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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended: December 31, 1998
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)
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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 $70,744,520 as of February 26, 1999 based upon the last closing
price as reported by the Nasdaq National Market System ($11.00).
The number of shares outstanding of the Registrant's Common Stock as of February
26, 1999 was 8,755,561 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement for its 1999 Annual Meeting of Shareholders.
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<PAGE>
GARDENBURGER, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 25
PART III
Item 10. Directors and Executive Officers of the Registrant 26
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners
and Management 26
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 27
Signatures 28
<PAGE>
PART I
ITEM 1. BUSINESS
- - ------- --------
COMPANY OVERVIEW
Gardenburger, Inc. (the "Company") is the leading producer and marketer of
branded veggie burgers. The Company's Gardenburger(R) product line, featuring
the grain-based original Gardenburger veggie burger, is the number one national
brand in market share in the retail grocery, food service, club store and
natural foods channels of distribution. The Company's net sales grew to $100.1
million for the year ended December 31, 1998, a 76% increase over the same
period of 1997.
As a result of innovative product development and its consumer and trade
marketing, the Company has emerged as the leader in the rapidly growing veggie
burger segment of the meat alternative category, which is one of the fastest
growing categories in the food industry. By making the Gardenburger brand the
premier name in this market segment and establishing broad distribution of its
products, the Company believes it is well-positioned to benefit as the veggie
burger increasingly becomes a mainstream consumer product.
The Company's objective is to be the leading provider of veggie burgers in the
four primary distribution channels in which the Company distributes its
products--retail grocery stores; food service, including restaurants,
universities and other commercial outlets; club stores; and natural foods
outlets. The Company currently distributes its products through more than 26,000
retail outlets, 35,000 food service outlets, 600 club store locations and 4,000
natural foods stores.
In 1997, the Company began a strategic initiative to penetrate the retail
grocery channel, which is the largest channel of distribution. At that time, the
Company had approximately 20,000 retail grocery placements of its products,
representing an all commodity volume ("ACV")1 penetration of 30%, and an average
of 1.8 product variations available in each retail outlet. Each product line is
commonly referred to as a stock keeping unit ("SKU"). As of December 31, 1998,
there were over 143,000 retail grocery placements of the Company's products in
more than 26,000 grocery stores, representing an ACV penetration level of 89%,
with an average of 5.4 SKUs per store. This rapid expansion in the availability
of the Company's products occurred following an aggressive national television
advertising campaign in 1998. According to A.C. Nielsen Scantrack, there was a
203% increase in consumer purchases of the Company's veggie burgers in retail
grocery stores in 1998 compared to 1997, and these additional purchases
represent 81% of the unit volume increase in total veggie burger sales through
the retail grocery channel since January 1, 1998.
The Company was organized in 1985 under the name Wholesome & Hearty Foods, Inc.
and completed its initial public offering in 1992. The Company changed its name
to Gardenburger, Inc., in October 1997. The Company's Common Stock currently
trades on the National Market Tier of The Nasdaq Stock Market under the symbol
"GBUR."
- - -------------------------------
1 All commodity volume compares the total sales volume of the stores carrying
the Company's products to the total sales volume throughout the retail grocery
channel.
2
<PAGE>
GROWTH STRATEGY
The Company's objective is to capitalize on what it believes to be a significant
growth opportunity for veggie burgers by increasing household penetration,
consumer usage and product distribution throughout all channels of distribution.
Accordingly, the Company's growth strategy consists of the following key
elements:
CONTINUE TO LEAD MAINSTREAMING OF VEGGIE BURGERS. The Company believes that its
national advertising efforts have acted as a significant catalyst for the
conversion of the veggie burger from a niche to a mainstream product. The
Company has captured 81% of the unit volume increase in total veggie burger
sales in the retail grocery channel since January 1, 1998. The Company intends
to continue its efforts to capture a substantial share of the expected growth in
veggie burger sales.
CAPTURE THE VEGGIE BURGER SEGMENT. The Company's goal is to make the
Gardenburger brand the premier name in the meat alternative category. By doing
so, the Company believes it can maximize its share of this category on a long
term basis and sustain the premium pricing levels associated with
category-leading branded products. The Company's objective is for consumers to
associate the Gardenburger brand name with the veggie burger in the way
consumers associate Campbell's with soups, Heinz with ketchup and Gatorade with
sports drinks.
INCREASE CONSUMER AWARENESS, TRIAL AND USAGE TO ACCELERATE CATEGORY LEADERSHIP.
The Company believes that increased consumer awareness, trial and usage are the
keys to achieving significant growth among mainstream consumers and to
establishing the Gardenburger line as the brand of choice in the veggie burger
segment. The Company, therefore, is committed to building consumer demand for
its products through aggressive investments in national television and print
advertising, in-store sampling, coupon promotion and other marketing techniques.
PENETRATE MULTIPLE DISTRIBUTION CHANNELS. The Company is already the leader in
the retail grocery, food service, club store and natural foods distribution
channels, although it is most dominant in the retail grocery channel. The
Company's goal is to expand its leadership position in the retail grocery
channel and substantially improve upon its current 46% market share while also
focusing on further penetration of the food service and club store channels. In
addition, the Company believes other distribution channels, such as vending and
convenience stores, present growth opportunities. The Company believes that its
leadership in multiple distribution channels will allow it to achieve economies
of scale in manufacturing and advertising.
LEVERAGE NEW PRODUCT INTRODUCTIONS TO REINFORCE BRAND SUPERIORITY. The Company
intends to continue to improve its existing products as well as to develop new
product varieties. In March 1998, the Company introduced three new gourmet
flavors of its veggie burger. Two of these flavors, Gardenburger Savory
Mushroom(TM) and Gardenburger Fire Roasted Vegetable(TM), are currently ranked
in the top five in veggie burger sales in the retail grocery channel. The
Company believes that innovative product improvements and new product
introductions will support the Company's efforts to increase its shelf space in
retail grocery stores and reinforce the Gardenburger brand.
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The Company believes that continued revenue growth can be achieved and sales
growth maintained if it continues to advertise and promote its products at
current levels. Consumer demand may not increase or may even decline without
renewed advertising and promotional efforts. In addition, the Company has a
limited operating history and limited experience relating to the long-term
effect of advertising and promotional activities (like coupons and other trade
promotions) on sales levels. It is possible that consumers who originally buy
during a trade promotion may not continue to purchase the Company's products
without incentives. A failure to attract repeat customers or an inability to
continue current advertising and promotional levels could lead to a decrease in
sales growth or even reduced sales.
Consistent with its growth strategy, the Company has experienced rapid growth,
which places and will continue to place significant demands on the Company's
management, administrative, operating and financial resources. The Company's
future performance and profitability will depend in large part on its ability to
continue to execute its growth strategy, adapt to and continue to foster its
rapid growth, retain and continue to attract qualified employees, and
successfully implement enhancements to its internal information systems and
adapt those systems, as necessary, to respond to expansion of its business.
PRODUCTS
The Company is committed to offering healthy, great tasting and convenient
meatless food choices to consumers. The Company's principal products are veggie
burgers, either veggie-grain based or soy based, which are currently offered in
eight flavors. The Company also offers specialized products in certain channels,
including Gardenburger Sub(R), GardenSausage(R) and GardenVegan(R).
The Company's recipes for its products are proprietary although they contain
commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms,
brown rice, onions, rolled oats, low-fat cheeses, bulgur wheat, egg whites,
natural seasonings and spices and contain no artificial additives. Soy based
burgers are seasoned to taste like ground beef. All of the Company's veggie
burgers are considerably lower in fat and calories than hamburgers of comparable
weight.
4
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<TABLE>
<CAPTION>
2.5 OZ. VEGGIE-GRAIN BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- - ------------------------------------ -------------------- ------------------------ ------------------- --------------
<S> <C> <C> <C> <C>
Gardenburger(R)Original Veggie-grain based Mushrooms, brown rice, Low fat 130
burger onions, rolled oats and
low-fat cheese
Gardenburger Spicy, Mexican Red and black beans, Low fat 120
Zesty Bean(R) flavor burger Anaheim chilies, red
and yellow bell
peppers, cilantro
Gardenburger Veggie Medley(R) Vegetable emphasis Soy cheese, broccoli, No fat 100
burger carrots, red and
yellow bell peppers
*Gardenburger Savory Mushroom(TM) Gourmet burger Portabella mushrooms, Low fat 120
wild rice
*Gardenburger Fire Roasted Gourmet burger Roasted garlic, Low fat 120
*Gardenburger Classic Greek(TM) Gourmet burger Kalamata olives, feta Low fat 120
cheese
2.5 OZ. SOY BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- - ------------------------------------ -------------------- ------------------------ ------------------- --------------
Gardenburger Hamburger Style(R) Hamburger analog Soy, wheat gluten No fat 90
burger
Gardenburger Hamburger Style(R)with Hamburger analog Soy, wheat gluten, Low fat 110
Cheese burger mozzarella and cheddar
cheese
</TABLE>
- - --------------------------
* MARCH 1998 NEW PRODUCT INTRODUCTIONS.
All of the Company's products are frozen. The Company believes that its colorful
product packaging, which features recipes and prominent Gardenburger script logo
on all sides of the package, contributes to brand recognition and easy consumer
identification of Gardenburger products, and is superior to that of its
competitors.
Gardenburger veggie burgers sold in retail grocery stores weigh 2.5 ounces and
come in boxes of four or bags of eight. Gardenburger veggie burgers sold in the
food service channel are available in both 3.4-ounce and 5-ounce sizes.
Gardenburger veggie burgers are distributed to club stores in packages of 15
burgers of 3.4 ounces each.
5
<PAGE>
DISTRIBUTION
The Company primarily distributes its products into four channels: retail
grocery, food service, club stores and natural foods stores. In addition, it
recently began distribution in the vending channel.
RETAIL GROCERY. Beginning in 1997, the Company began aggressively expanding
distribution of its veggie burgers in the retail grocery channel, and
Gardenburger veggie burgers can now be found in more than 26,000 grocery stores.
The Company's ACV penetration in the U.S. retail grocery channel has risen from
less than 30% at the beginning of 1996, with an average of 1.8 SKUs, to an ACV
penetration of 89% as of December 31, 1998, with an average of 5.4 SKUs. The
Company has increased its retail grocery placements from approximately 20,000 at
the beginning of 1997 to over 143,000 as of December 31, 1998. The Company's
products are currently carried in most major U.S. retail grocery chains.
FOOD SERVICE. The Company distributes its products to more than 35,000 food
service outlets throughout the U.S. and Canada, including restaurant chains such
as Applebee's, Denny's, Fuddruckers, Marie Callenders, Red Robin, Subway and
T.G.I. Friday's. In many of these restaurants, the Gardenburger brand name
appears directly on the menu. Additional points of food service distribution
include academic institutions, hotels and other outlets, including amusement
parks and sports stadiums. In the United States, there are approximately 800,000
outlets in the food service channel. The Company relies primarily on
distributors such as Sysco for distribution to this channel.
CLUB STORES. The Company's products are distributed to club stores with over 600
locations, including Costco and Sam's Club. The Company relies on Norpac Food
Sales, Inc. as its broker in this channel. Currently, these stores carry the
Gardenburger Original veggie burger in the 3.4 ounce food service size, and the
Company recently introduced the Gardenburger Hamburger Style in a number of
these stores.
NATURAL FOODS. The Company's products are distributed to more than 4,000 natural
food stores, including Whole Foods and Wild Oats. The Company utilizes food
brokers that specialize in natural foods stores.
The Company's ability to expand distribution in each of the described channels
will depend in part on consumer preferences, and to a certain extent on
continuation of the current trends of health awareness, emphasis on a reduced
fat diet and reduced consumption of red meat, as well as safety concerns
associated with red and white meat. There is always a risk that further
development of low fat red or white meat products or technological advances that
limit food-borne disease risks may lead to a change in consumer preferences and
reduce demand for meat replacement products. Demand for the Company's products
may be adversely affected by such changes, which may occur rapidly and without
warning. Because of the Company's dependence on a single product line, any
change in consumer preferences or increase in competition in the veggie burger
market segment wold adversely affect the Company's business to a greater degree
than if it had multiple product lines.
The Company sells its products in North America primarily through approximately
60 independent, commissioned food brokers and 500 active distributors. The
retail food brokers have close working relationships with the leading grocery
chains, club stores and natural food stores and arrange for sales of
Gardenburger products, which the Company then ships directly to the retailers'
warehouses. Products sold into the food service channel are purchased from the
Company by distributors who arrange for shipment by temperature-controlled truck
6
<PAGE>
to their frozen storage warehouses in principal cities in the United States and
Canada for distribution to food service outlets. The Company has no long-term
contracts with its food brokers and distributors and occasionally changes
brokers or distributors in an effort to increase coverage in a geographic
region. The Company could experience a substantial temporary or permanent
decline in net sales if one or more of the Company's major food brokers or
distributors were to discontinue handling the Company's products, go out of
business or decide to emphasize distributing products of the Company's
competitors.
The following table lists selected retailers, distributors and food service
outlets that offer the Company's products for sale to consumers:
Retail Food Service
------ ------------
GROCERY RESTAURANTS
A&P Applebee's
Albertsons Damon's
Buttrey's Denny's
Dominick's IHOP
Food Lion Jeremiah's
Fred Meyer Lyons
Giant Eagle Peppermill
Giant Food Red Robin
HEB Sizzler
Jewel Subway
Kroger T.G.I. Friday's
Meijers
Publix Super Markets HOTELS
Ralph's Holiday Inn
Safeway Marriott
Thriftway Sheraton
Von's
Winn-Dixie UNIVERSITIES
Stanford
NATURAL FOODS UCLA
Wild Oats University of California, Berkeley
Whole Foods Harvard
MIT
CLUB STORES
Costco SPORTS/ENTERTAINMENT
Sam's Club Dodger Stadium
Yankee Stadium
DISTRIBUTORS Rose Garden
Sysco Six Flags
Rykoff-Sexton Universal Studios
7
<PAGE>
Prior to 1997, the Company focused primarily on distribution of its products in
the Western United States. However, following the Company's 1998 marketing
campaign and in connection with the Company's penetration into the retail
grocery channel, product sales have become increasingly broad-based:
% OF NET SALES
--------------
REGION 1998 1997
- - ------ ---- ----
Northeast 30% 25%
Southwest 29% 33%
Midwest 14% 11%
Northwest 12% 16%
Southeast 12% 11%
Canada 3% 4%
---- ----
100% 100%
To date, the Company has focused its sales efforts primarily in North America,
and international sales have not been material. The Company believes, however,
that opportunities exist for international distribution of Gardenburger
products.
SALES AND MARKETING
SALES. The Company's sales objective is to maintain its veggie burgers as the
number one brand in the retail grocery, food service, club store and natural
foods store channels. The Company's use of regional food brokers as its
representatives allows it to maintain contact with the nation's major retail
grocery chains and food service outlets without a large internal sales force.
Brokers are paid sales commissions on all volume sold. Commission rates as a
percentage of net sales have declined as the Company has grown.
The Company's Vice President of Retail Sales and Senior Vice President of Food
Service Sales and Marketing, located in Portland, Oregon and Chicago, Illinois,
respectively, coordinate the Company's sales efforts. The Company's regional
sales force, located strategically in the Company's primary geographic sales
regions and in proximity to its brokers, is divided into a food service division
and a retail grocery division. The regional sales managers, who joined the
Company from major food products companies such as Campbell's, Nestle, Quaker
Oats and Sara Lee, have substantial sales and industry experience. These
regional sales managers coordinate the efforts of the food brokers and
distributors.
MARKETING. The Company's primary marketing objective is to build awareness of
the veggie burger in general and the Gardenburger brand in particular in order
to increase the market for veggie burgers and to make the Gardenburger brand the
premier name in the veggie burger segment. The Company spent $14 million on
advertising in 1998. Advertising and marketing strategies are directed by the
Company's Vice President of Marketing and developed in collaboration with an
outside advertising agency. The Company advertises through a wide variety of
media, including television, print, restaurant menus and point-of-sale displays.
