfield, Utah
production facility. Additional capital expenditures are estimated to total
approximately $3.0 million for 1998, primarily for information systems
infrastructure.
During March 1998, the Company completed a private placement of $15 million of 7
percent Convertible Senior Subordinated Notes (the "Notes") with Dresdner
Kleinwort Benson Private Equity Partners LP ("Dresdner"). The Notes are
convertible into shares of the Company's Common Stock at the option of Dresdner
until maturity in 2003, at which time they will be due in full if not previously
converted. The Company may also elect to redeem the Notes, if not previously
converted, at any time after two years from the date of issuance. The initial
conversion price is $12.90 based on a conversion premium of 120 percent of the
market price of the Company's Common Stock at the time the transaction was
negotiated. Under certain circumstances, the conversion price may be adjusted to
120 percent of the alternative market price (as defined) of the Company's Common
Stock on July 1, 1998, but will not be less than $11.40 or more than $12.90.
In April 1998, the Company entered into a Business Loan Agreement (the
"Agreement") with Bank of America NT & SA for a $10.0 million revolving line of
credit, which expires July 1, 1999. Interest is at the bank's reference rate, or
at the option of the Company, at LIBOR plus 1.0 percentage point or the Offshore
Rate plus 1.0 percentage point. This facility also contains a provision for a
$0.4 million letter of credit with a maximum maturity of March 31, 2000. The
Agreement also provides for a separate $5.0 million revolving line of credit,
which expires December 1, 1998. Interest is at the bank's reference rate plus
3.0 percentage points. The Agreement is secured by all equipment, inventory,
receivables and other personal property owned by the Company. The Agreement
contains certain covenants relating to the availability of financial information
from the Company, as well as the maintenance of certain financial ratios and
tests.
Management believes that its existing working capital, in combination with cash
flow from operations and funds available under credit facilities, should be
sufficient to support its operations and current marketing plans for the balance
of the 1998 fiscal year. However, execution of the Company's long-term business
strategy is likely to require additional funding. The Company plans to fund its
long-term liquidity needs through available sources, including its existing
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credit lines, and will also consider raising additional capital through
privately placed or public offerings of equity.
New Accounting Pronouncement
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In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS 130"). This statement establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general purpose financial statements. The objective of SFAS 130
is to report a measure of all changes in equity of an enterprise that result
from transactions and other economic events of the period other than
transactions with owners. The Company adopted SFAS 130 during the first quarter
of 1998. Comprehensive loss did not differ from currently reported net loss in
the periods presented.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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On March 27, 1998, the Company sold $15,000,000 aggregate principal amount of 7%
Convertible Senior Subordinated Notes (the "Notes") at par to Dresdner Kleinwort
Benson Private Equity Partners LP ("Dresdner") pursuant to a Note Purchase
Agreement dated as of March 27, 1998. The Company paid a closing fee of $150,000
to Dresdner Kleinwort Benson North America LLC and paid the Company's placement
agent, Hambrecht & Quist LLP, a placement fee of $750,000 in connection with the
transaction. The following is a summary of the material terms of the Notes, the
Note Purchase Agreement, and a related Registration Rights Agreement. This
summary does not purport to be complete and is qualified by reference to the
actual provisions of the documents, which are attached as exhibits to this
report.
The Notes will mature on April 1, 2003. Interest is payable semi-annually. The
Notes may be converted at any time prior to maturity, in whole or in part, into
shares of the Company's Common Stock. The initial conversion price is $12.90 per
share, subject to adjustment for changes in capitalization and other
antidilution provisions. As a result of the convertibility of the Notes,
Dresdner is deemed to beneficially own approximately 1,162,800 shares of Common
Stock, or 11.9 percent of the outstanding shares (including shares issuable upon
conversion of the Notes).
