================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-20330
GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0886359
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1411 SW MORRISON STREET, SUITE 400, PORTLAND, OREGON 97205
(Address of principal executive offices)
Registrant's telephone number, including area code: (503)-205-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
----------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $71,619,541 as of February 27, 1998 based upon the last closing
price as reported by the Nasdaq National Market System ($9.3125).
The number of shares outstanding of the Registrant's Common Stock as of February
27, 1998 was 8,608,854 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 1998 Annual Meeting of Shareholders.
================================================================================
<PAGE>
GARDENBURGER, INC.
1997 FORM 10-K AMENDMENT NO. 2 TO ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART II
Item 8. Financial Statements and Supplementary Data 2
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 3
Signatures 4
This Amendment No. 2 to Form 10-K/A to Gardenburger, Inc.'s 1997 Annual Report
is being filed to revise note 1 to the Company's financial statements to include
additional disclosures relating to the Company's accounting treatment for
slotting fees paid to retail grocers.
1
<PAGE>
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 14 of Part IV of this document.
Unaudited quarterly financial data for each of the eight quarters in the
two-year period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ----------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Net sales $ 10,304 $ 13,465 $ 16,071 $ 16,997
Gross margin 5,115 6,842 8,179 9,465
Net income (loss) (355) (1,371) (645) 978
Basic net income (loss) per share (0.04) (0.16) (0.08) 0.11
Diluted net income (loss) per share (0.04) (0.16) (0.08) 0.10
1996
Net sales $ 9,439 $ 11,352 $ 11,431 $ 8,305
Gross margin 4,798 5,879 5,823 4,121
Net income (loss) 58(1) 521 778 (294)
Basic net income (loss) per share 0.01 0.06 0.09 (0.03)
Diluted net income (loss) per share 0.01 0.06 0.09 (0.03)
</TABLE>
(1) Operating expenses in the first quarter of 1996 included a $612 one-time
charge for acquired in-process research and development related to the
Gorilla Foods acquisition.
2
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------- ---------------------------------------------------------------
(a) FINANCIAL STATEMENTS AND SCHEDULES
Page
----
Report of Arthur Andersen LLP F-1
Balance Sheets - December 31, 1997 and 1996 F-2
Statements of Operations for the years ended December 31,
1997, 1996 and 1995 F-3
Statements of Shareholders' Equity - December 31, 1997,
1996 and 1995 F-4
Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 F-5
Notes to Financial Statements F-6
Report of Independent Public Accountants on Financial
Statement Schedule F-15
Schedule II Valuation and Qualifying Accounts F-16
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1997.
(c) EXHIBITS
Exhibits are listed on the Index to Exhibits following the financial statements
included in this report.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 3, 1998
GARDENBURGER, INC.
By: /s/ Richard C. Dietz
----------------------------
Richard C. Dietz
Executive Vice President and
Chief Financial Officer
4
<PAGE>
Report of Independent Public Accountants
To the Board of Directors and Shareholders of
Gardenburger, Inc.:
We have audited the accompanying balance sheets of Gardenburger, Inc. (an Oregon
corporation) as of December 31, 1997 and 1996 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gardenburger, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon,
February 5, 1998
F-1
<PAGE>
GARDENBURGER, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------------ ------------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents (Note 1) $ 2,602 $ 7,755
Accounts receivable, net of allowances of
$275 and $177 (Note 1) 8,848 2,800
Inventories, net (Notes 1 and 2) 3,203 4,790
Prepaid expenses 2,321 378
Income taxes receivable 475 653
Deferred income tax benefit (Note 6) 713 470
------- -------
Total Current Assets 18,162 16,846
Property, Plant and Equipment, net of accumulated
depreciation of $2,005 and $1,220 (Notes 1 and 3) 7,822 6,814
Other Assets, net of accumulated amortization of
$250 and $122 (Note 1) 1,261 1,274
------- -------
Total Assets $27,245 $24,934
======= =======
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 3,165 $ 2,173
Payroll and related liabilities payable 948 458
Accrued employee bonuses 668 221
Accrued relocation 161 178
Accrued brokers' commissions 469 199
Accrued slotting fees 679 10
Other current liabilities 568 214
------- -------
Total Current Liabilities 6,658 3,453
Deferred Income Tax Liability (Note 6) 438 502
Other Long-Term Liabilities 310 -
Shareholders' Equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued (Note 9) - -