Any decrease in planned advertising expenditures would adversely effect the
Company's ability to execute its marketing strategy.
8
<PAGE>
In 1998, the Company undertook a significant national television ad campaign,
featuring three animated commercials, some of which aired during prime-time on
NBC, CBS, Fox and selected cable networks. The pinnacle of this campaign was a
30-second spot that aired during the final episode of "Seinfeld" in May 1998.
This spot received national attention prior to airing, including articles in THE
WALL STREET JOURNAL and news stories on NBC Nightly News with Tom Brokaw and CNN
Financial News.
Print advertisements for the Gardenburger brand have appeared in a number of
magazines with national circulation. In 1998, the Company used five different
"cartoon" print ads.
During 1998, the Company's marketing included four free-standing newspaper
inserts with coupons, which appeared throughout the United States. The Company
also invested heavily in grocery trade programs to support its rapid
distribution gains and to encourage trial of the Company's products, including
product demonstrations, introductory allowances and temporary price reductions.
The Company expects investment in trade programs to decline as a percentage of
net sales because the Company intends to increase its reliance on advertising
and couponing, which the Company believes will create more consumer awareness,
trials and usage than trade programs.
The Company introduced a new coupon promotion at the beginning of 1999, which it
plans to follow with a renewed television advertising campaign in the spring.
Although the Company's 1998 advertising efforts resulted in substantially
increased net sales, there is no assurance that this trend can be sustained,
that the planned campaign will occur or be successful, or that the Company can
maintain current net sales levels.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the development
of new varieties of the Gardenburger(R) veggie burger and the improvement of
existing flavors, as well as improvement and increased efficiency in the
manufacturing process. In addition to its permanent R&D staff, the Company
involves other employees as well as outside consultants on an as-needed basis
for specific projects. The Company's R&D staff developed the Gardenburger
Hamburger Style(R) and the three gourmet flavors of veggie burgers introduced in
March 1998, two of which were ranked in the top five in sales in the veggie
burger category in the retail grocery channel. Several new Gardenburger
varieties are currently under development, with introductions planned in 1999.
The Company conducts its research and development activities in its facilities
in both Portland, Oregon and Clearfield, Utah.
In 1998 and 1997, the Company spent approximately $1,121,000 and $565,000,
respectively, on research and development activities. In 1996, the Company spent
approximately $1.0 million on such activities, including $612,000 of acquired
in-process research and development in connection with its acquisition of
Gorilla Foods, Inc.
MANUFACTURING
The Company historically produced its line of veggie burgers using a batch
process in its Portland, Oregon plant. Beginning in February 1998, the Company
began assembly-line production at a second facility, located in Clearfield,
Utah, near Salt Lake City. The Company operates the Clearfield plant under a
five-year lease, with an option to renew for two successive five-year terms.
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The 120,000 square-foot Clearfield facility handles multiple manufacturing lines
for the Company's products. The first line commenced operations in early 1998. A
second line is scheduled to begin producing at full capacity by April 1999. The
Company has announced plans to discontinue production at its Portland facility
as of April 30, 1999. The Company believes the Clearfield facility, once fully
operational, will be able to support up to approximately $240 million of annual
net sales at current price levels. Clearfield, Utah is a more central location
than Portland, Oregon, with better distribution routes.
The production process involves cleaning, chopping and mixing the ingredients,
then forming, baking and quick-freezing the veggie burgers and finally packaging
them. The Company's manufacturing process in its Clearfield facility is highly
automated, mixing and baking products in assembly-line fashion with minimal
human interaction. The Clearfield facility also utilizes newly-developed,
proprietary ovens that quickly cook the products. Products are shipped fully
cooked, frozen and packaged via temperature controlled truck to distributors
throughout North America and by temperature controlled container to Europe.
A significant disruption in the Clearfield facility's production capacity as a
result of, for instance, fire, severe weather, regulatory actions, work
stoppages or other factors could disable the Company's capacity to manufacture
its products. In addition, if the second production line does not operate as
efficiently as expected, the Company would not be able to manufacture its
products at planned levels. If Gardenburger veggie burgers became less
available, consumers may switch to another brand of veggie burger and grocery
stores may reduce shelf space allocated to the Company's products. Any
significant disruption in manufacturing would likely have a material adverse
effect on the Company's results of operations and financial condition.
COMPETITION
The market for veggie burgers and other meat alternative products is highly
competitive. The Company's products compete primarily on the basis of taste,
quality of natural ingredients, ease of preparation, availability, price,
consumer awareness and brand preference.
The Company believes that its products compare favorably to those offered by its
competitors. The Company prices its products competitively or at a slight
premium to its primary competitors. The calorie and fat content of
Gardenburger(R) products is generally equivalent to that of competitors'
products.
The Company believes that its principal competitors are Worthington Foods, Inc.,
which distributes its products under the "Morningstar Farms" label to the food
service and retail grocery channels, and Boca Burger, Inc., which distributes
soy-based meat analog burgers primarily in the retail grocery and natural food
channels. Recently, Worthington Foods acquired the "Harvest Burger" brand from
Archer Daniels Midland and began marketing and selling the brand in early 1999.
Previously, Harvest Burger was marketed and sold by Pillsbury under the "Green
Giant" brand name pursuant to a joint venture with Archer Daniels Midland. In
addition, other major national food products companies could decide to produce
veggie burgers at any time in the future.
10
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The Company's products also compete indirectly with low fat meat products, such
as ConAgra's Healthy Choice 96 percent Extra Lean Ground Beef burger, and
chicken or turkey based low fat products distributed by several large companies
such as Tyson Foods, and with frozen, mass-produced low calorie/low fat entrees,
including national brands such as Healthy Choice, Lean Cuisine and Weight
Watchers. These products are produced by large companies with substantially
greater financial resources, name recognition and marketing experience than the
Company.
SIGNIFICANT CUSTOMERS
NORPAC Food Sales ("Norpac") accounted for approximately 13.6 percent of the
Company's 1998 revenue and, at December 31, 1998, accounted for 7.6 percent of
the outstanding accounts receivable balance. NORPAC has been a significant
customer of the Company for several years, and its loss could have a material
adverse effect on the Company's business.
SOURCES OF SUPPLY
The Company uses natural ingredients such as mushrooms, oats, rice, onions, and
egg whites. These are common agricultural items typically available in most
parts of the United States. In addition, the Company uses packaging and other
materials that are common in the food industry. As a result, the Company
believes, but cannot assure, that its sources of supply are reasonably reliable
and that the Company is at no greater risk regarding supply issues than other
similar food processors and producers.
EMPLOYEES
As of December 31, 1998, the Company had approximately 320 full-time equivalent
employees, including 70 employees at its headquarters in Portland, 90 at its
Portland production facility, and 160 at its Clearfield facility. In March 1999,
the Company announced the closure of the Portland facility, resulting in the
termination of approximately 75 employees by April 30, 1999. None of the
Company's employees is subject to a collective bargaining agreement, and the
Company considers its relations with its employees to be excellent.
INTELLECTUAL PROPERTY
The Company has approximately 19 U.S. registered trademarks, including
"Gardenburger," "Gardenburger Hamburger Style," "Gardenburger Sub" and
"GardenSausage." The Company has registered certain trademarks in Australia,
Canada, France, Germany and the United Kingdom, along with other smaller
countries, and applied for registration of certain trademarks in various other
foreign countries, including but not limited to Japan, Mexico and Thailand.
The Company actively monitors use of its trademarks by food service customers
and others and takes action it believes appropriate to halt infringement or
improper usage. The Company defends its intellectual property aggressively and,
from time to time, has been engaged in infringement protection activities.
Nonetheless, in the event third parties infringe or misappropriate the Company's
trademarks, the Company may have to incur substantial costs to protect its
intellectual property or risk losing its rights. Any large expenditure or loss
of rights could have a material adverse effect on the Company's business.
The Company generally does not hold any patents covering its recipes or
production methods and, therefore, can protect them only as trade secrets. Some
or all of these trade secrets could be obtained by others or could enter the
public domain, which could place the Company at a competitive disadvantage.
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MANAGEMENT INFORMATION SYSTEMS
The Company currently utilizes a number of computer systems in its business.
These include the Cimpro system that handles inventory control, order entry and
accounts payable functions; a DOS-based general ledger system; and an electronic
data interchange ("EDI") system currently used primarily to provide order
confirmation and other historical information to some food brokers and
distributors.
The Company is upgrading its existing systems by replacing the Cimpro, general
ledger, and EDI systems with a single Baan enterprise resource planning system.
This upgrade is scheduled for completion by mid-1999 and is expected to meet the
Company's information systems needs for the next several years. In addition to
integrating manufacturing, sales and accounting functions, the new Baan system
will increase the availability of real-time information for management analysis
and use in operations. The Baan system will enhance the Company's production
planning (planning of raw material purchases) and demand forecasting (matching
supply to distribution centers with order volume) capabilities. The Baan system
also includes pallet tagging, bar coding and scanning applications that will
facilitate tracking of raw materials and finished goods through the Company's
manufacturing operation. The new system should enable the Company to expand its
use of EDI if desired by customers and suppliers, which the Company believes
will expedite order entry, payment and cash collection processes.
The Company's Utah manufacturing facility is highly automated, using a number of
computerized process level controllers. The Company is considering implementing
a manufacturing enterprise system to further facilitate integration of
manufacturing information with information available through the Baan system.
GOVERNMENT REGULATION
The manufacturing, packaging, storage, distribution and labeling of food
products are subject to extensive federal and state laws and regulations. The
Food and Drug Administration (the "FDA") has issued regulations governing the
ingredients that may be used in food products, the content of labels on food
products and the labeling claims that may be made for foods. Foods may only
include additives, colors and ingredients that are either approved by the FDA or
generally recognized as safe. Gardenburger(R) veggie burgers must be
manufactured in compliance with the FDA's current Good Manufacturing Practice
regulations applicable to food.
Regulators have broad powers to protect public health, including the power to
inspect the Company's products and facilities, to order the shutdown of a
facility or to seize or stop shipment of the Company's products and order a
recall of previously shipped products, as well as the power to impose
substantial fines and seek criminal sanctions against the Company or its
officers. The Company does not currently carry insurance against the cost of a
product recall, and a significant recall would have an adverse effect on the
Company's business and financial condition. In addition, negative publicity may
result if regulators take any of the foregoing actions against the Company or if
the Company were to voluntarily recall products to avoid regulatory enforcement.
12
<PAGE>
INSURANCE
The Company maintains insurance against various risks related to its business.
This includes property and casualty, business interruption, director and officer
liability, food spoilage, products liability (but not product recalls) and
workers' compensation insurance. The Company currently maintains $2 million of
product liability insurance coverage and $20 million of general umbrella
coverage. The Company considers its policies adequate to cover the major risks
in its business, but there can be no assurance that this coverage will be
sufficient to cover the cost of defense or damages in the event of a significant
product liability claim.
ITEM 2. PROPERTIES
- - ------- ----------
The Company leases approximately 19,000 square feet of administrative office
space at 1411 SW Morrison, Suite 400 in Portland, Oregon, pursuant to a two-year
extension to its original lease that terminates on December 31, 2000. Current
monthly rent is approximately $24,100.
The Company leases 15,000 square feet of distribution space at 215 SE Stark,
Portland, Oregon under a month-to-month lease that is terminable on two months'
notice. Rental on the Stark Street facility is $9,000 per month in 1999.
The Company leases additional space for research and development and production
at 1416 S.E. Eighth Avenue in Portland, Oregon. The facility is leased pursuant
to a one-year lease agreement from Frank S. Card, a shareholder of the Company,
at a rental rate of $2,700 per month, which the Company considers to be
consistent with rental rates charged by unaffiliated property owners in the same
market area. The lease term expires on December 31, 1999. The Company has an
option to renew the lease for an additional one-year term.
The Company also leases 120,000 square feet of production space at Freeport
Center, Building A-16, in Clearfield, Utah, pursuant to a five-year lease that
terminates on December 31, 2002. The Company has the option to renew the lease
for two successive five-year terms. The Company began utilizing such space for
production in the first quarter of 1998. The monthly rent on this facility is
currently $28,000.
The Company recently entered into a lease for 16,000 square feet of storage
space at the Freeport Center in Clearfield. The lease commenced February 15,
1999 and will expire December 31, 2002. The Company has an option to renew the
lease for an additional three-year term. The monthly rent for the storage space
is $3,200.
The Company owns 40,000 square feet of production facilities at 1005 S.E.
Washington Street, Portland, Oregon, and a 1,200 square foot annex at the same
location. The Company has announced plans to sell this facility in connection
with the closure of its Portland production plant.
The Company owns approximately 18 acres of land near the Portland Airport. The
property was originally purchased as a site for expansion of the Company's
manufacturing capabilities, but is no longer needed for this purpose since the
lease of the Clearfield facility. The Company is currently marketing this
property for sale.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- - ------- -----------------
There are currently no material, pending legal proceedings to which the Company
or its subsidiaries are a party. From time to time, the Company becomes involved
in ordinary, routine or regulatory legal proceedings incidental to the business
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- - ------- ---------------------------------------------------------------------
The Company's Common Stock trades on the National Market tier of The Nasdaq
Stock Market under the symbol GBUR. The Common Stock traded under the symbol
WHFI until October 17, 1997, when the symbol was changed to GBUR in connection
with the change in the Company's name from Wholesome & Hearty Foods, Inc. to
Gardenburger, Inc.
The high and low sales prices for the two years in the period ended December 31,
1998 were as follows:
1997 High Low
------------------------- ---------- --------
Quarter 1 $ 7.13 $ 6.00
Quarter 2 8.50 6.63
Quarter 3 10.13 7.13
Quarter 4 12.00 8.13
1998 High Low
------------------------- ---------- --------
Quarter 1 $ 13.88 $ 8.00
Quarter 2 16.13 10.13
Quarter 3 15.13 9.25
Quarter 4 13.75 8.63
The number of shareholders of record and approximate number of beneficial
shareholders at March 5, 1999 was 683 and 10,650, respectively.
There were no cash dividends declared or paid in 1998 or 1997. The Company does
not anticipate declaring cash dividends in the foreseeable future. The Company
may not, without the consent of Dresdner Kleinwort Benson Private Equity
Partners, LP ("Dresdner") declare or pay any dividends or make any distributions
with respect to its capital stock or other equity securities to the extent that
at least $5,000,000 in principal amount remains outstanding under the Company's
convertible senior subordinated notes and Dresdner owns a majority of the then
outstanding principal amount.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- - ------- -----------------------
<TABLE>
<CAPTION>
IN THOUSANDS:
EXCEPT PER SHARE AMOUNTS 1998 1997 1996 1995 1994
- - ------------------------------------------ ------------ ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales $ 100,120 $ 56,837 $ 40,527 $ 36,818 $ 24,448
Gross margin 49,550 29,601 20,621 18,720 13,057
Sales and marketing expense 58,513 26,191 13,583 11,151 6,357
General and administrative expense 5,387 5,471 4,963 3,871 2,397
Operating income (loss) (14,350) (2,061) 1,463 3,698 3,591
Net income (loss) $ (10,042) $ (1,393) $ 1,063 $ 2,510 $ 2,391
Basic net income (loss) per share $ (1.16) $ (0.16) $ 0.13 $ 0.33 $ 0.32
Diluted net income (loss) per share $ (1.16) $ (0.16) $ 0.12 $ 0.29 $ 0.28
BALANCE SHEET DATA
Working capital $ 7,354 $ 11,504 $ 13,393 $ 11,978 $ 11,037
Total assets 55,048 26,470 24,934 19,325 15,320
Shareholders' equity 10,926 19,839 20,979 16,955 14,028
GROWTH INDICATORS (UNAUDITED)
Net sales growth 76% 40% 10% 51% 83%
Operating income growth (decline) n/a n/a (60%) 3% 35%
Net income growth (decline) n/a n/a (58%) 5% 56%
Diluted net income per share growth
(decline) n/a n/a (59%) 4% 47%
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve known and
unknown risks and uncertainties. The Company's actual results, performance, or
achievements could differ materially from historical results or from any future
results anticipated by the forward-looking statements. In addition to statements
that explicitly describe such risks and uncertainties, readers should consider
statements containing words like "believes," "expects," "intends," "anticipates"
or "plans" to be uncertain and forward-looking. Important risks that could cause
actual results, performance or achievements to differ from those expressed or
implied by the forward-looking statements are described below and elsewhere in
this Form 10-K. Investors are cautioned not to place undue reliance on the
forward-looking statements.