The Company may prepay the principal amount of the Notes, in whole or in part,
at any time prior to maturity, subject to a prepayment premium of 2.8 percent of
the principal amount if the prepayment occurs between April 1, 2000, and March
31, 2001, and 1.4 percent if the prepayment occurs between April 1, 2001, and
March 31, 2002. If the Company prepays any portion of the Notes on or before
March 31, 2000, or as a result of an event of default under the Notes, the
Company is required to issue warrants to purchase shares of Common Stock in the
same number as the repaid principal amount of Notes was convertible into and
with an exercise price equal to the then applicable conversion price. The Notes
are also subject to special prepayment provisions (including a 20 percent
prepayment premium) in the event of a change in control or sale of more than 50
percent of the assets of the Company or if a management change (defined as the
cessation of employment of Lyle G. Hubbard, President and Chief Executive
Officer, or Richard C. Dietz, Executive Vice President and Chief Financial
Officer, of the Company where a successor reasonably satisfactory to the holders
of a majority of the shares of Common Stock issued or issuable upon conversion
of the Notes (the "Majority Holders") is not employed by the Company within 60
days of such cessation of employment) has occurred.
Pursuant to the Note Purchase Agreement, the Company may not, without the prior
written consent of the Majority Holders, (i) amend the Company's Articles of
Incorporation, Bylaws or the Rights Agreement between the Company and First
Chicago Trust Company of New York in a manner materially adverse to Dresdner's
rights and preferences under the Note Purchase Agreement and the Notes, (ii)
create a new class or series of securities on a par with or senior to the Notes,
or (iii) engage in certain significant corporate transactions, including, but
not limited to, a merger or sale of the Company or its business, liquidation or
dissolution of the Company, certain business acquisitions, and the incurrence of
indebtedness or lease obligations in excess of specified thresholds.
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In addition, the Company has agreed to maintain the following financial ratios:
(a) current assets to current liabilities of at least 1.575 to 1.0, measured
monthly; (b) total liabilities to tangible net worth not to exceed 1.1 to 1.0,
measured monthly and (c) a minimum fixed charge coverage ratio of 1.08 to 1.0,
measured annually. So long as at least $5,000,000 in principal amount of the
Notes remains outstanding and Dresdner and its affiliates own at least a
majority of the principal amount of such Notes, the Company may not declare any
dividends or make any distributions with respect to its capital stock or redeem
or purchase any of its capital stock without the prior written consent of the
Majority Holders. Also, so long as any Notes remain outstanding, Paul F. Wenner,
Lyle G. Hubbard and the Company have agreed to take all reasonably necessary and
desirable actions within their control so that an individual designated by the
Majority Holders is elected as a director of the Company (a "Designated
Director"). If at any time a Designated Director is not a member of the Board of
Directors, the Majority Holders have the right to appoint a representative to
attend and observe board meetings at the Company's expense.
On April 21, 1998, the Board of Directors acted to increase the number of
positions on the Board to eight and elected Alexander Coleman, who is Vice
President of Dresdner Kleinwort Benson North America LLC and an Investment
Partner in Dresdner Bank's U.S.-based SBIC, Dresdner Kleinwort Benson Private
Equity LLC, as a director in accordance with the terms of the Note Purchase
Agreement. Ronald C. Kesselman, Executive Vice President of Borden Holdings,
Inc., Chairman of Wise Foods, and Chairman of Elmer's Products, was also elected
as a director of the Company. The terms of Messrs. Coleman and Kesselman will
expire at the 1999 annual meeting of shareholders of the Company.
Pursuant to a separate Registration Rights Agreement, the Company has agreed to
register the shares of Common Stock into which the Notes are convertible for
resale by the holders thereof within 120 days after March 27, 1998, and to keep
such registration in effect until March 31, 2004.
The Company relied on the exemption from registration provided by Section 4(2)
under the Securities Act of 1933 with respect to the sale of the Notes.
Pursuant to the Business Loan Agreement dated as of April 28, 1998, between the
Company and Bank of America NT & SA, the Company is required to maintain a ratio
of current assets to current liabilities of at least 2.0 to 1.0, a ratio of
total liabilities to tangible net worth not exceeding 1.0 to 1.0, and a minimum
fixed charge coverage ratio of 1.2 to 1.0. The foregoing ratios are more
stringent than those contained in the Notes.
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SIGNATURES
Pursuant to the requirements 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: July 29, 1998 GARDENBURGER, INC.
By: /s/LYLE G. HUBBARD
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Lyle G. Hubbard
Director, President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ RICHARD C. DIETZ
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Richard C. Dietz
Executive Vice President, Chief Financial Officer,
Treasurer and Secretary
(Principal Financial and Accounting Officer)
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