Series A Junior Participating Preferred Stock,
no par value, 250,000 shares authorized;
none issued (Note 9) - -
Common Stock, no par value, 25,000,000 shares
authorized; shares issued and outstanding:
8,608,254 and 8,566,456 8,651 8,468
Additional paid-in capital 4,203 4,139
Retained earnings 6,985 8,372
------- -------
Total Shareholders' Equity 19,839 20,979
------- -------
Total Liabilities and Shareholders' Equity $27,245 $24,934
======= =======
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $56,837 $40,527 $36,818
Cost of goods sold 27,236 19,906 18,098
------- ------- -------
Gross margin 29,601 20,621 18,720
Operating expenses:
Sales and marketing 26,191 13,583 11,151
General and administrative 5,471 4,963 3,871
Acquired in-process research & development - 612 -
------- ------- -------
31,662 19,158 15,022
------- ------- -------
Operating income (loss) (2,061) 1,463 3,698
Other income (expense):
Interest income 145 365 284
Other, net (136) (38) (131)
------- ------- -------
9 327 153
------- ------- -------
Income (loss) before provision for
(benefit from) income taxes (2,052) 1,790 3,851
Provision for (benefit from) income taxes (659) 727 1,341
======= ======= =======
Net income (loss) $(1,393) $ 1,063 $ 2,510
======= ======= =======
Net income (loss) per share - basic $ (0.16) $ 0.13 $ 0.33
======= ======= =======
Net income (loss) per share - diluted $ (0.16) $ 0.12 $ 0.29
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------------------- Paid-In Retained Shareholders'
Shares Amount Capital Earnings Equity
-------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 7,642,122 $ 7,312 $ 1,927 $ 4,789 $14,028
Exercise of Common Stock Options 59,334 291 - - 291
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 126 - 126
Net income - - - 2,510 2,510
---------- ------- ------- ------- -------
Balance at December 31, 1995 7,701,456 7,603 2,053 7,299 16,955
Exercise of Common Stock Options 625,000 625 - - 625
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 1,336 - 1,336
Issuance of shares for acquisition
of Gorilla Foods, Inc. 240,000 240 750 - 990
Foreign currency translation - - - 10 10
Net income - - - 1,063 1,063
--------- ------- ------- ------- -------
Balance at December 31, 1996 8,566,456 8,468 $ 4,139 8,372 20,979
Exercise of Common Stock Options 41,798 183 - - 183
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 64 - 64
Foreign currency translation - - - 6 6
Net loss - - - (1,393) (1,393)
========= ======= ======== ======= =======
Balance at December 31, 1997 8,608,254 $ 8,651 $ 4,203 $ 6,985 $19,839
========= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
1997 1996 1995
--------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,393) $ 1,063 $ 2,510
Effect of exchange rate on operating accounts 6 10 -
Adjustments to reconcile net income (loss) to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 977 594 334
Acquired in-process research and development, net of tax - 386 -
Loss on sale of fixed assets 145 52 52
Deferred income taxes (307) (57) (154)
(Increase) decrease in:
Investments - - 507
Accounts receivable, net (6,048) 141 (519)
Inventories, net 1,587 (3,228) 1,398
Prepaid expenses (1,943) (181) (60)
Income taxes receivable, net 178 (922) 2,559
Increase (decrease) in:
Accounts payable 992 1,134 409
Payroll and related liabilities 490 50 178
Other accrued liabilities 1,723 413 239
-------- -------- --------
Net cash provided by (used in) operating activities (3,593) (545) 7,453
Cash flows from investing activities:
Payments for purchase of property and equipment (12,141) (2,428) (2,219)
Proceeds from sale of equipment 10,477 26 1
Cash paid for Gorilla Foods and Whole Food Marketing - (419) -
Other assets, net (143) (87) (137)
-------- -------- --------
Net cash used in investing activities (1,807) (2,908) (2,355)
Cash flows from financing activities:
Proceeds from exercise of common stock options and warrants 183 625 291
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 64 1,336 126
-------- -------- --------
Net cash provided by financing activities 247 1,961 417
Increase (decrease) in cash and cash equivalents (5,153) (1,492) 5,515
Cash and cash equivalents:
Beginning of period 7,755 9,247 3,732
-------- -------- --------
End of period $ 2,602 $ 7,755 $ 9,247
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GARDENBURGER, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------------------
ORGANIZATION AND NATURE OF OPERATIONS
Gardenburger, Inc. was incorporated in Oregon in 1985 to provide a line of 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 products that include a variety of frozen, meatless
items that are generally low in cholesterol and fat. The Company's products are
principally sold to retail and institutional customers throughout the United
States.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management believes that the estimates used
are reasonable.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less.