The Company's net sales are attributable almost entirely to the Gardenburger(R)
veggie burger (and related veggie patty products). If demand for the
Gardenburger veggie burger declines or does not increase at the rate currently
anticipated, whether as a result of competition, lower consumer demand or other
unforeseen events, the Company's business will be adversely affected to a
greater degree than if it had multiple product lines. In addition, the Company
15
<PAGE>
has experienced a large increase in net sales over the past year due in large
part to substantial expenditures on advertising during 1998. Consumer demand may
not continue to increase or may even decline without renewed advertising and
marketing expenditures, and there is no guarantee that current sales increases
can be maintained. Any decrease in the Company's net sales levels may lead to
reductions in the amount of shelf space allocated to the Company's products at
grocery stores, or menu space devoted to such products at food service outlets,
thereby compounding the difficulty of continuing current growth trends, and even
current sales levels. The Company plans to continue advertising and other
promotions in 1999 with expenditures similar to those in 1998, but there is no
assurance that sufficient funds will be available to support such advertising or
that future advertising will be as successful in generating new sales as the
Company's 1998 campaign.
Over the past two years, the Company has incurred significant operating and net
losses due largely to its efforts to penetrate the retail grocery channel and to
mainstream its veggie burger products through extensive advertising and other
marketing expenditures. Continued growth of the Company's business will require
significant additional working capital to support the Company's planned
advertising campaign. The Company has some funds available under its existing
revolving lines of credit, but amounts available for borrowing thereunder are
insufficient to support the Company's discretionary marketing spending. As a
result, the Company has entered into an agreement with an investor group to sell
$32.5 million of convertible preferred stock. See "Liquidity and Capital
Resources" below. The Company's inability to maintain adequate sources of
funding would cause the Company to significantly curtail its strategic plans and
could lead to decreased sales growth or even a reduction in sales.
The Company has significant outstanding indebtedness to Bank of America N.T. &
S.A. ("Bank of America") and Dresdner Kleinwort Benson Private Equity Partners
LP ("Dresdner"). These debt instruments require the Company to maintain
compliance with certain financial ratios described under "Liquidity and Capital
Resources" below. The Company presently is not in compliance with certain of the
financial ratio covenants in its debt instruments, but has received waivers from
both Bank of America and Dresdner. Nonetheless, either or both of Bank of
America and Dresdner could require the Company to repay all amounts outstanding
if it continues to fail to comply with the financial ratio covenants in its debt
instruments. Any acceleration of repayment would require the Company to seek
replacement debt or equity financing, which may only be available, if at all, on
terms less favorable than its existing debt.
The Company leases various food processing, production and other equipment
pursuant to two operating leases for use in its Clearfield, Utah production
facility. Lease payments on the equipment totaled $2.2 million in 1998 and will
total approximately $2.8 million in 1999. The leases were accomplished through
lease agreements between the Company and BA Leasing & Capital Corporation ("BA
Capital"), an affiliate of Bank of America. Each lease agreement contains
certain cross-default provisions with the Company's existing line of credit
agreement with Bank of America, which provide that any default under any other
borrowing or credit agreement constitutes a default under each lease agreement
if the default consists of failure to make payment when due or gives the holder
a right of acceleration. In addition, the financial covenants in the Bank of
America credit agreement will survive as covenants under each lease agreement in
the event the line of credit agreement is terminated. If any event of default by
16
<PAGE>
the Company occurred under the lease agreements with BA Capital, the Company's
manufacturing capacity would be significantly curtailed or even eliminated if BA
Capital were to exercise its right to sell the equipment. In addition, neither
lease agreement contains express provisions giving the Company a right to
purchase the equipment at the end of the lease term, which term ranges from five
to seven years, depending upon the equipment.
The Company is no longer producing inventory in its Portland facility, and plans
to sell the plant building. As a result, the Company's Clearfield, Utah facility
will be expected to handle all of the Company's production. The Company has
recently commenced operation of a second production line at the Clearfield
facility and expects its second line to be fully operational by the end of the
third quarter.
In light of the foregoing factors, as well as other variables, investors are
cautioned not to place undue reliance on current financial performance or
historical trends and such trends should not be relied on to anticipate future
financial results.
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations for
the periods indicated and presents the results of operations as a percentage of
net sales.
<TABLE>
<CAPTION>
Calendar year ended December 31, 1998 December 31, 1997 December 31, 1996
- - ------------------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 50.5 47.9 49.1
----------------- ----------------- -----------------
Gross margin 49.5 52.1 50.9
Sales and marketing expense
58.4 46.1 33.5
General and administrative
expense 5.4 9.6 12.3
Acquired in-process re-search
and development -- -- 1.5
----------------- ----------------- -----------------
Operating income (loss) (14.3) (3.6) 3.6
Other income (expense) (1.5) -- 0.8
----------------- ----------------- -----------------
Income (loss) before income
taxes (15.8) (3.6) 4.4
Income taxes (benefit) (5.8) (1.1) 1.8
================= ================= =================
Net income (loss) (10.0)% (2.5)% 2.6%
================= ================= =================
</TABLE>
1998 COMPARED TO 1997
NET SALES Net sales for 1998 increased 76.2 percent to $100.1 million from $56.8
million for 1997. The Company has increased its sales levels in its retail
grocery, food service and club store channels. The increase in overall net sales
is primarily related to increased unit sales in the Company's grocery channel as
a result of the Company's investment in efforts to expand this channel,
including its national advertising campaign. The Company increased prices on
certain products in its grocery channel an average of 7 percent in the fourth
quarter of 1997, which also contributed to the increase in net sales in 1998.
Net sales were higher in the 1998 third and fourth quarters than in the second
quarter. The Company's market share in the grocery channel reached an all-time
high of 56 percent during the third quarter of 1998 and averaged 42 percent
during all of 1998. During 1998, the Company increased its U.S. All Commodity
Volume ("ACV") to 89 percent from 68 percent at the end of 1997. ACV compares
the total sales volume of the stores carrying the Company's products to the
total sales volume throughout the retail grocery channel.
17
<PAGE>
GROSS MARGIN Gross margin increased 67.4 percent to $49.6 million (49.5 percent
of net sales) for 1998 from $29.6 million (52.1 percent of net sales) for 1997.
The decrease in the annualized gross margin percentage is primarily a result of
start-up costs associated with the Company's new manufacturing facility in
Clearfield, Utah. The Company achieved a gross margin percentage of 51.9 percent
in the fourth quarter of 1998. The improvement in gross margin during the fourth
quarter of 1998 compared to the average for the year is primarily a result of
declining start-up costs and increased manufacturing efficiencies at the
Clearfield facility. The Company commenced operation of a second production line
at its Clearfield facility in early 1999 and ceased production at its Portland
production facility on March 1, 1999. The costs incurred in connection with the
start-up of a second production line are expected to result in lower gross
margins in the first and possibly second quarters of 1999 compared to the fourth
quarter of 1998. The Company expects that gross margin percentages for all of
1999 will be slightly higher than the gross margin percentages achieved for all
of 1998, but this expectation could be affected by any unexpected delays in
completing the second production line. Following transfer of all production to
the Clearfield facility, the Company expects to have $240 million of total
production capacity, based on current estimates. Unit costs of production are
expected to be lower than with the Company's historical batch manufacturing
process used at the Portland facility.
SALES AND MARKETING EXPENSE Sales and marketing expense increased to $58.5
million (58.4 percent of net sales) for 1998 from $26.2 million (46.1 percent of
net sales) for 1997. The increase in spending in 1998 is primarily a result of
costs associated with the Company's aggressive 1998 advertising plan, including
a national television advertising campaign during the second and third quarters,
and the introduction of new products into the retail grocery channel. The
Company spent approximately $11.0 million on media advertising during the first
half of 1998 and approximately $3.6 million on media advertising during the
second half of 1998. The Company plans to continue expenditures for
advertising and marketing at approximately 1998 levels during 1999, which is
expected to yield a reduction in sales and marketing expense as a percent of net
sales as net sales increase.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("g&a")
decreased to $5.4 million (5.4 percent of net sales) for 1998 from $5.5 million
(9.6 percent of net sales) for 1997. The Company has been able to maintain its
g&a expenditures at 1997 levels while increasing sales, thereby decreasing g&a
as a percentage of net sales. The Company received a $240,000 insurance
settlement in the first quarter of 1997 that effectively lowered g&a expense in
1997.
OPERATING LOSS Operating loss was $14.4 million in 1998 compared to an operating
loss of $2.1 million for 1997 as a result of the individual line item changes
discussed above, including in particular the increased advertising expenses
incurred by the Company consistent with its strategic plan.
18
<PAGE>
OTHER INCOME (EXPENSE) Other income (expense) was a net expense of $1.5 million
in 1998 compared to net income of $9,000 in 1997 primarily as a result of
increased interest expense during 1998 related to debt incurred during 1998 to
help fund the Company's increased sales and marketing activities.
INCOME TAXES Income taxes are based on an estimated rate of approximately 37
percent for 1998 compared to the approximately 32 percent rate used for 1997.
The increase in the rate is primarily attributable to a decrease in meals and
entertainment expense and non-deductible goodwill amortization in relation to
the reported net loss of the Company, offset in part by a decrease in tax exempt
dividends and interest.
NET INCOME (LOSS) Net loss was $10.0 million in 1998 compared to a net loss of
$1.4 million in 1997 as a result of the individual line item changes discussed
above. The Company believes that the impact of inflation on the net loss was not
material for fiscal years 1998 and 1997.
1997 COMPARED TO 1996
NET SALES Net sales for 1997 increased 40.2 percent to $56.8 million from $40.5
million for 1996. The Company increased its sales levels in each of its major
channels, including food service, retail and club stores. Such increases were
primarily a result of increased marketing and public relations activities, which
increased awareness of the Company's products throughout its channels of
distribution. The Company increased its store penetration from 30 percent U.S.
ACV at the end of 1996 to 70 percent U.S. ACV by the end of 1997.
GROSS MARGIN Gross margin increased 43.5 percent to $29.6 million (52.1 percent
of net sales) for 1997 from $20.6 million (50.9 percent of net sales) for 1996.
The increase in gross margin as a percentage of net sales was primarily due to
an increased sales base to absorb fixed costs, improvements in manufacturing
efficiencies at its Portland, Oregon manufacturing facility, and selected price
increases.
SALES AND MARKETING EXPENSE Sales and marketing expense increased to $26.2
million (46.1 percent of net sales) for 1997 from $13.6 million (33.5 percent of
net sales) for 1996. The increase was primarily a result of costs associated
with the Company's plan to aggressively expand its retail grocery business
nationwide in 1997 and increased promotional activities, including the launching
of a new national print advertising campaign.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense increased
to $5.5 million (9.6 percent of net sales) for 1997 from $5.0 million (12.3
percent of net sales) for 1996. General and administrative expense remained
relatively constant as increases in compensation expense related to additional
personnel to support the growth of the Company and increased bonus accruals in
1997 were substantially offset by a decrease in severance and hiring costs,
absence of litigation costs in 1997 resulting from settlement of a lawsuit
against the Company during the third quarter of 1996 and a related insurance
refund of $240,000 which was received in the first quarter of 1997.
19
<PAGE>
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT In connection with the acquisition
of Gorilla Foods, Inc. in 1996, the Company recorded a one-time pretax charge of
$612,000 ($386,000 net of taxes) related to acquired in-process research and
development costs. The value assigned to the in-process research and development
was determined by appraisal and represents those efforts in process at the
acquisition date that had not yet established technological feasibility and that
had no alternative future uses. Accounting rules require that such costs be
charged to expense as incurred.
OPERATING INCOME (LOSS) Operating loss was $2.1 million in 1997 compared to
operating income (without the one-time charge for purchased in-process research
and development) of $2.1 million (5.1 percent of net sales) for 1996 as a result
of the individual line item changes discussed above.
OTHER INCOME (EXPENSE) Other income decreased to $9,000 in 1997 from $327,000 in
1996 primarily as a result of decreased cash balances in 1997 and therefore
lower interest income in 1997, as well as a loss in 1997 related to the
disposition of certain property and equipment.
INCOME TAXES The Company's income tax rate for 1997 decreased to 32.1 percent
compared to 40.6 percent for 1996, primarily due to lower amounts of tax exempt
interest and dividends, as well as a lower effective state tax rate in 1997.
NET INCOME (LOSS) Net loss was $1.4 million for 1997 compared to net income of
$1.1 million (2.6 percent of net sales) for 1996 as a result of the individual
line item changes discussed above. The Company believes that the impact of
inflation on net income (loss) was not material for fiscal years 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had working capital of $7.4 million, which
included $2.3 million of cash and cash equivalents as compared to $11.5 million
in working capital at December 31, 1997, including $2.6 million of cash and cash
equivalents. The $4.1 million decrease in available working capital is primarily
due to the use of $23.7 million in operations and net purchases of $5.9 million
of property and equipment, offset by $30.0 million provided by net short and
long-term borrowings and $0.6 million provided by the exercise of stock options
and related income tax benefits.
Accounts receivable increased $6.9 million to $15.0 million at December 31, 1998
from $8.1 million at December 31, 1997, due primarily to significantly higher
sales during the fourth quarter of 1998 compared to the fourth quarter of 1997.
Days sales outstanding increased to 47 at December 31, 1998 from 34 at December
31, 1997.
Inventories increased $9.3 million to $12.5 million at December 31, 1998 from
$3.2 million at December 31, 1997 in order to support an expected increased
level of sales as well as to provide for potential delays in bringing the second
production line at the Clearfield facility on-line. Inventory turned 5.3 times
on an annualized basis during the fourth quarter of 1998 compared to 9.6 times
on an annualized basis for the fourth quarter of 1997.
20
<PAGE>
In May 1997, the Company entered into a lease for its production facility in
Clearfield, Utah. Later that year and in 1998, the Company entered into two
separate leases for various production and other equipment used at this
facility. Total lease payments for the facility and equipment in 1998 were $2.2
million. In 1999, total payments will be approximately $3.1 million.
Capital expenditures of $5.9 million during 1998 resulted primarily from
expenditures of $3.3 million for equipment for the Company's Clearfield
production facility and $2.2 million for information systems infrastructure. The
Company anticipates spending approximately $1.4 million on information systems
infrastructure during 1999.
During March 1998, the Company completed a private placement of $15 million of 7
percent Convertible Senior Subordinated Notes (the "Notes") with 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
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. The conversion price will be adjusted to approximately $12.14 upon
completion of the preferred stock financing discussed below. Under the terms of
the Note Purchase Agreement relating to the Notes, the Company must comply with
certain covenants and maintain certain financial ratios as follows: current
assets to current liabilities of at least 1.575 to 1.0, measured monthly; total
liabilities, exclusive of the Notes, to tangible net worth, inclusive of the
Notes, not to exceed 1.1 to 1.0, measured monthly; and a minimum fixed charge
coverage ratio of 1.08 to 1.0, measured annually. At December 31, 1998, the
Company was out of compliance with its financial ratio covenants under the
Notes. The Company received a waiver of compliance from Dresdner through the
period ended December 31, 1998.
In April 1998, the Company entered into a Business Loan Agreement (as amended,
the "Agreement") with Bank of America for a $10.0 million revolving line of
credit. In July 1998, the Agreement was amended to increase the maximum
borrowing limit to $14.5 million. The Agreement also provides for a separate
$5.0 million revolving line of credit through February 28, 1999 and $3.0 million
through July 1, 1999. At December 31, 1998, the Company had $15.0 million
outstanding of $19.5 million available under this Agreement at interest rates
ranging from 6.06 percent to 7.06 percent. In March 1999, the Agreement was
amended to consolidate the $14.5 million and the $5.0 million lines of credit.
In addition, the interest rate was changed to the bank's reference rate plus one
percentage point, or at the option of the Company, at LIBOR plus 4.0 percentage
points or the Offshore rate plus 4.0 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 as follows: current assets to
current liabilities of at least 1.5 to 1.0; total liabilities, exclusive of the
Notes, to tangible net worth, inclusive of the Notes, not exceeding 1.0 to 1.0;
and a minimum fixed charge coverage ratio of 1.2 to 1.0. At December 31, 1998,
the Company was out of compliance with the financial ratio covenants under the
Agreement. The Company received a waiver of compliance from Bank of America
through the period ended December 31, 1998. The consolidated line of credit
expired March 19, 1999. The Company is currently renegotiating its credit
facilities.
21
<PAGE>
Management believes that the Company's existing working capital, in combination
with cash flow from operations and funds available under credit facilities,
should be sufficient to support working capital requirements in the near term.
In order to continue its current strategic plan, including significant
discretionary advertising expenditures at 1998 levels, the Company determined
that it needed to raise additional capital in the first half of 1999.
Accordingly on March 29, 1999, the Company entered into a definitive stock
purchase agreement to sell $32.5 million of convertible preferred stock to a
group of investors. Under the terms of the agreement, the Company will sell an
aggregate of 2,762,500 shares of Series A convertible preferred stock and
487,500 shares of Series B convertible preferred stock to members of the
investor group, each at a price of $10 per share, or an aggregate consideration
of $32.5 million, subject to certain closing conditions. The preferred shares
are convertible at a price of $10 per share at any time following issuance at
the discretion of the holder. The Series B conversion price will be adjusted to
$3.75 if the Company fails to meet specified performance targets for fiscal
years 1999 and 2000. Both series of preferred stock are entitled to a 12 percent
cumulative annual dividend payable upon redemption of the stock or in the event
of a sale or liquidation of the Company. Shares may not be redeemed until five
years after the original date of issuance, at which point they may be redeemed
at the election of the holders or, under certain conditions, at the discretion
of the Company.
The preferred stock sale is scheduled to close in mid-April 1999. The Company
plans to use $25 million of the net proceeds of the transaction to pursue its
strategic business plan, including its marketing and advertising campaign, and
the balance of the net proceeds as working capital.
YEAR 2000
INFORMATION SYSTEMS The Company utilizes, or will utilize by mid-1999, packaged
application strategies for all critical information systems functions, which
have all been certified to be Year 2000 compliant by the vendors. This includes
enterprise software, operating systems, networking components, application and
data servers, PC hardware, and core office automation software. The Company is
currently performing various component tests to verify full Year 2000
operational compliance and additional tests are planned. In addition to the
information system component testing, the Company will conduct a system wide
test, to include all components from the desktop to the data center, to ensure
that all of the compliant components will function properly as a whole. The
focus of these tests will be to ensure that the Company's business processes run
end-to-end with no Year 2000 errors or issues. The Company expects to have
tested and ensured Year 2000 compliance for all critical information systems by
August 31, 1999.
22
<PAGE>
SUPPLIER AND CUSTOMER BASE The Company has begun a Year 2000 supplier and
customer audit program. As a part of this program, the Company has contacted
all of its critical suppliers and significant customers to inform them of the
Company's Year 2000 expectations and to request copies of their compliance
programs.
COST The Company expects to incur no more than $150,000 of incremental costs to
ensure Year 2000 compliance of its information systems. All system hardware and
software upgrades already completed, or anticipated to be completed prior to the
year 2000, were budgeted in the normal course of business regardless of the Year
2000 issue. The costs of the Company's Year 2000 identification, assessment,
replacement and testing efforts and the dates for completion of such efforts are
based on management's best estimates, which include assumptions regarding future
events such as the continued availability of certain resources, the success of
third-party compliance efforts, and other factors. Actual results may differ
materially from management's expectations.
RISKS Despite the Company's efforts to identify all internal systems with Year
2000 issues, it is likely that unexpected problems will arise. As with most
businesses, the Company will also be at risk from external infrastructure
failures that could arise from Year 2000 failures. It is possible, for example,
that electrical power, telephone and financial networks across the nation will
experience breakdowns in the days and weeks following January 1, 2000. There is
also a real possibility of failures of key components in the national
transportation infrastructure or delays in rail, over-the-road and air shipments
due to failures in transportation control systems due to the Year 2000 problem.
Investigation and assessment of risks associated with such ubiquitous and
interconnected utility systems and transportation systems are beyond the
resources of the Company. The failure by the Company or third parties to correct
a material Year 2000 problem could result in an interruption in, or a failure
of, certain of the Company's normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
Due to the general uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of third-party suppliers
and customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition. The Company has not yet
developed any contingency plans in regard to its internal systems, supplier or
customer issues or any of the more global infrastructure issues. The Company
expects to consider whether such plans are needed by August 1999. This process
will include identifying, assessing and developing plans for dealing with the
most reasonably likely worst case scenario facing the Company.
23
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("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.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for all derivative
instruments. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company does not have any derivative instruments and, accordingly, the
adoption of SFAS 133 will have no impact on the Company's financial position or
results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - -------- ----------------------------------------------------------
No disclosure is required under this item.
24
<PAGE>
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, 1998 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- - ----------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998
Net sales $ 13,040 $ 25,739 $ 32,630 $ 28,711
Gross margin 6,153 12,302 16,192 14,903
Net income (loss) (4,318) (6,240) 182 334
Basic net income (loss) per share (0.50) (0.72) 0.02 0.04
Diluted net income (loss) per share (0.50) (0.72) 0.02 0.03
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
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - -------- --------------------------------------------------
Information required by this item is included under the captions ELECTION OF
DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- - -------- ----------------------
Information required by this item is included under the captions EXECUTIVE
COMPENSATION, DIRECTOR COMPENSATION, EMPLOYMENT CONTRACTS AND SEVERANCE AND
CHANGE-IN-CONTROL ARRANGEMENTS and COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS in the Company's Proxy Statement for its
1999 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- - -------- --------------------------------------------------------------
Information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's Proxy
Statement for its 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - -------- ----------------------------------------------
Information required by this item is included under the caption MANAGEMENT
TRANSACTIONS in the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders and is incorporated herein by reference.
26
<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, 1998 and 1997 F-2
Statements of Operations for the years ended December 31,
1998,1997 and 1996
F-3
Statements of Shareholders' Equity - December 31, 1998, 1997
and 1996 F-4
Statements of Cash Flows for the years ended December 31, 1998,
1997 and 1996
F-5
Notes to Financial Statements F-6
Report of Independent Public Accountants on Financial
Statement Schedule
F-16
Schedule II Valuation and Qualifying Accounts F-17
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1998.
(c) EXHIBITS
Exhibits are listed on the Index to Exhibits following the financial statements
included in this report.
27
<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 report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 31, 1999
GARDENBURGER, INC.
By: /s/ Lyle G. Hubbard
----------------------
Lyle G. Hubbard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on March 31, 1999.
Signature Title
- - --------- -----
/s/ Lyle G. Hubbard Director, President and Chief
- - ------------------------ Executive Officer
Lyle G. Hubbard (Principal Executive Officer)
/s/ Richard C. Dietz Executive Vice President,
- - ------------------------ Chief Financial Officer, Secretary
Richard C. Dietz and Treasurer
(Principal Financial and Accounting
Officer)
/s/ Alexander P. Coleman Director
- - ------------------------
Alexander P. Coleman
/s/ Ronald C. Kesselman Director
- - ------------------------
Ronald C. Kesselman
/s/ Richard L. Mazer Director
- - ------------------------
Richard L. Mazer
/s/ Mary O. McWilliams Director
- - ------------------------
Mary O. McWilliams
/s/ Michael L. Ray Director
- - ------------------------
Michael L. Ray
/s/ E. Kay Stepp Chairman of the Board
- - ------------------------
E. Kay Stepp
/s/ Paul F. Wenner Founder, Chief Creative Officer
- - ------------------------ and Director
Paul F. Wenner
28
<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, 1998 and 1997 and the related statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our 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, 1998 and 1997, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Portland, Oregon,
January 26, 1999
(except for the matters discussed in
Note 13, as to which the date is
March 30, 1999)
F-1
<PAGE>
GARDENBURGER, INC.
BALANCE SHEEETS
(In thousands, except share amounts)
December 31, December 31,
1998 1997
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,320 $ 2,602
Accounts receivable, net of allowances of
$148 and $275 14,969 8,073
Inventories, net 12,457 3,203
Prepaid expenses 4,515 2,321
Income taxes receivable - 475
Deferred income taxes 1,989 713
--------- ---------
Total Current Assets 36,250 17,387
Property, Plant and Equipment, net of accumulated
depreciation of $3,174 and $2,005 12,238 7,822
Deferred Income Taxes 4,242 -
Other Assets, net of accumulated amortization of
$534 and $250 2,318 1,261
--------- ---------
Total Assets $ 55,048 $ 26,470
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term note payable $ 15,000 $ -
Accounts payable 9,708 3,165
Payroll and related liabilities payable 1,822 1,616
Accrued brokers' commissions 973 469
Other current liabilities 1,393 633
--------- ---------
Total Current Liabilities 28,896 5,883
Deferred Income Taxes - 438
Other Long-Term Liabilities 226 310
Convertible Notes Payable 15,000 -
Shareholders' Equity:
Preferred Stock, no par value, 5,000,000 shares
authorized; none issued - -
Common Stock, no par value, 25,000,000 shares
authorized; shares issued and outstanding:
8,733,811 and 8,608,254 9,717 8,651
Additional paid-in capital 4,275 4,203
Retained earnings (deficit) (3,066) 6,985
--------- ---------
Total Shareholders' Equity 10,926 19,839
--------- ---------
Total Liabilities and Shareholders' Equity $ 55,048 $ 26,470
========= =========
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,
---------------------------------------------------
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Net sales $ 100,120 $ 56,837 $ 40,527
Cost of goods sold 50,570 27,236 19,906
-------------- --------------- --------------
Gross margin 49,550 29,601 20,621
Operating expenses:
Sales and marketing 58,513 26,191 13,583
General and administrative 5,387 5,471 4,963
Acquired in-process research & development - - 612
-------------- --------------- --------------
63,900 31,662 19,158
-------------- --------------- --------------
Operating income (loss) (14,350) (2,061) 1,463
Other income (expense):
Interest income 115 185 365
Interest expense (1,404) (40) -
Other, net (200) (136) (38)
-------------- --------------- --------------
(1,489) 9 327
-------------- --------------- --------------
Income (loss) before provision for
(benefit from) income taxes (15,839) (2,052) 1,790
Provision for (benefit from) income taxes (5,797) (659) 727
============== =============== ==============
Net income (loss) $ (10,042) $ (1,393) $ 1,063
============== =============== ==============
Net income (loss) per share - basic $ (1.16) $ (0.16) $ 0.13
============== =============== ==============
Net income (loss) per share - diluted $ (1.16) $ (0.16) $ 0.12
============== =============== ==============
</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, 1998, 1997 and 1996
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
------------------------------ Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
------------ ------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
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
Exercise of Common Stock Options 74,586 541 - - 541
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 72 - 72
Issuance of shares in exchange for
interest on convertible notes payable 50,971 525 - - 525
Foreign currency translation - - - (9) (9)
Net loss - - - (10,042) (10,042)
------------ ------------- -------------- -------------- ---------------
Balance at December 31, 1998 8,733,811 $ 9,717 $ 4,275 $ (3,066) $ 10,926
============ ============= ============== ============== ===============
</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,
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (10,042) $ (1,393) $ 1,063
Effect of exchange rate on operating accounts (9) 6 10
Adjustments to reconcile net income (loss) to net cash flows
used in operating activities:
Depreciation and amortization 1,637 977 594
Other non-cash expenses 409 - -
Acquired in-process research and development, net of tax - - 386
Loss on sale of fixed assets 75 145 52
Deferred income taxes (5,956) (307) (57)
(Increase) decrease in:
Accounts receivable, net (6,896) (5,273) 141
Inventories, net (9,254) 1,587 (3,228)
Prepaid expenses (2,194) (1,943) (181)
Income taxes receivable, net 475 178 (922)
Increase in:
Accounts payable 6,543 992 1,134
Payroll and related liabilities 206 937 50
Other accrued liabilities 1,264 501 413
--------------- --------------- --------------
Net cash used in operating activities (23,742) (3,593) (545)
Cash flows from investing activities:
Payments for purchase of property and equipment (11,282) (12,141) (2,428)
Proceeds from sale of equipment 5,355 10,477 26
Cash paid for Gorilla Foods and Whole Food Marketing - - (419)
Other assets, net (102) (143) (87)
--------------- --------------- --------------
Net cash used in investing activities (6,029) (1,807) (2,908)
Cash flows from financing activities:
Proceeds from line of credit, net 15,000 - -
Proceeds from issuance of convertible notes payable 15,000 - -
Financing fees from issuance of convertible notes payable (1,124) - -
Proceeds from exercise of common stock options and warrants 541 183 625
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 72 64 1,336
--------------- --------------- --------------
Net cash provided by financing activities 29,489 247 1,961
Decrease in cash and cash equivalents (282) (5,153) (1,492)
Cash and cash equivalents:
Beginning of period 2,602 7,755 9,247
--------------- --------------- --------------
End of period $ 2,320 $ 2,602 $ 7,755
================ ================ ==============
</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
meatless food products in response to the public's awareness of the importance
of diet to overall health and fitness. Toward this end, the Company developed
and now produces and distributes frozen, meatless food products that are
generally low in cholesterol and fat, consisting primarily of various flavors
and styles of veggie burgers. The Company's products are principally sold to
retail and food service customers throughout the United States.
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.
OTHER ASSETS
Other assets consist principally of $1,085 in deferred financing fees and $873
in goodwill as of December 31, 1998. Deferred financing fees are being amortized
over the maturity period of the related debt and goodwill is being amortized
using the straight-line method over ten years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the lease term or the
estimated useful life of the asset, whichever is shorter.
Estimated useful lives are as follows:
BUILDINGS AND IMPROVEMENTS 3-40 YEARS MACHINERY AND EQUIPMENT 7-30 YEARS
OFFICE FURNITURE AND EQUIPMENT 3-10 YEARS VEHICLES 5 YEARS
F-6
<PAGE>
LONG-LIVED ASSETS
In fiscal year 1996, the Company adopted Statement of Financial Accounting
Standards No. 121 (SFAS 121), ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED of. The adoption of SFAS 121 had no
impact on the Company's financial position or on its results of operations.
In accordance with SFAS 121, long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the asset.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION for
the year ended December 31, 1998. Based upon definitions contained within SFAS
131, the Company has determined that it operates in one segment.
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, 1998, one customer accounted for approximately
14 percent of revenue and 8 percent of the accounts receivable balance at
December 31, 1998.
For the year ended December 31, 1997, two customers accounted for approximately
19 percent and 10 percent of revenue and 10 percent and 7 percent of the
accounts receivable balance at December 31, 1997, respectively.
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.
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, including media advertising, couponing and other advertising,
which are included in sales and marketing expense, are expensed when the
advertising first takes place. Advertising expense was approximately $19,904,
$3,844 and $1,539 in 1998, 1997 and 1996, respectively.
F-7
<PAGE>
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 $1,121 in 1998, $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 8).