INVENTORIES
Inventories are valued at standard cost, which approximates the lower of cost
(using the first-in, first-out (FIFO) method), or market, and include materials,
labor and manufacturing overhead.
GOODWILL
Goodwill is being amortized using the straight-line method over ten years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using straight-line and accelerated methods over the estimated
useful lives of the assets. Leasehold improvements are amortized over the lease
term or the estimated useful life of the asset, whichever is shorter.
Estimated useful lives are as follows:
BUILDINGS AND IMPROVEMENTS 3-40 YEARS MACHINERY AND EQUIPMENT 7-30 YEARS
OFFICE FURNITURE AND EQUIPMENT 3-10 YEARS VEHICLES 5 YEARS
F-6
<PAGE>
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company invests its excess cash with high credit quality financial
institutions, which bear minimal risk, and, by policy, limits the amount of
credit exposure to any one financial institution.
For the year ended December 31, 1997, two customers accounted for approximately
19 percent and 10 percent of revenue and 7 percent and 7 percent of the accounts
receivable balance at December 31, 1997, respectively.
For the year ended December 31, 1996, two customers accounted for approximately
23 percent and 12 percent of revenue and 32 percent and 13 percent of the
accounts receivable balance at December 31, 1996, respectively.
For the year ended December 31, 1995, two customers accounted for approximately
23 and 12 percent of revenue and 24 and 8 percent of the accounts receivable
balance at December 31, 1995, respectively.
Historically, the Company has not incurred significant losses related to its
accounts receivable.
REVENUE RECOGNITION
Revenue from the sale of products is generally recognized at time of shipment to
the customer. Promotional and other discounts are accrued at time of shipment
based on historical experience.
ADVERTISING COSTS
Advertising costs, which are included in sales and marketing expense, are
expensed when the advertising first takes place. Advertising expense was
approximately $3,844, $1,539 and $871 in 1997, 1996 and 1995, respectively.
SLOTTING FEES
Slotting fees associated with a new product or new territory are initially
recorded as an asset and the related expense is recognized ratably over the
12-month period beginning with the initial introduction of the product. Slotting
agreements refer to oral arrangements pursuant to which the retail grocer allows
the Company's products to be placed on the store's shelves in exchange for a
slotting fee. If a slotting fee agreement were breached, the Company would
pursue available legal remedies to enforce the agreement as appropriate.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expense was approximately $565 in 1997 and $1,000 in 1996, which
includes a one-time charge of $612 for in-process research and development in
conjunction with the acquisition of Gorilla Foods (see Note 7). The amount spent
on such activities during 1995 was immaterial.