NET INCOME (LOSS) PER SHARE
Basic earnings per share (EPS) is calculated using the weighted average number
of common shares outstanding for the period and diluted EPS is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding. Following is a reconciliation of basic EPS and diluted EPS:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 1997 1996
- - ----------------------------- ----------------------------- ----------------------------- ---------------------------
Per Share Per Share Per Share
Amount Amount Amount
BASIC EPS Loss Shares Loss Shares Income Shares
----------------------------- ----------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income (loss) available to
Common Shareholders $(10,042) 8,659 $ (1.16) $(1,393) 8,584 $ (0.16) $ 1,063 8,456 $ 0.13
========= ========= =========
EFFECT OF DILUTIVE SECURITIES
Stock Options - - - - - 610
---------- -------- --------- --------- -------- --------
DILUTED EPS
Income (loss) available to
Common Shareholders $(10,042) 8,659 $ (1.16) $(1,393) 8,584 $ (0.16) $ 1,063 9,066 $ 0.12
========= ========= =========
</TABLE>
At December 31, 1998, 1997 and 1996, the Company had options outstanding
covering 2,768, 2,447 and 959 shares, respectively, of the Company's Common
Stock not included in the above calculations since they would have been
antidilutive. In addition, at December 31, 1998, the Company had 1,163 shares
issuable pursuant to the Company's convertible notes that were not included as
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, 1998 and 1997 is as follows:
December 31, 1998 1997
- - ------------------------------- ---------------- -----------------
Raw materials $ 2,843 $ 1,148
Packaging and supplies 275 193
Finished goods 9,339 1,862
================ =================
$ 12,457 $ 3,203
================ =================
F-8
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT
- - --------------------------------
December 31, 1998 1997
- - ------------------------------------ ------------------ ----------------
Land $ 787 $ 787
Building and improvements 5,262 3,374
Machinery and equipment 7,320 3,949
Office furniture and equipment 2,043 1,717
------------------ ----------------
15,412 9,827
Less accumulated depreciation (3,174) (2,005)
================== ================
$ 12,238 $ 7,822
================== ================
4. LINE OF CREDIT
- - -----------------
In April 1998, the Company entered into a Business Loan Agreement (as amended,
the "Agreement") with Bank of America NT & SA for a $10.0 million revolving line
of credit, which expires July 1, 1999. In July 1998, the Agreement was amended
to increase the maximum borrowing limit to $14.5 million. Interest is at the
bank's reference rate, or at the option of the Company, at LIBOR plus 1.0
percentage points or the Offshore Rate (as defined) plus 1.0 percentage points.
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 through February 28, 1999 and $3.0 million
through July 1, 1999. Interest on the revolving line of credit is at the bank's
reference rate or, at the option of the Company, at LIBOR plus 2.0 percentage
points or the Offshore Rate plus 2.0 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 as follows: current assets to current
liabilities of at least 1.5 to 1.0; 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.
At December 31, 1998, the Company was out of compliance with its financial ratio
covenants under the Agreement. The Company received a waiver of compliance from
the Bank through the period ended December 31, 1998. At December 31, 1998, the
Company had $15 million outstanding under this Agreement at interest rates
ranging from 6.06 percent to 7.06 percent. See Note 13.
5. LEASE COMMITMENTS
- - --------------------
Future minimum lease payments at December 31, 1998 are as follows:
Year Ended December 31,
- - --------------------------------------
1999 $ 3,167
2000 3,686
2001 3,417
2002 3,417
2003 3,291
Thereafter 5,541
------------
Total $22,519
============
Rental expense for the years ended December 31, 1998, 1997 and 1996 was $2,613,
$601 and $257, respectively.
F-9
<PAGE>
6. DRESDNER NOTES
- - -----------------
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 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
the terms of the Note Purchase Agreement relating to the Notes, the Company must
comply with certain covenants and maintain certain financial ratios as follows:
current assets to current liabilities of at least 1.575 to 1.0, measured
monthly; total liabilities to tangible net worth not to exceed 1.1 to 1.0,
measured monthly; and a minimum fixed charge coverage ratio of 1.08 to 1.0,
measured annually. At December 31, 1998, the Company was out of compliance with
its financial ratio covenants under the Notes. The Company received a waiver of
compliance from Dresdner through the period ended December 31, 1999.
7. INCOME TAXES
- - ---------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards 109, ACCOUNTING FOR INCOME TAXES. The Company realizes tax benefits as
a result of the exercise of nonqualified stock options and the exercise and
subsequent sale of certain incentive stock options (disqualifying dispositions).
For financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits is credited to additional paid-in capital. Tax
benefits of $72, $64 and $1,336 were credited to additional paid-in capital in
1998, 1997 and 1996, respectively.
The provision for (benefit from) income taxes is as follows:
December 31, 1998 1997 1996
- - ----------------- ----------- ---------- ----------
CURRENT:
Federal $ 129 $ (352) $ 616
State 30 - 168
----------- ---------- ----------
159 (352) 784
DEFERRED (5,956) (307) (57)
=========== ========== ==========
$ (5,797) $ (659) $ 727
=========== ========== ==========
F-10
<PAGE>
Total deferred income tax assets were $6,751 and $972 and liabilities were $520
and $697 at December 31, 1998 and 1997, respectively. Individually significant
temporary differences are as follows:
December 31, 1998 1997
- - ------------------------------------ ----------- ----------
Net operating loss carryforwards $ 4,602 $ -
Accounts receivable reserves 58 115
Provision for trade promotions
and discounts
1,046 318
Inventory 500 243
Book/tax depreciation differences (520) (515)
The Company believes deferred income tax assets are realizable as a result of
expected future income.
At December 31, 1998, the Company had available federal and state income tax
carryforwards of $4,244 and $358, respectively. The federal and state income tax
carryforwards expire through the year 2018 and 2013, respectively.
The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
December 31, 1998 1997 1996
- - ---------------------------------------- ------ ------ ------
Statutory federal income tax rate (34.0)% (34.0)% 34.0%
State taxes, net of federal income
tax benefit (3.9) (3.5) 5.9
Tax exempt interest and dividends (0.1) (1.7) (4.0)
Trademark and goodwill amortization 0.2 1.5 2.0
Meals and entertainment 0.4 1.8 --
Revision of prior year estimates -- 1.6 2.0
Other 0.8 2.2 0.7
------ ------ ------
Effective tax rate (36.6)% (32.1)% 40.6 %
====== ====== ======
8. 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 ensuing five years. To date, the Company has made no
sales of wheat protein-based products. 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-11
<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.
9. RELATED PARTY TRANSACTIONS
- - -----------------------------
The Company leases its S.E. 8th Avenue plant facility from a shareholder of the
Company. The lease is for a one-year term ending December 31, 1999, and the
Company may renew the lease for an additional term of one year.
10. 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, when exercisable, will entitle shareholders to buy one one-hundredth
of a share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $47 per share. The rights will become exercisable if a person
or group (an "Acquiring Person") acquires 15 percent or more of the Company's
Common Stock (with certain exceptions) or announces a tender offer for 15
percent or more of the Common Stock. With the exception of certain cash tender
offers, if a person becomes an Acquiring Person, or in the event of certain
mergers of the Company with an Acquiring Person, the rights will become
exercisable for shares of Common Stock with a market value of two times the
exercise price of the right. The Company's Board of Directors is entitled to
redeem the rights at $.01 per right at any time before a person has acquired 15
percent or more of the outstanding Common Stock.
STOCK OPTIONS 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, 1998, an option to purchase 1,025
shares of Common Stock was outstanding, all of which were exercisable. At
December 31, 1998, 1,025 shares of the Company's Common Stock were reserved for
issuance under this option grant.
F-12
<PAGE>
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
and generally expire ten years from the date of grant. Vesting may accelerate
upon a change in control of the Company. At December 31, 1998, the Company had
2,017 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, 1995 1,647 495 $ 10.73
Options granted (907) 907 7.87
Options canceled 21 (21) 12.11
Options exercised -- (9) 3.08
--------------------- --------------------- ----------------------
Balances, December 31, 1996 761 1,372 8.87
Options granted (172) 172 7.17
Options canceled 58 (58) 9.12
Options exercised -- (42) 4.37
--------------------- --------------------- ----------------------
Balances, December 31, 1997 647 1,444 8.78
Options granted (467) 467 9.71
Options canceled 94 (94) 8.12
Options exercised -- (74) 7.27
===================== ===================== ======================
Balances, December 31, 1998 274 1,743 $ 9.13
===================== ===================== ======================
</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 1998, 1997 and 1996 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,
1998 1997 1996
- - ------------------------------- -------------- ------------ ------------
Risk-free interest rate 5.50% 6.25% 6.00%
Expected dividend yield 0% 0% 0%
Expected lives 6.5 years 6.5 years 8 years
Expected volatility 60.77% 58.11% 60.94%
F-13
<PAGE>
Using the Black-Scholes methodology, the total value of options granted during
1998, 1997 and 1996 was $2,534, $760 and $4,762, 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
1998, 1997 and 1996 was $4.92, $4.45 and $5.55, 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, 1998 1997 1996
- - -------------------------- -------------------------- ------------------------- ---------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $(10,042) $(11,870) $(1,393) $(3,102) $1,063 $(299)
Basic net income (loss)
per share $(1.16) $(1.37) $(0.16) $(0.36) $0.13 $(0.04)
Diluted net income
(loss) per share $(1.16) $(1.37) $(0.16) $(0.36) $0.12 $(0.04)
</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, 1998:
<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
12/31/98 Life - Years Price 12/31/98 Price
- - -------------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 1,025 3.1 $ 1.00 1,025 $ 1.00
3.08 1 5.0 3.08 1 3.08
6.56 - 6.78 211 7.3 6.62 127 6.62
6.88 - 7.94 290 7.4 7.45 203 7.41
8.69 - 8.97 750 7.9 8.80 273 8.75
9.56 12 6.9 9.56 12 9.56
10.91 - 11.75 391 5.1 11.56 332 11.62
12.31 - 13.56 88 8.3 12.79 37 12.90
==================== ================ ================ ============== ================ ==============
$ 1.00 - 13.56 2,768 5.6 $ 6.12 2,010 $ 5.08
==================== ================ ================ ============== ================ ==============
</TABLE>
At December 31, 1997 and 1996, 1,783 and 1,575 options, respectively, were
exercisable at weighted average exercise prices of $4.54 per share and $4.05 per
share, respectively.
F-14
<PAGE>
11. 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 $137 in 1998, $106 in
1997 and $74 in 1996.
12. SUPPLEMENTAL CASH FLOW INFORMATION
- - --------------------------------------
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - ----------------------------------------------------------- ------------- ------------- ---------------
<S> <C> <C> <C>
Cash paid during the period for interest $ 552 $ -- $ --
Cash paid during the period for income taxes 11 13 1,062
Issuance of Common Stock in exchange for interest expense
on Convertible Notes 525 -- --
Issuance of Common Stock in exchange for the assets of
Gorilla Foods, Inc. -- -- 990
</TABLE>
13. SUBSEQUENT EVENTS
- - ---------------------
In March 1999, the Agreement (see Note 4) was amended to consolidate the $14.5
million and the $5.0 million lines of credit. In addition, the interest rate was
changed to the bank's reference rate plus one percentage point, or at the option
of the Company, at LIBOR plus 4.0 percentage points or the Offshore rate plus
4.0 percentage points. This line of credit expired March 19, 1999. The Company
is currently renegotiating its credit facilities.
On March 29, 1999, the Company entered into a definitive stock purchase
agreement to sell $32.5 million of convertible preferred stock to a group of
investors. Under the terms of the agreement, the Company will sell an aggregate
of 2,762,500 shares of Series A convertible preferred stock and 487,500 shares
of Series B convertible preferred stock to members of the investor group, each
at a price of $10 per share, or an aggregate consideration of $32.5 million,
subject to certain closing conditions. The preferred shares are convertible at a
price of $10 per share at any time following issuance at the discretion of the
holder. The Series B conversion price will be adjusted to $3.75 if the Company
fails to meet specified performance targets for fiscal years 1999 and 2000. Both
series of preferred stock are entitled to a 12 percent cumulative annual
dividend payable upon redemption of the stock or in the event of a sale or
liquidation of the Company. Shares may not be redeemed until five years after
the original date of issuance, at which point they may be redeemed at the
election of the holders or, under certain conditions, at the discretion of the
Company.
F-15
<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, and have issued
our report thereon dated January 26, 1999. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule included
on page F-17 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
January 26, 1999
F-16
<PAGE>
SCHEDULE II
GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- - ------------------------------------------ -------------- ------------------------------------- ------------- ---------
Balance Charged Charged to Balance
at Beginning to Costs and Other Accounts - Deductions - at End
Description of Period Expenses Describe Describe(a) of Period
- - ------------------------------------------ -------------- ---------------- ----------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 120 $ 70 $ - $ 13 $ 177
Year Ended December 31, 1997:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 177 $ 128 $ - $ 30 $ 275
Year Ended December 31, 1998:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 275 $ 146 $ - $ 273 $ 148
</TABLE>
(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-17
<PAGE>
Exhibit Index
Exhibit No. Description
- - ----------- -----------
3.1 Restated Articles of Incorporation as amended October 17, 1997 (8)
3.2 1995 Restated Bylaws of the Company, as amended April 21, 1998 (12)
10.1 Business Loan Agreement with Bank of America NT & SA re:
Line-of-Credit, dated April 28, 1998 (12)
10.2 First Amendment, dated July 24, 1998, to Business Loan Agreement,
dated April 28, 1998, between Bank of America NT & SA and the
Company (13)
10.3 Second Amendment, dated August 18, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company (14)
10.4 Third Amendment, dated November 20, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.5 Fourth Amendment, dated December 8, 1998, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.6 Fifth Amendment, dated January 27, 1999, to Business Loan
Agreement, dated April 28, 1998, between Bank of America NT & SA
and the Company
10.7 Sixth Amendment, dated March 8, 1999, to Business Loan Agreement,
dated April 28, 1998, between Bank of America NT & SA and the
Company
10.8 Plant Lease-1416 S.E. 8th, Portland, Oregon (1)
10.9 First Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon
(11)
10.10 Second Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon
(12)
10.11 Third Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon,
dated January 1, 1999
10.12 Consent to Assignment and Option to purchase 1005 S.E. Washington,
Portland, Oregon (1)
10.13 Morrison Plaza Office Lease dated October 29, 1996. (10)
10.14 First Amendment to Morrison Plaza Office Lease, dated December 9,
1997 (11)
10.15 Lease extension for Morrison Plaza Office Building, dated September
11, 1998 (14)
10.16 Facility Lease by and between Freeport Center Associates, a Utah
general partnership and the Company, dated May 28, 1997 (9)
E-1
<PAGE>
Exhibit No.
- - -----------
10.17 Addendum dated August 1, 1997 to Facility Lease by and between
Freeport Center Associates, and the Company (11)
10.18 Purchase and Sale Agreement and Receipt For Earnest Money Between
the Iseli Family Partnership (Seller) and the Company (Buyer), as
amended, dated May 8, 1995 (5)
10.19 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)
10.20 Rights Agreement between the Company and First Chicago Trust
Company of New York, dated April 25, 1996 (7)
10.21 Amendment No. 1, dated as of March 26, 1998, to Rights Agreement
dated as of April 25, 1996, between the Company and First Chicago
Trust Company of New York (12)
10.22 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of December 17, 1997 (11)
10.23 First Amendment, dated June 4, 1998, to Lease Agreement, dated
December 17, 1997 between BA Leasing & Capital Corporation and the
Company (13)
10.24 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of May
28, 1998 (14)
10.25 First Amendment, dated January 14, 1999 to Lease Agreement between
BA Leasing & Capital Corporation and the Company, dated as of May
28, 1998
10.26 Note Purchase Agreement, dated as of March 27, 1998, between the
Company and Dresdner Kleinwort Benson Private Equity Partners L.P.
(12)
10.27 Convertible Senior Subordinated Note dated March 27, 1998 (12)
10.28 Registration Rights Agreement dated as of March 27, 1998, between
the Company and Dresdner Kleinwort Benson Private Equity Partners
L.P. (12)
10.29 1992 First Amended and Restated Combination Stock Option Plan (4)
(15)
10.30 Lyle Hubbard Employment Agreement dated April 14, 1996 (10) (15)
10.31 Agreement to Extend and Amend Employment Agreement dated November
16, 1998 to Lyle Hubbard Employment Agreement dated April 14, 1996
(15)
10.32 Agreement to Extend and Amend Employment Agreement dated March 5,
1999 to Lyle Hubbard Employment Agreement dated April 14, 1996
10.33 Paul F. Wenner Employment Agreement and Amendment thereto (1) (15)
E-2
<PAGE>
Exhibit No.
- - -----------
10.34 Paul F. Wenner Stock Option Agreement (2) (15)
10.35 Form of Severance Agreement for Executive Officers (10) (15)
10.36 Form of Indemnification Agreement between the Company and its
Officers and Directors (15)
10.37 1999 Executive Annual Incentive Plan (15)
10.38 Form of Incentive Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)
10.39 Form of Non-Statutory Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)
10.40 Warehouse Lease between Freeport Center Associates and the Company,
dated January 25, 1999.
10.41 Stock Purchase Agreement dated as of March 29, 1999, by and among
Gardenburger, Inc., and Rosewood Capital III, L.P., Farallon
Capital Management LLC, Gruber & McBaine Capital Management, LLC,
BT Capital Investors LP, and certain other purchasers identified
therein. (16)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Description of Common Stock of Gardenburger, Inc. (12)
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Commission File No. 33-46623), filed May 6, 1992.
(2) Incorporated by reference to the Company's 1992 Form 10-K Annual Report,
filed March 23, 1993.
(3) Incorporated by reference to the Company's 1993 Form 10-K Annual Report,
filed March 23, 1994.
(4) Incorporated by reference to the Company's 1994 Form 10-K Annual Report,
filed March 30, 1995.
(5) Incorporated by reference to the Company's 1995 Form 10-K Annual Report,
filed March 29, 1996.
(6) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1996, filed November 4, 1996.
(7) Incorporated by reference to the Company's Form 8-K Current Report, filed
May 8, 1996.
(8) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1997, filed November 4, 1997.
(9) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended June 30, 1997, filed August 14, 1997.
(10) Incorporated by reference to the Company's 1996 Form 10-K Annual Report,
filed March 25, 1997.
(11) Incorporated by reference to the Company's 1997 Form 10-K Annual Report,
filed March 31, 1998.
(12) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1998, filed May 15, 1998.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1998, filed August 12, 1998.
(14) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1998, filed November 5, 1998.
(15) Management contract or compensatory plan or arrangement.
(16) Incorporated by reference to the Company's Form 8-K Current Report, as
filed with the Securities and Exchange Commission on March 31, 1999.
E-3
EXHIBIT 10.4
- - --------------------------------------------------------------------------------
BANK OF AMERICA AMENDMENT TO DOCUMENTS
- - --------------------------------------------------------------------------------
AMENDMENT NO. 3 TO BUSINESS LOAN
AGREEMENT
This Amendment No. 3 (the "Amendment") dated as of November 20, 1998, is between
Bank of America NT & SA (the "Bank") and Gardenburger, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of April 28, 1998, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Agreement shall
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 In Paragraph 2.2. of the Agreement, the date "February 1, 1999" is
substituted for the date "December 1, 1998".
3. CONDITIONS. This Amendment will be effective when the Bank receives the
following items, in form and content acceptable to the Bank:
3.1 The Borrower agrees to pay a Twenty Five Thousand Dollar ($25,000) fee
due upon execution of this Amendment.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
and conditions of the Agreement shall remain in full force and effect.
BANK OF AMERICA NT & SA GARDENBURGER, INC.
/s/ Ed Kluss /s/ Richard C. Dietz
- - --------------------------------- ---------------------------------------
By: Ed Kluss By: Richard C. Dietz
Title: Vice President Title: Executive Vice President & CFO
-1-
EXHIBIT 10.5
- - --------------------------------------------------------------------------------
BANK OF AMERICA AMENDMENT TO DOCUMENTS
- - --------------------------------------------------------------------------------
AMENDMENT NO. 4 TO BUSINESS LOAN
AGREEMENT
This Amendment No. 4 (the "Amendment") dated as of December 8, 1998, is between
Bank of America NT & SA (the "Bank") and Gardenburger, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of April 28, 1998, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to further amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Agreement shall
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Subparagraph 1.1(b) of the Agreement is amended in its entirety to
read as follows:
(b) the sum of:
(i) 80% of the balance due on Acceptable Receivables; and
(ii) The lesser of the amounts indicated for each period
specified below, or 50% of the value of Acceptable Inventory
consisting of finished goods.
Period Amounts
------ -------
Through December 31, 1998 $5,000,000
From January 1, 1999 $4,000,000
through January 30, 1999
January 31, 1999, and thereafter $3,000,000
In determining the value of Acceptable Inventory to be included in the
Borrowing Base, the Bank will use the lowest of (i) the Borrower's
cost, (ii) the Borrower;s estimated market value, or (iii) the Bank's
independent determination of the resale value of such inventory in
such quantities and on such terms as the Bank deems appropriate.
-1-
<PAGE>
2.2 Subparagraph 1.2(i) of the Agreement is amended in its entirety to
read as follows:
(i) The account, when added to all other accounts that are
obligations of the same debtor, does not cause that debtor's
total obligations to the Borrower to exceed 10% of the balance
due on all of the Borrower's accounts.
It is provided, however, that if the debtor obligated upon an
account is one of the debtors listed below, the above limitation
will be increased to the percentage set forth below:
Debtor Limitation
------ ----------
Sysco 20%
DOT Foods 20%
Norpac Sales 20%
Aggregate of C&S Metro
and C&S Wholesale Grocers 20%
3. CONDITIONS. This Amendment will be effective when the Bank receives the
following items, in form and content acceptable to the Bank:
3.1 The Borrower agrees to pay a Seventy Five Thousand Dollar ($75,000)
fee due upon execution of this Amendment.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
and conditions of the Agreement shall remain in full force and effect.
BANK OF AMERICA NT & SA GARDENBURGER, INC.
/s/ Ed Kluss /s/ Richard C. Dietz
- - --------------------------------- ---------------------------------------
By: Ed Kluss By: Richard C. Dietz
Title: Vice President Title: Executive Vice President & CFO
-2-
EXHIBIT 10.6
- - --------------------------------------------------------------------------------
BANK OF AMERICA AMENDMENT TO DOCUMENTS
- - --------------------------------------------------------------------------------
AMENDMENT NO. 5 TO BUSINESS LOAN
AGREEMENT
This Amendment No. 5 (the "Amendment") dated as of January 27, 1999, is between
Bank of America NT & SA (the "Bank") and Gardenburger, Inc. (the "Borrower").
RECITALS
--------
A. The Bank and the Borrower entered into a certain Business Loan
Agreement dated as of April 28, 1998, as previously amended (the
"Agreement").
B. The Bank and the Borrower desire to amend the Agreement.
AGREEMENT
---------
1. DEFINITIONS. Capitalized terms used but not defined in this Agreement shall
have the meaning given to them in the Agreement.
2. AMENDMENTS. The Agreement is hereby amended as follows:
2.1 Subparagraph 1.1(b) of the Agreement is amended in its entirety to
read as follows:
(b) the sum of:
(i) 80% of the balance due on Acceptable Receivables; and
(ii) The lesser of the amounts indicated for each period
specified below, or 50% of the value of Acceptable Inventory
consisting of finished goods.
Period Amounts
------ -------
Through February 28, 1999 $5,000,000
March 1, 1999, and thereafter $3,000,000
In determining the value of Acceptable Inventory to be included in the
Borrowing Base, the Bank will use the lowest of (i) the Borrower's
cost, (ii) the Borrower;s estimated market value, or (iii) the Bank's
independent determination of the resale value of such inventory in
such quantities and on such terms as the Bank deems appropriate.
2.2 In Paragraph 2.2 of the Agreement, the date "March 1, 1999" is
substituted for the date "February 1, 1999".
-1-
<PAGE>
2.3 A new Paragraph 4.2 is added to the Agreement to read in its entirety
as follows:
4.2 REAL PROPERTY. The Borrower's obligations to the Bank under this
Agreement will be secured by a deed of trust covering:
2.4 Paragraph 6.2 of the Agreement is amended in its entirety to read
as follows:
6.2 SECURITY AGREEMENTS. Signed original security agreements, deeds
of trust, and financing statements and fixture filings (together with
collateral in which the Bank requires a possessory security interest),
which the Bank requires.
2.5 A new Paragraph 6.2A is added to the Agreement to read in its entirety
as follows:
6.2A EVIDENCE OF PRIORITY. Evidence that security interests and liens
in favor of the Bank are valid, enforceable, and prior to all others'
rights and interests, except thouse the Bank consents to in writing.
The Bank must receive acceptable beneficiary's statements from the
holders of any prior liens on the real property collateral.
2.6 Paragraph 9 of the Agreement is amended in its entirety to read
as follows:
9. HAZARDOUS WASTE
9.1 INDEMNITY REGARDING HAZARDOUS SUBSTANCES
The Borrower agrees to indemnify and hold the Bank harmless for, from
and against all liabilities, claims, actions, foreseeable and
unforeseeable consequential damages, costs and expenses (including
sums paid in settlement of claims and all consultant, expert and legal
fees and expenses of the Bank's counsel) or loss directly or
indirectly arising out of or resulting from any of the following:
(a) Any hazardous substance being present at any time, whether
before, during or after any construction, in or around any part
of the real property collateral securing this Agreement (the
"Real Property"), or in the soil, groundwater or soil vapor on or
under the Real Property, including those incurred in connection
with any investigation of site conditions or any clean-up,
remedial, removal or restoration work, or any resulting damages
or injuries to the person or property of any third parties or to
any natural resources.
(b) Any use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a
hazardous substance. This indemnity will apply whether the
hazardous substance is on, under or about any of the Borrower's
property or operations or proeprty leased to the Borrower,
whether or not the property has been taken by the Bank as
collateral.
Upon demand by the Bank, the Borrower will defend any investigation,
action or proceeding alleging the presence of any hazardous substance
in any such location, which affects the Real Property or which is
brought or commenced against the Bank, whether alone or together with
the Borrower or which is brought or commenced against the Bank,
whether alone or together with the Borrower or any other person, all
at the Borrower's own cost and by counsel to be approved by the Bank
in the exercise of its reasonable judgment. In the alternative, the
Bank may elect to conduct its own defense at the expense of the
Borrower.
-2-
<PAGE>
9.2 REPRESENTATION AND WARRANTY REGARDING HAZARDOUS SUBSTANCES
Before signing this Agreement, the Borrower reached and inquired into
the previous uses and ownership of the Real Property. Based on that
due diligence, the Borrower represents and warrants that to the best
of its knowledge, no hazardous substance has been disposed of or
released or otherwise exists in, ownership of the Real Property. Based
on that due diligence, the Borrower represents and warrants that to
the best of its knowledge, no hazardous substance has been disposed of
or released or otherwise exists in, on, under or onto the Real
Property, except as the Borrower has disclosed to the Bank in writing.
9.3 COMPLIANCE REGARDING HAZARDOUS SUBSTANCES
The Borrower has complied, and will comply and cause all occupants of
the Real Property to comply, with all laws, regulations and ordinances
governing or applicable to hazardous substances as well as the
recommendations of any qualified environmental engineer or other
expert which apply or pertain to the Real Property or the operations
of the Borrower. The Borrower acknowledges that hazardous substances
may permanently and materially impair the value and use of the Real
Property.
9.4 NOTICES REGARDING HAZARDOUS SUBSTANCES
Until full repayment of the loan, the Borrower will promptly notify
the Bank if it knows, suspects or believes there may be any hazardous
substance in or around the Real Property, or in the soil, groundwater
or soil vapor on or under the Real Property, or that the Borrower or
the Real Property may be subject to any threatened or pending
investigation by any governmental agency under any law, regulation or
ordinance pertaining to any hazardous substance.
9.5 SITE VISITS, OBSERVATIONS AND TESTING
The Bank and its agents and representatives will have the right at any
reasonable time to enter and visit the Real Property and any other
place where any property is located for the purposes of observing the
Real Property, taking and removing soil or groundwater samples, and
conducting tests on any part of the Real Property. The Bank is under
no duty, however, to visit or observe the Real Property or to conduct
tests, and any such acts by the Bank will be solely for the purposes
of protecting the Bank's security and preserving the Bank's rights
under this Agreement. No site visit, observation or testing by the
Bank will result in a waiver of any default of the Borrower or impose
any liability on the Bank. In no event will any site visit,
observation or testing by the Bank be a representation that hazardous
substances are or are not present in, on or under the Real Property,
or that there has been or will be compliance with any law, regulation
or ordinance pertaining to hazardous substances or any other
applicable governmental law. Neither the Borrower nor any other party
is entitled to rely on any site visit, observation or testing by the
Bank. The Bank owes no duty of care to protect the Borrower or any
other party against, or to inofrm the Borrower or any other party of,
any hazardous substances or any other adverse condition affecting the
Real Property. The Bank will not be obligated to disclose to the
Borrower or any other party any report or findings made as a result
of, or in connection with, any site visit, observation or testing by
the Bank. In each instance, the Bank will give the Borrower reasonable
notice before entering the Real Property or any other place the Bank
is permitted to enter under this Paragraph. The Bank will make
reasonable efforts to avoid interfering with the Borrower's use of the
Real Property or any other property in exercising any rights provided
in this paragraph.
-3-
<PAGE>
9.6 CONTINUATION OF INDEMNITY
The Borrower's obligations to the Bank under this Article, except the
obligation to give notices to the Bank, shall survive termination of
this Agreement and repayment of the Borrower's obligations to the Bank
under this Agreement, and shall also survive as unsecured obligations
after any acquisition by the Bank of the collateral securing this
Agreement, including the Real Property or any part of it, by
foreclosure or any other means.
9.7 DEFINITION OF HAZARDOUS SUBSTANCE
For purposes of this Agreement, the term "hazardous substances" means
any substance which is or becomes designated as "hazardous" or "toxic"
under any federal, state or local law, or any petroleum products,
including crude oil and any product derived directly or indirectly
from, or any fraction or distillate of, crude oil.
2.7 A new Paragraph 10.3A is added to the Agreement to read in its
entirety as follows:
10.3A LIEN PRIORITY. The Bank fails to have an enforceable first
lien (except for any prior liens to which the Bank has consented in
writing) on or security interest in any property given as security
for this loan.
3. CONDITIONS. This Amendment will be effective when the Bank receives the
following items, in form and content as security for this loan.
3.1 The Borrower agrees to pay a Twenty Five Thousand Dollar ($25,000) fee
due upon execution of this Amendment.
4. EFFECT OF AMENDMENT. Except as provided in this Amendment, all of the terms
and conditions of the Agreement shall remain in full force and effect.
BANK OF AMERICA NT & SA GARDENBURGER, INC.
/s/ Ed Kluss /s/ Richard C. Dietz
- - --------------------------------- ---------------------------------------
By: Ed Kluss By: Richard C. Dietz
Title: Vice President Title: Executive Vice President & CFO
-4-
EXHIBIT 10.7
AMENDMENT NO. 6 TO
BUSINESS LOAN AGREEMENT
This Amendment No. 6 ("the Amendment") dated as of March 8, 1999 is between
Bank of America, NT&SA (the "Bank") and Gardenburger, Inc. (the "Borrower").
RECITALS:
A. The Bank and the Borrower entered into a certain Business Loan Agreement
dated as of April 28, 1998, which has been subject to five previous amendments
(as so amended, the "Agreement").
B. The Bank and Borrower desire to further amend the Agreement.
C. Borrower is in default of its covenants to Bank respecting its leverage
and current ratio, and is without additional availability under the Line of
Credit to fund its current liquidity needs.
D. The $5,000,000 Reserve facility is due in full.
E. In consideration of the promises of Borrower and the plant trust deed
(defined below) and subject to the conditions stated below, Bank is willing to
amend the Agreement to accommodate the Borrower's current liquidity needs.
AGREEMENTS:
The Bank and the Borrower agree as follows:
1. The recitals are true.
2. Capitalized terms not defined in this Amendment shall have the
meaning given them in the Agreement.
3. To amend subparagraph 1.1(a) to strike the text introduced in
Amendment No. 1 and substitute the following: $19,500,000.