F-7
<PAGE>
NET INCOME (LOSS) PER SHARE
Beginning December 31, 1997, basic earnings per share (EPS) and diluted EPS are
required to be computed using the methods prescribed by Statement of Financial
Accounting Standard No. 128, EARNINGS PER SHARE (SFAS 128). Basic 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. Prior period
amounts have been restated to conform with the presentation requirements of SFAS
128. Following is a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31, 1997 1996 1995
- ----------------------- ----------------------------- ----------------------------- ----------------------------
Per Share Per Share Per Share
BASIC EPS Income Shares Amount Income Shares Amount Income Shares Amount
----------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) available to
Common Shareholders $(1,393) 8,584 $ (0.16) $ 1,063 8,456 $ 0.13 $ 2,510 7,670 $ 0.33
======= ====== ======
Effect of Dilutive Securities
Stock Options - - - 610 - 969
------- ------ ------- ------ ------- -----
DILUTED EPS
Income (loss) available to
Common Shareholders $(1,393) 8,584 $ (0.16) $ 1,063 9,066 $ 0.12 $ 2,510 8,639 $ 0.29
======= ====== ======
</TABLE>
At December 31, 1997, 1996 and 1995, the Company had options covering 2,447, 959
and 394 shares, respectively, of the Company's Common Stock outstanding that
were not considered in the respective diluted EPS calculations since they would
have been antidilutive.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
2. INVENTORIES
- ----------------
Detail of inventories at December 31, 1997 and 1996 is as follows:
December 31, 1997 1996
- ---------------------------------------- --------------- -----------------
Raw materials $ 1,148 $ 670
Packaging and supplies 193 243
Finished goods 1,862 3,877
======= =======
$ 3,203 $ 4,790
======= =======
3. PROPERTY, PLANT AND EQUIPMENT
- ---------------------------------
December 31, 1997 1996
- ---------------------------------------- --------------- -----------------
Land $ 787 $ 787
Building and improvements 3,374 1,968
Machinery and equipment 3,897 3,825
Vehicles 52 49
Office furniture and equipment 1,717 1,405
------- -------
9,827 8,034
Less accumulated depreciation (2,005) (1,220)
======= =======
$ 7,822 $ 6,814
======= =======
F-8
<PAGE>
4. LINE OF CREDIT
- -------------------
On June 26, 1997, the Company signed a $10.0 million unsecured line of credit
agreement with a commercial bank. Interest is at the bank's reference rate or,
at the Company's option, at LIBOR plus 1.0 percent or at the Offshore Rate plus
1.0 percent. The line of credit decreases to $5.0 million on April 16, 1998 and
expires July 1, 1998. The line of credit agreement contains certain financial
and other covenants. At December 31, 1997, there were no amounts outstanding
under this line of credit and the Company was in compliance with its covenants.
At December 31, 1997, the bank's reference rate was 8.5 percent.
5. LEASE COMMITMENTS
- ----------------------
Future minimum lease payments at December 31, 1997 were as follows:
Year Ended December 31,
- -----------------------
1998 $ 1,691
1999 1,763
2000 1,763
2001 1,793
2002 1,793
Thereafter 3,211
-------
Total $12,014
=======
Rental expense for the years ended December 31, 1997, 1996 and 1995 was $601,
$257 and $180, respectively.
6. INCOME TAXES
- -----------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards 109, ACCOUNTING FOR INCOME TAXES. The Company realizes tax benefits as
a result of the exercise of nonqualified stock options and the exercise and
subsequent sale of certain incentive stock options (disqualifying dispositions).
For financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits is credited to additional paid-in capital. Tax
benefits of $64, $1,336 and $126 were credited to additional paid-in capital in
1997, 1996 and 1995, respectively.
The provision for (benefit from) income taxes is as follows:
December 31, 1997 1996 1995
- ---------------------------- ---------- ---------- ----------
CURRENT:
Federal $ (352) $ 616 $1,309
State - 168 186
------ ------ ------
(352) 784 1,495
DEFERRED (307) (57) (154)
====== ====== ======
$ (659) $ 727 $1,341
====== ====== ======
F-9
<PAGE>
Total deferred income tax assets were $972 and $507 and liabilities were $697
and $539 at December 31, 1997 and 1996, respectively. Individually significant
temporary differences are as follows:
December 31, 1997 1996
- ----------------------------------- --------------- --------------
Accounts receivable reserves $ 115 $ 74
Inventory 174 238
Book/tax depreciation differences (515) (517)
The Company's deferred tax assets are realizable as a result of past and future
income.
At December 31, 1997, the Company had available federal and state income tax
carryforwards of $111 and $109, respectively. The federal income tax
carryforwards do not expire and the state income tax carryforwards expire
through the year 2012.
The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
December 31, 1997 1996 1995
- ----------------------------------------------- ------- ------ ------
Statutory federal income tax rate (34.0)% 34.0% 34.0%
State taxes, net of federal income tax benefit (3.5) 5.9 3.4
Tax exempt interest and dividends (1.7) (4.0) (2.3)
Trademark and goodwill amortization 1.5 2.0 --
Meals and entertainment 1.8 -- --
Revision of prior year estimates 1.6 2.0 --
Other 2.2 0.7 (0.3)
------- ------ ------
Effective tax rate (32.1)% 40.6% 34.8%
======= ====== ======
7. ACQUISITIONS
- -----------------
In January 1996 the Company completed the acquisition of Ojai, California-based
Gorilla Foods, Inc., a privately held developer and manufacturer of wheat
protein-based, meatless food products, including the GardenDog. The Company
issued 240 shares of the Company's Common Stock in exchange for all outstanding
common shares of Gorilla Foods, and paid $69 in cash. In addition, the Company
agreed to issue up to an additional 200 shares of the Company's Common Stock in
50 share increments if the Company's sales of wheat protein-based products reach
certain levels over the next five years. If such levels are achieved, the
Company will record additional purchase price, principally as goodwill, for the
fair value of the shares issued. Currently, sales levels are not sufficient to
cause the Company to issue additional shares. The Company incurred a one-time
charge of $612 in the first quarter of 1996 as a result of the acquisition of
in-process research and development associated with this acquisition, with the
remainder of the purchase price primarily allocated to goodwill.
In a separate transaction in January 1996, the Company completed the acquisition
of the assets of Whole Food Marketing, Inc., a Southern California based food
broker of the Company's and Gorilla Foods' products. The Company paid $350 for
F-10
<PAGE>
the assets of Whole Food Marketing, Inc., all of which was allocated to
goodwill. This acquisition was accounted for under the purchase method.
Pro forma financial information has not been provided for these acquisitions, as
the pro forma results are not materially different from actual results.
8. RELATED PARTY TRANSACTIONS
- -------------------------------
The Company leases its S.E. 8th Avenue plant facility from the Company's Chief
Creative Officer and one other shareholder. This lease agreement provides for a
$2.2 monthly rent payment. The lease provides for cancellation, without penalty,
by either party with a 30-day notice.
9. SHAREHOLDERS' EQUITY
- -------------------------
PREFERRED STOCK
The Company has authorized 5,000 shares of preferred stock. Such stock may be
issued by the Board of Directors in one or more series, with the preferences,
limitations and rights of each series to be determined by the Board of
Directors.
PREFERRED SHARE PURCHASE RIGHTS
In April 1996, the Company declared a dividend distribution of one preferred
share purchase right on each outstanding share of the Company's Common Stock.
Each right 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 be exercisable if a person or group
acquires 15 percent or more of the Company's Common Stock or announces a tender
offer for 15 percent or more of the Common Stock. The Company's Board of
Directors is entitled to redeem the rights at $.01 per right at any time before
a person has acquired 15 percent or more of the outstanding Common Stock.
STOCK OPTIONS AND WARRANTS
On March 10, 1992, the Company granted a non-statutory stock option to its then
Chief Executive Officer exercisable for 1,650 shares of the Company's Common
Stock. Such option is exercisable for a period of ten years from the date of
grant at an exercise price of $1.00 per share, the fair market value of the
Company's Common Stock on the date of grant. During 1996, an option covering 625
of the shares was exercised. At December 31, 1997, an option to purchase 1,025
shares of Common Stock was outstanding, all of which were exercisable. At
December 31, 1997, 1,025 shares of the Company's Common Stock were reserved for
issuance under this option grant.
In addition, the Company has a 1992 First Amended and Restated Combination Stock
Option Plan (the "Plan") which provides for the issuance of incentive stock
options ("ISOs") to employees and officers of the Company and non-statutory
stock options ("NSOs") to employees, officers, directors and consultants of the
Company. Under the Plan, the exercise price of an ISO cannot be less than the
fair market value on the date of grant and the exercise price of an NSO cannot
be less than 85 percent of fair market value on the date of grant. Options
granted under the Plan generally vest three to five years from the date of grant
F-11
<PAGE>
and generally expire ten years from the date of grant. At December 31, 1997, the
Company had 2,091 shares of Common Stock reserved for issuance under the Plan.
Activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Shares Available Shares Subject to Weighted Average
for Grant Options Exercise Price
-------------------- --------------------- ----------------------
<S> <C> <C> <C>
Balances December 31, 1994 460 240 $ 7.88
Additional shares reserved 1,500 -- --
Options granted (326) 326 11.77
Options canceled 13 (13) 10.19
Options exercised -- (58) 4.95
-------------------- --------------------- ----------------------
Balances, December 31, 1995 1,647 495 10.73
Options granted (902) 902 7.88
Options canceled 21 (21) 12.11
Options exercised -- (9) 3.08
-------------------- --------------------- ----------------------
Balances, December 31, 1996 766 1,367 8.87
Options granted (173) 173 7.16
Options canceled 76 (76) 8.91
Options exercised -- (42) 4.37
==================== ===================== ======================
Balances, December 31, 1997 669 1,422 $ 8.36
==================== ===================== ======================
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1997, 1996 and 1995 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the following
weighted average assumptions for grants:
For the Year Ended
December 31, 1997 1996 1995
-------------- ------------- ---------------
Risk-free interest rate 6.25% 6.0% 6.0%
Expected dividend yield 0% 0% 0%
Expected lives 6.5 years 8 years 8 years
Expected volatility 58.11% 60.94% 64.51%
F-12
<PAGE>
Using the Black-Scholes methodology, the total value of options granted during
1997, 1996 and 1995 was $760, $4,762 and $2,721, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
four years). The weighted average per share fair value of options granted during
1997, 1996 and 1995 was $4.45, $5.55 and $8.47, respectively. If the Company had
accounted for its stock-based compensation plans in accordance with SFAS 123,
the Company's net income (loss) and net income (loss) per share would
approximate the pro forma disclosures below:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1997 1996 1995
------------------------- --------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(1,393) $(3,102) $1,063 $(299) $2,510 $1,046
Basic net income (loss)
per share $(0.16) $(0.36) $0.13 $(0.04) $0.33 $0.14
Diluted net income
(loss) per share $(0.16) $(0.36) $0.12 $(0.04) $0.29 $0.12
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. SFAS 123 does not apply to awards prior to January 1, 1995,
and additional awards are anticipated in future years.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------ -----------------------------------
Weighted
Average Weighted Number of Weighted
Range of Exercise Number Remaining Average Shares Average
Prices Outstanding at Contractual Exercise Exercisable at Exercise Price
12/31/97 Life - Years Price 12/31/97
- ------------------- ---------------- --------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
$ 1.00 1,025 4.0 $ 1.00 1,025 $ 1.00
3.08-5.00 14 4.0 3.30 14 3.30
6.51-9.00 1,026 8.3 7.77 405 7.58
9.56-11.75 351 5.7 11.57 308 11.56
11.76-13.25 31 7.4 12.85 31 12.85
============= ====== ===== ======== ======= ========
$ 1.00-13.25 2,447 6.1 $ 5.52 1,783 $ 4.54
============= ====== ===== ======== ======= ========
</TABLE>
At December 31, 1996 and 1995, 1,575 and 2,010 options, respectively, were
exercisable at weighted average exercise prices of $4.05 per share and $2.66 per
share, respectively.
F-13
<PAGE>
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 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 $106 in 1997, $74 in
1996 and $51 in 1995.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Cash paid during the period for interest $ -- $ -- $ 1
Cash paid during the period for income taxes 13 1,062 96
Issuance of Common Stock in exchange for the assets of
Gorilla Foods, Inc. -- 990 --
</TABLE>
F-14
<PAGE>
Report of Independent Public Accountants
on Financial Statement Schedule
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Gardenburger, Inc.'s Form 10-K/A, and have
issued our report thereon dated February 5, 1998. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The schedule
listed on page F-16 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in our audit of
the basic financial statements and, in our opinion, fairly states, in all
material respects, the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
February 5, 1998
F-15
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation as amended October 17,
1997 (8)
3.2 1995 Restated Bylaws (6)
4 Instruments defining the rights of security holders. See
Article II, Sections 3, 4 and 5 of Restated Articles of
Incorporation and Article I of 1995 Restated Bylaws (6)(8)
10.1 Business Loan Agreement with Bank of America re: Line-of-
Credit, dated June 26, 1997 (9)