4. To amend subparagraph 1.1(b) by substituting the following for the
entire text, as amended:
"(b) the sum of
(i) 70% of the balance due on Acceptable Receivables; and
(ii) 50% of the value of Acceptable Inventory consisting of
finished goods; and
(iii) $5,100,000.
<PAGE>
In determining the value of Acceptable Inventory to be
included in the Borrowing Base, the Bank will use the lowest
of (i) the Borrower's cost, (ii) the Borrower's estimated
market value, or (iii) the bank's independent determination
of the resale value of such inventory in such quantities and
on such terms as the Bank deems appropriate.
(c) Less a reserve of $500,000 for payroll through March 11,
1999.
5. To amend subparagraph 1.2A to strike "July 1, 1999" and substitute
"3/19/99" as the Expiration Date.
6. To amend subparagraph 1.3A(a) to insert at the end thereof "plus
1.0%."
7. To amend subparagraphs 1.7A and 1.8A to strike "1.0" in the second
lines thereof and substitute "4.0."
8. To delete paragraph 2 in its entirety.
9. Borrower agrees to pay, upon the execution of this Amendment, a fee
of $25,000.
10. Subparagraph 4.2 is amended by substituting the following text for
the present text:
"4.2 Real Property. The Borrower's obligations to the Bank under
this Agreement will be secured by deeds of trust covering:
(a) 166th and Airport Way, Portland, Oregon, 97203; and
(b) 1005 S.E. Washington, Portland, Oregon, 97214
11. Borrower represents that it has a net worth in excess of
$4,000,000.
12. The Bank agrees to forbear enforcement of its remedies through
March 19, 1999, for the Borrower's breach of its covenants respecting its
leverage and current ratio.
13. In addition to any terms respecting payment, the Borrower agrees
to pay to the Bank 100% of the net proceeds of all sales of assets. Net
proceeds for the purpose of this provision means the gross proceeds of the
sale of an asset or assets less the costs of such sale consisting of
Seller's reasonable attorneys' fees, transfer taxes, closing costs payable
by the Borrower, and the cost of satisfaction of liens prior to the Bank's
liens.
14. That any advance by Bank hereunder shall be conditioned on the
provision by the Borrower to the Bank of a Borrowing Certificate in form
and content satisfactory to the Bank consistent with paragraph 4 above.
-2-
<PAGE>
15. The Borrower releases all claims and cause of action against the
Bank of every kind and nature, whether known or unknown in tort or in
contract.
16. The Borrower acknowledges and agrees that the Bank has not
committed to extend any borrowing facility beyond March 19, 1999, and
retains the unfettered discretion to refrain from extending any
accommodation to the Borrower beyond the accommodations provided herein.
17. Except as amended herein, all provisions of the Loan Agreement, as
previously amended, remains in full force and effect.
18. This Amendment supercedes all prior agreements and discussions not
specifically incorporated herein, and incorporates and integrates all prior
agreements of the parties.
19. NOTICE: UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND
COMMITMENTS MADE BY THE BANK AFTER OCTOBER 3, 1989, CONCERNING LOANS AND
OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD
PURPOSES OR SECURED SOLELY BY THE BORROWER'S RESIDENCE MUST BE IN WRITING,
EXPRESS CONSIDERATION AND BE SIGNED BY THAT BANK TO BE ENFORCEABLE.
20. The Agreement remains in full force and effect without
modification except as contained in amendments executed by both parties.
BANK OF AMERICA, NT&SA GARDENBURGER, INC.
By: /s/Ed Kluss By: /s/Richard C. Dietz
------------------ -------------------
-3-
EXHIBIT 10.11
THIRD AMENDMENT TO LEASE
This Third Amendment to Lease is made and entered into this 1st day of
January, 1999, by and between Frank S. Card and Maralee Jeanne Card, as Trustees
in the Card Trust U/D/T October 6, 1994 ("Lessor"), on the one hand and
Gardenburger, Inc. ("Lessee"), on the other.
RECITALS
A. On or about January 1, 1993, Lessor and Lessee entered into a
certain lease agreement (the "Lease"), pursuant to which Lessor agreed to lease
to Lessee certain real property in the City of Portland, Oregon described as
follows: Lots 1 and 2, Block 172, HAWTHORNE PARK, Multnomah County, Oregon (the
"Premises"), having a street address of 1416 S.E. 8th Avenue, Portland, Oregon.
B. The Premises are currently owned by Frank S. Card and Maralee Jeanne
Card, as Trustees in the Card Trust U/D/T October 6, 1994.
C. On or about January 1, 1998, the parties hereto entered into a
Second Amendment to Lease pursuant to which (1) the term of the Lease was an
additional year, commencing January 1, 1998, and ending December 31, 1998, (2)
the Lessee had the option to renew the lease for an additional year if
notification of such renewal was given to Lessor by November 1, 1998.
D. The parties hereto desire to amend the Lease and make the Lease a
lease for a period of one year effective January 1, 1999, with the option of
renewing the Lease for an additional year.
AMENDMENT
Now, therefore, in consideration for the mutual covenants contained
herein, the parties hereto agree to amend the Lease as follows:
1
<PAGE>
1. TERM OF LEASE. The term of the Lease will be one year, commencing
January 1, 1999, and ending December 31, 1999.
2. RENEWAL OPTION. Lessee shall have the option to renew the Lease for
an additional one-year term if notification of such renewal is given to Lessor
by November 1, 1999. If no notification is given to Lessor, the Lease shall
terminate on December 31, 1999.
3. RENT. Beginning with the rent due for January 1999, Lessee shall pay
Lessor a rental rate of $2,700 per month, which includes a $500 per month rental
rate for the use of the billboard sign.
4. NO OTHER MODIFICATION TO LEASE. No other modification to the Lease
is made or intended to be made hereby. All terms, conditions, and covenants to
the Lease, to the extent not inconsistent with the foregoing amendments, shall
remain in full force and effect.
LESSOR:
/s/ Frank S. Card
--------------------------------
Frank S. Card, as Trustee in the Card
Trust U/D/T October 6, 1994
/s/ Maralee Jeanne Card
--------------------------------
Maralee Jeanne Card, as Trustee in the
Card Trust U/D/T October 6, 1994
LESSEE: GARDENBURGER, INC.
By: /s/ Richard C. Dietz
-----------------------------
Richard C. Dietz
Executive Vice President and
Chief Financial Officer
2
EXHIBIT 10.25
FIRST AMENDMENT TO LEASE entered into as of January 14, 1999 by and between
BA LEASING & CAPITAL CORPORATION, a California corporation, with its principal
office at 555 California Street, Fourth Floor, San Francisco, California 94104
("Lessor") and GARDENBURGER, INC., an Oregon corporation, with its principal
office at 1411 S.W. Morrison Street, Suite 400, Portland, OR 97205 ("Lessee")
with reference to the following:
A. Lessor and Lessee have entered into a Lease Agreement dated as of May 28,
1998, and an Appendix No. 1 to the Lease Agreement dated as of May 28, 1998
(together the "Lease"; all defined terms therein not otherwise defined
herein being used with their meanings as defined therein); and
B. Lessor and Lessee now desire to amend the Lease as hereinafter set forth:
NOW, THEREFORE, the parties hereto agree as follows:
1. In paragraph C entitled INTERIM TERM AND BASE TERM of the Appendix to the
Lease, replace the third sentence to read:
"The `Base Term' for each Unit will begin on, and include, its Base Date
and continue for 84 months."
2. In paragraph D entitled UTILIZATION PERIOD, replace the date "December 31,
1998" with "June 30, 1999."
3. In paragraph E 3. entitled BASE RENT of the Appendix to the Lease, change
the Delivery Date from "June 1998" to "June 1999".
4. In paragraph J entitled COVENANTS of the Appendix to the Lease, hereby
amend and restate in its entirety to read as follows:
"(a) If that certain Business Loan Agreement dated as of April 28, 1998
(the `Loan Agreement') between Bank of America National Trust and Savings
Association (`BANTSA'), as lender, and Lessee, as borrower, terminates or
ceases for any reason to be binding upon Lessee without being replaced by a
replacement credit agreement with BANTSA or an affiliate (a `Termination'),
then the covenants and agreements of Lessee contained in Article 8 of the
Loan Agreement as such covenants and agreements may be from time to time
amended or replaced shall be deemed incorporated herein and shall survive
such Termination.
(b) Lessee agrees that during the Lease Term it shall not, without Lessor's
prior written consent, incur any additional debt other than the debt
outstanding under the Loan Agreement, and that Lessor's consent to any
future debt obligations of Lessee will be conditioned upon receipt of a
subordination agreement executed by all lenders or creditors of Lessee, in
form and substance acceptable to Lessor, subordinating all claims of any
such lender or creditor against Lessee to any and all claims, now or at any
later time existing (and renewals and extensions of the same) which Lessor
may have against Lessee."
<PAGE>
First Amendment to Lease
January 14, 1999
Page 2
Except as is herein specifically amended, all of the terms, covenants, and
provisions of the Lease remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
to Lease as of the day and year written above.
GARDENBURGER, INC. BA LEASING & CAPITAL CORPORATION
By /s/ Richard C. Dietz By /s/ Albert Norona
--------------------------- ---------------------------
Title: Chief Financial Officer Title: Vice President
By /s/ Angela Catalli
---------------------------
Title: Assistant Vice President
<PAGE>
REQUEST FOR ADVANCE
-------------------
Reference is made to the Lease Agreement dated as of May 28, 1998
capitalized terms unsed herein shall have the same meaning as the terms have in
such Lease.
Lessee hereby requests Lessor to make advances to the Vendors in the
amounts indicated below and hereby certifies that in accordance with the terms
of the relevant Purchase Agreement(s) the requisite amount of equipment has been
or will be delivered or the requisite amount of work has been or will be
completed so that the Vendors are entitled to progress payments in the amounts
specified below. Lessee further confirms that Lessee is obligated to pay any
Interim Rent provided in the relevant Appendix with respect to such advances.
Amount of Date of Lessee Purchase Order Vendor's Name
Requested Advance Requested Advance Number and Date and Address
- - ----------------- ----------------- --------------------- -------------
$1,044,071.09 01/22/99 See Attached Annex A See Attached
(Funding #7) Annex A
IN WITNESS WHEREOF, Lessee has executed this REQUEST FOR ADVANCE on
January 26, 1999.
GARDENBURGER, INC.
By: /s/Richard C. Dietz
-----------------------
Title: Chief Financial Officer
<PAGE>
PURCHASE AGREEMENT ASSIGNMENT dated January 22, 1999 between GARDENBURGER,
INC., an Oregon corporation ("Assignor"), and BA LEASING & CAPITAL CORPORTION, a
California corporation ("Assignee").
INTRODUCTION
------------
Assignor has entered into a purchase agreement no. SEE ATTACHED ANNEX A,
dated SEE ATTACHED ANNEX A, (the "Purchase Agreement") with SEE ATTACHED ANNEX A
("Vendor"), a copy of which Purchase Agreement is attached hereto, provided for
the sale to Assignor of food processing equipment (the "Units"), which Assignor
desires to lease from Assignee under a Lease Agreement dated as of May 28, 1998
between Assignor and Assignee (the "Lease"; defined terms therein not otherwise
defined herein being used herein as so defined).
NOW, THEREFORE, the parties hereto agree as follows:
1. Assignor hereby assigns to Assignee all of Assignor's right, title and
interest in and to the Purchase Agreement and the Units. Assignee hereby accepts
such assignment. Notwithstanding such assignment, Assignor may pay for or make
advances toward the purchase of one or more Units and then, subject to
satisfaction of the relevant conditions precedent in the Appendix, obtain
reimbursement from Assignee for such advances. Assignee hereby appoints Assignor
as its agent solely for the purpose of purchasing such Units on behalf of
Assignee under the Lease.
2. Neither Assignor nor Assignee may amend, modify, rescind, or terminate
any Purchase Agreement without the prior express written consent of the other.
3. Notwithstanding this assignment, (a) Assignor shall at all times remain
liable to Vendor under the Purchase Agreement to perform all the duties and
obligations of the purchaser thereunder to the same extent as if this Purchase
Agreement Assignment had not been executed, (b) the exercise by Assignee of any
of the rights assigned hereunder shall not release Assignor from its duties or
obligations to Vendor under any Purchase Agreement, (c) Assignee shall not be
obligated to make any payment to Vendor other than an amount equal to the
purchase price of the Units as shown on the Purchase Agreement attached hereto
and (d) the obligation of Assignee to purchase the Units is conditioned upon
acceptance of the Units by Assignor and the fulfillment by Assignor of the
conditions set forth in the Lease.
4. Assignor represents and warrants that (a) Assignor has the right to
assign the Purchase Agreement without the Vendor's consent or, if not
assignable, consent has been obtained and a copy of which is attached hereto,
(b) the right, title and interest of Assignor in the Purchase Agreement so
assigned is and shall be free from all claims, liens, security interests and
encumbrances, (c) Assignor will warrant and defend the assignment against claims
and demands of all persons, (d) the Purchase Agreement contains no conditions
under which Vendor may reclaim title to any Unit after delivery, acceptance and
payment therefor and (e) the Purchase Agreement is and when the Purchase
Agreement Assignment is executed and delivered it will be in full force and
effect and enforceable in accordance with its terms and Assignor is not and will
not then be in default thereunder.
5. At any time and from time to time, upon the written request of Assignee,
Assignor agrees to promptly and duly execute and deliver any and all such
further documents and take such further actions as Assignee may reasonably
request in order to obtain the full benefits of this Purchase Agreement
Assignment and of the rights and powers herein granted.
IN WITNESS WHEREOF, the parties hereto have caused this Purchase Agreement
Assignment to be duly executed as of the day and year first written above.
BA LEASING & CAPITAL CORPORATION GARDENBURGER, INC.
(Assignee) (Assignor)
By: /s/Albert Norona By: /s/Richard C. Dietz
------------------------- -------------------------
Title: Vice President Title: Chief Financial Officer
By: /s/Angela Catalli
-------------------------
Title: Assistant Vice President
EXHIBIT 10.31
AGREEMENT TO EXTEND AND AMEND EMPLOYMENT AGREEMENT
This Agreement to Extend and Amend Employment Agreement is entered into as
of this 16th day of November, 1998, by and between Gardenburger, Inc., formerly
known as Wholesome & Hearty Foods, Inc. ("Gardenburger"), and Lyle G. Hubbard
("Hubbard").
RECITALS
A. On or about May 23, 1996, Gardenburger and Hubbard executed an
Employment Agreement dated as of April 14, 1996 (the "Employment Agreement"),
pursuant to which Gardenburger agreed to employ Hubbard as its chief executive
officer. A copy of the Employment Agreement is attached hereto as Exhibit A.
Pursuant to the Employment Agreement, Hubbard's employment as Gardenburger's
chief executive officer will terminate on April 13, 1999, unless extended or
terminated.
B. Gardenburger's Board of Directors (the "Board") and Hubbard wish to
extend the term of Hubbard's employment as chief executive officer pursuant to
the terms of the Employment Agreement for an additional period of one year and
two days and to amend certain provisions of the Employment Agreement.
AGREEMENTS
NOW, THEREFORE, Gardenburger and Hubbard agree as follows:
1. EXTENSION OF TERM. Pursuant to Section 1.1. of the Employment Agreement,
the term of Hubbard's employment with Gardenburger as its chief executive
officer is hereby extended for an additional period of one year and two days.
Accordingly, Hubbard's employment with Gardenburger as its chief executive
officer shall be extended through April 15, 2000.
2. BASE COMPENSATION. The Board and Hubbard acknowledge that the Board, in
November 1997, agreed to increase Hubbard's annual base compensation to
$280,000. All references to base compensation under Section 2.1 of the
Employment Agreement shall be deemed to be $280,000 of base compensation, as
increased from time to time. The second sentence of Section 2.1 of the
Employment Agreement shall be replaced with the following:
"The Board of Directors shall periodically review Employee's base
compensation and, in its sole and absolute discretion, may increase
(but not decrease) Employee's base compensation."