10.2 Plant Lease-1416 S.E. 8th, Portland, Oregon (1)
10.3 First Amendment to Plant Lease-1416 S.E. 8th, Portland,
Oregon*
10.4 Office Lease-975 S.E. Sandy Blvd., Portland, Oregon (4)
10.5 Consent to Assignment and Option to purchase 1005 S.E.
Washington, Portland, Oregon (1)
10.6 Morrison Plaza Office Lease dated October 29, 1996 (10)
10.7 First Amendment to Morrison Plaza Office Lease, dated
December 9, 1997*
10.8 Facility Lease by and between Freeport Center Associates, a
Utah general partnership and Wholesome & Hearty Foods, Inc.,
an Oregon corporation, dated May 28, 1997 (9)
10.9 Addendum dated August 1, 1997 to Facility Lease by and
between Freeport Center Associates and Wholesome & Hearty
Foods, Inc.*
10.10 Purchase and Sale Agreement and Receipt For Earnest Money
Between the Iseli Family Partnership, an Oregon Partnership
(Seller) and the Company (Buyer), as amended, dated May 8,
1995 (5)
10.11 1992 First Amended and Restated Combination Stock Option
Plan (4)(11)
10.12 Lyle Hubbard Employment Agreement dated April 14, 1996 (10)
(11)
10.13 Paul F. Wenner Employment Agreement and Amendment thereto
(1)(11)
10.14 Paul F. Wenner Stock Option Agreement (2)(11)
10.15 Form of Severance Agreement for Executive Officers (10)(11)
10.16 Form of Indemnification Agreement between the Company and
its Officers and Directors (3)(11)
10.17 Plan and Agreement of Reorganization by Exchange by the
Company of its Voting Stock for Substantially All The
Properties of Gorilla Foods, Inc., dated January 31, 1996
(5)
<PAGE>
Exhibit No.
- -----------
10.18 1998 Executive Annual Incentive Plan (11)*
10.19 Consulting Agreement between the Company and E. Kay Stepp,
dated November 1, 1996 (10)(11)
10.20 Amendment No. 1 to Consulting Agreement between the Company
and E. Kay Stepp, dated January 1, 1998 (11)*
10.21 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated April 25, 1996 (7)
10.22 Lease Agreement between BA Leasing & Capital Corporation and
Gardenburger, Inc., dated as of December 17, 1997*
10.23 Form of Option Agreement for Option grants to executive
officers after May 24, 1995 (11)*
10.24 Purchase and Sale Agreement with effective date of March 18,
1998, between the Company and Opus Northwest, L.L.C. for the
sale of real property at N.E. 166th and Airport Way in
Portland, Oregon*
23 Consent of Arthur Andersen LLP
24 Powers of Attorney*
27.1 Financial Data Schedule*
27.2 Restated Financial Data Schedule*
- ---------------------
*previously filed.
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Commission File No. 33-46623) as filed with the Securities and Exchange
Commission on May 6, 1992.
(2) Incorporated by reference to the Company's fiscal year ended December 26,
1992 Form 10-K Annual Report as filed with the Securities and Exchange
Commission on March 23, 1993.
(3) Incorporated by reference to the Company's fiscal year ended December 25,
1993 Form 10-K Annual Report as filed with the Securities and Exchange
Commission on March 23, 1994.
(4) Incorporated by reference to the Company's fiscal year ended December 31,
1994 Form 10-K Annual Report as filed with the Securities and Exchange
Commission on March 30, 1995.
(5) Incorporated by reference to the Company's fiscal year ended December 31,
1995 Form 10-K Annual Report as filed with the Securities and Exchange
Commission on March 29, 1996.
(6) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1996, as filed with the Securities and
Exchange Commission on November 4, 1996.
(7) Incorporated by reference to the Company's Form 8-K Current Report, as
filed with the Securities and Exchange Commission on May 8, 1996.
(8) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1997, as filed with the Securities and
Exchange Commission on November 4, 1997.
(9) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended June 30, 1997, as filed with the Securities and Exchange
Commission on August 14, 1997.
(10) Incorporated by reference to the Company's fiscal year ended December 31,
1996 Form 10-K Annual Report as filed with the Securities and Exchange
Commission on March 25, 1997.
(11) Management contract or compensatory plan or arrangement.
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated February 5, 1998 included in this Amendment No. 2 to Form 10-K/A
into the Company's previously filed Registration Statements Nos. 33-64622,
33-64624 and 33-76764 on Form S-8.
/s/ ARTHUR ANDERSEN LLP
Portland, Oregon
December 3, 1998