3. In November 1997, the Board of Directors approved an executive annual
incentive plan that governs the payment of incentive bonuses for Hubbard and
certain other employees of the Company. The Company agrees to maintain the
executive annual incentive plan, or a substantially similar incentive plan, and
to continue Employee's participation in such plan during the term of the
Employment Agreement. Therefore, Section 2.2 of the Employment Agreement is
deleted in its entirety.
-1-
<PAGE>
4. Section 5.3 of the Employment Agreement is deleted in its entirety.
5. Sections 5.5.2(c) and (d) of the Employment Agreement are amended to
provide as follows:
"5.5.2 In the event of the termination of Employee's employment
pursuant to Section 5.2 (Death or Disability) or Section 5.4 (termination
of Employee's employment by the Company without Cause occurring in the
absence of a Change in Control, as that term is defined in Section 5.7 of
this Agreement), the Company shall pay to Employee:
* * *
(c) Severance pay equal to
(i) the greater of (x) 18 months of the base compensation payable
to Employee under Section 2.1, or (y) the base compensation remaining
to be paid to Employee under Section 2.1 between the effective date of
such termination and the end of the employment term under this
Agreement; and
(ii) the average of Employee's annual incentive bonuses for the
two full fiscal years ending prior to the fiscal year in which the
termination occurs divided by 12 (to obtain the "average monthly
bonus"), multiplied by the greater of 18 months or the number of
months remaining between the effective date of termination and the end
of Employee's employment term.
Employee agrees, as a condition to payment and receipt of such
severance pay, to execute a full and complete release, in form and
substance satisfactory to the Company, of any and all claims of every
kind and nature whatsoever against the Company.
(d) No other compensation, benefits or payments of any nature
whatsoever shall be due and payable under this Agreement in the event of
termination of Employee's employment by the Company pursuant to Sections
5.2 or 5.4 without Cause."
6. Section 5.6.1 of the Employment Agreement is amended to provide as
follows:
"5.6.1 DECISION OF COMPANY NOT TO EXTEND TERM. The Company is required
under Section 1.1 above to notify Employee at the end of the second year of
the employment term and, in the event this Agreement is extended, at the
end of each subsequent one-year period thereafter, whether the Company
elects to extend this Agreement for an additional one-year term. If the
Company, in its sole and absolute discretion, decides not to extend this
Agreement for an additional one-year term, then the Company shall, in the
-2-
<PAGE>
event it has not already paid severance pay to Employee under Section 5.5.2
above, pay to Employee at the end of the final year of Employee's
employment, as severance pay, 18 months of the then current base
compensation payable to Employee under Section 2.1, together with the
"average monthly bonus" as described in Section 5.5.2(c)(ii) of this
Agreement multiplied by a factor of 18; provided, however, the Company
shall have no obligation to pay such severance pay if the reason for not
extending this Agreement is Employee's retirement. Employee agrees, as a
condition of payment and receipt of such severance pay, to execute a full
and complete release, in form and substance satisfactory to the Company, of
any and all claims of every kind and nature whatsoever against the Company.
The Board of Directors shall be under no obligation, in the event it elects
not to extend the term of this Agreement, to review Employee's performance,
or offer Employee another extension, at the end of the final year of
Employee's employment."
7. The following shall be inserted into the Agreement as Section 5.7:
"5.7 TERMINATION FOLLOWING CHANGE IN CONTROL.
5.7.1 The following definitions will apply to this Section 5.7:
(a) `Acquiring Person' means any person or related person or
related persons which constitute a `group' for purposes of Section
13(d) and Rule 13d-5 under the Securities Exchange Act of 1934 (the
`Exchange Act'), as such Section and Rule are in effect as of the date
of any acquisition; provided, however, that the term Acquiring Person
shall not include (1) the Company or any of its subsidiaries, (2) any
employee benefit plan or related trust of the Company or any of its
subsidiaries, (3) any entity holding voting capital stock of the
Company for or pursuant to the terms of any such employee benefit
plan, or (4) any person or group solely because such person or group
has voting power with respect to capital stock of the Company arising
from a revocable proxy or consent given in response to a public proxy
or consent solicitation made pursuant to the Exchange Act.
(b) `Change in Control' of the Company means:
"(1) The acquisition by any Acquiring Person of beneficial
ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities; provided,
however, that for purposes of this paragraph (1), the following
acquisitions shall not constitute a Change in Control: (i) any
acquisition by the Company, or (ii) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained
by the Company or any corporation controlled by the Company; or
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(2) The date of approval by the shareholders of the Company
of a plan of merger or consolidation of the Company in which such
shareholders will not hold at least seventy-five percent (75%) of
the combined voting power of the resulting entity immediately
following such merger or consolidation, or the approval by the
stockholders of the Company of a plan of complete liquidation of
the Company or an agreement for the sale of substantially all of
the Company's assets.
(c) `Change in Control Date' means the first date following the
date of this Agreement on which a Change in Control has occurred.
(d) `Excise Tax.' A tax imposed by Section 4999(a) of the
Internal Revenue Code of 1986, as amended (the `Code'), or any
successor provision, with respect to `excess parachute payments', as
described in Section 280G(b) of the Code.
(e) `Good Reason.' Termination by Employee of his employment with
the Company for `Good Reason' shall mean termination based on any of
the following:
(1) a change in Employee's status, title, or position or
positions with the Company which represents a demotion from
Employee's status, title, or position or positions as in effect
immediately prior to the Change in Control, or a change in
Employee's duties or responsibilities which is inconsistent with
such status, title, or position or positions, or any removal of
Employee from or any failure to reappoint or reelect Employee to
such title or position or positions, except in connection with
the termination of Employee's employment for Cause or Disability
or as a result of Employee's death or the termination by Employee
other than for Good Reason;
(2) a reduction by Company in Employee's base salary as in
effect immediately prior to the Change in Control Date or a
material reduction in Employee's opportunity for an incentive
bonus from the opportunity that existed for Employee immediately
prior to the Change in Control Date; or
(3) the Company's requiring Employee to be based anywhere
more than 35 miles from where Employee's office is located
immediately prior to the Change in Control Date except for
required travel on the Company's business to an extent
substantially consistent with the business travel obligations
which Employee undertook on behalf of the Company prior to the
Change in Control Date.
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5.7.2 In the event that Employee's employment with the Company is
terminated, either by Employee with Good Reason or by the Company without
Cause, within two years after the date of occurrence of any event
constituting a Change in Control (it being recognized that more than one
such event may occur in which the two-year period shall run from the date
of occurrence of each event), and provided that the condition set forth in
Section 5.7.6 of this Agreement is satisfied, Employee shall be entitled to
the payments described in Sections 5.5.2(a) and (b) of this Agreement and,
in lieu of the severance pay described in Section 5.5.2(c) of this
Agreement, an amount of severance pay equal to 2.99 times the sum of (a)
the average of the annual base compensation paid to Employee by the Company
for the five full fiscal years ending prior to the fiscal year in which the
Change in Control occurs and (b) the average of the annual incentive
bonuses (if any) paid to Employee for the five full fiscal years ending
prior to the fiscal year in which the Change in Control occurs (hereinafter
referred to as the `Change in Control Severance Payment'). If Employee has
not been employed by the Company for at least five years at the time the
Change in Control occurs, the Company shall pay Employee a Change in
Control Severance Payment equal to 2.99 times the sum of the average of the
annual base compensation paid to Employee and the average of the annual
incentive bonuses (if any) paid to Employee for the full fiscal years in
which Employee was employed by the Company prior to the fiscal year in
which the Change in Control occurs.
5.7.3 The Change in Control Severance Payment shall be made not later
than the tenth day following the date of termination; provided, however,
that if the amount of such payment cannot be finally determined on or
before such day, the Company shall pay to Employee on such day an estimate,
as determined in good faith by the Company, of the minimum amount of such
payment, and shall pay the remainder of such payment (together with
interest at the rate of 10 percent per annum) as soon as the amount thereof
can be determined but in no event later than the 30th day after the date of
termination. In the event that the amount of the estimated payment exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to Employee, payable on the tenth day
after demand by the Company (together with interest at the rate of 10
percent per annum).
5.7.4 Employee shall not be required to mitigate the amount of any
Change in Control Severance Payment by seeking other employment or
otherwise, nor shall the amount of any such payment be reduced by any
compensation earned by Employee as the result of employment by another
employer after the date of termination, or otherwise.
5.7.5 (a) In the event that any portion of the total payments received
by Employee in connection with a Change in Control (including the payments
described in Sections 5.5.2(a) and (b) of this Agreement, the Change in
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Control Severance Payment and any other payment or benefit payable to
Employee in connection with the Change in Control pursuant to any plan,
arrangement, or agreement (other than this Agreement) with the Company, a
person whose actions result in the Change in Control, or person affiliated
with the Company or such person) (hereinafter referred to as `Total
Payments') would constitute an `excess parachute payment' within the
meaning of Section 280G(b) of the Code that is subject to an Excise Tax,
the payments otherwise payable under this Section 5.7 shall be reduced to
the extent necessary to avoid a portion of the Excise Tax, but only to the
extent such reduction in the amount of the Severance Payment would result
in a larger after-tax benefit to Employee, taking into account all
applicable federal, state, and local income and excise taxes, until either
(i) no portion of the payments are subject to such Excise Tax or (ii) the
Change in Control Severance Payment is reduced to zero, whichever occurs
first.
(b) For purposes of the reduction described in Section 5.7.5(a):
(1) No portion of the Total Payments, the receipts or
enjoyment of which Employee has effectively waived in writing
prior to the date of payment of the severance payments, shall be
taken into account;
(2) No portion of the Total Payments shall be taken into
account which, in the opinion of tax counsel selected by the
Company and reasonably acceptable to Employee ("Tax Counsel"),
does not constitute a `parachute payment' within the meaning of
Section 280G of the Code;
(3) If Employee and the Company disagree whether any Change
in Control Severance Payment will result in an Excise Tax or
whether a reduction in any such severance payment will result in
a larger after-tax benefit to Employee, the matter will be
conclusively resolved by an opinion of Tax Counsel;
(4) Employee agrees to provide Tax Counsel with all
financial information necessary to determine the after-tax
consequences of the Change in Control Severance Payment for
purposes of determining whether, or to what extent, such
severance payment is to be reduced pursuant to this Section
5.7.5; and
(5) The value of any noncash benefit or any deferred payment
or benefit included in the Total Payments, and whether or not all
or a portion of any payment or benefit is a 'parachute payment'
for purposes of paragraph (b)(2) above, shall be determined by
Tax Counsel in accordance with the principles of Section
280G(d)(3) and (4) of the Code.
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"5.7.6 The Change in Control Severance Payment shall be paid to
Employee only if the Change in Control results from an Acquiring Person
acquiring control in the Company for a price per share of the Company's
common stock that exceeds the minimum per share price set forth below:
Change in Control Minimum per
occurring on or before share sale price
---------------------- ----------------
December 1, 1998 $10.00
March 1, 1999 $10.375
June 1, 1999 $10.75
September 1, 1999 $11.125
December 1, 1999 $11.50
March 1, 2000 $11.93
April 15, 2000 $12.00
"5.7.7 Employee agrees, as a condition of payment and receipt of the
Change in Control Severance Payment, to execute a full and complete
release, in form and substance satisfactory to the Company, of any and all
claims of every kind and nature whatsoever against the Company."
8. Section 5.7 of the existing Agreement shall be renumbered as 5.8 and
shall be amended to provide as follows:
"5.8 OUTPLACEMENT SERVICES. In the event of the termination of
Employee's employment pursuant to Section 5.4 (Termination of Employee's
employment by the Company without Cause) or Section 5.7 (Termination
Following Change in Control), or in the event the Company elects not to
extend the term of this Agreement and Employee's employment ceases due to
expiration of the employment term, the Company shall retain a reputable
outplacement agency, acceptable to Employee, to assist Employee in finding
another job, provided, however, the maximum amount that the Company shall
be obligated to expend in outplacement services for Employee shall be
$25,000."
9. Section 8.10 of the Employment Agreement is amended to provide as
follows:
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"8.10 GOVERNING LAW AND DISPUTE RESOLUTION. This Agreement shall be
deemed to have been executed and entered into in Portland, Oregon, and this
Agreement, and its formation, operation and performance, shall be governed,
construed and enforced in accordance with the laws of the State of Oregon,
without regard to its conflict of law principles. Any dispute between the
parties concerning this Agreement shall be settled by arbitration in
accordance with the rules of Arbitration Service of Portland, Inc., or the
Commercial Arbitration Rules of the American Arbitration Association at the
election of the party initiating the arbitration. Unless otherwise agreed,
arbitration shall be conducted in Portland, Oregon, before a single
arbitrator. The parties shall be entitled to conduct discovery in
accordance with the Federal Rules of Civil Procedure as in effect in the
jurisdiction in which arbitration occurs, subject to limitation by the
arbitrator to secure just and efficient resolution of the dispute. Judgment
upon the arbitration award may be entered in any court having jurisdiction.
Nothing herein, however, shall prevent either party from resorting to a
court of competent jurisdiction in those instances where injunctive relief
may be appropriate. Any such action for injunctive relief shall be filed in
the federal or state court in Portland, Oregon, and the parties hereby
waive their right to change such venue and hereby submit to the
jurisdiction of such courts."
10. NO OTHER MODIFICATION OR AMENDMENT. No other modification or amendment
to the Employment Agreement is made or intended to be made hereby. All terms,
conditions, and covenants of the Employment Agreement, to the extent not
inconsistent with the amendments described above, shall remain in full force and
effect.
GARDENBURGER, INC.
By: /s/E. Kay Stepp By: /s/Lyle G. Hubbard
------------------------------- ----------------------------------
E. Kay Stepp Lyle G. Hubbard
Chair of the Board of Directors
Dated: 11/16/98 Dated: 11/18/98
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EXHIBIT 10.32
AGREEMENT TO EXTEND AND AMEND EMPLOYMENT AGREEMENT
This Agreement to Extend and Amend Employment Agreement is entered into as
of this 5th day of March, 1999, by and between Gardenburger, Inc.
("Gardenburger"), and Lyle G. Hubbard ("Hubbard").
RECITALS
A. On or about May 23, 1996, Gardenburger and Hubbard executed an
Employment Agreement dated as of April 14, 1996 (the "Employment Agreement"),
pursuant to which Gardenburger agreed to employ Hubbard as its Chief Executive
Officer. The Employment Agreement was extended and amended pursuant to an
Agreement to Extend and Amend Employment Agreement dated November 16, 1998.
Pursuant to the Employment Agreement, as amended and extended, Hubbard's
employment as Gardenburger's Chief Executive Officer will terminate on April 15,
2000, unless extended or terminated prior thereto.
B. Gardenburger's Board of Directors and Hubbard wish to extend the term of
Hubbard's employment as Chief Executive Officer pursuant to the terms of the
Employment Agreement for an additional period of one year.
AGREEMENTS
NOW, THEREFORE, Gardenburger and Hubbard agree as follows:
1. Pursuant to Section 1.1. of the Employment Agreement, the term of
Hubbard's employment with Gardenburger as its Chief Executive Officer is hereby
extended for an additional period of one year. Accordingly, Hubbard's employment
with Gardenburger as its Chief Executive Officer shall be extended through April
15, 2001.
2. Section 5.7.6 of the Employment Agreement is amended to provide as
follows:
5.7.6 The Change in Control Severance Payment shall be paid to
Employee only if the Change in Control results from an Acquiring Person
acquiring control in the Company for a price per share of the Company's
common stock that exceeds the minimum per share price set forth below:
Change in Control Minimum per
occurring on or before share sale price
---------------------- ----------------
December 1, 1998 $10.00
March 1, 1999 $10.375
June 1, 1999 $10.75
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September 1, 1999 $11.125
December 1, 1999 $11.50
March 1, 2000 $11.93
June 1, 2000 $12.36
September 1, 2000 $12.79
December 1, 2000 $13.23
March 1, 2001 $13.72
April 15, 2001 $13.96
3. No other modification or amendment to the Employment Agreement is made
or intended to be made hereby. All terms, conditions, and covenants of the
Employment Agreement, to the extent not inconsistent with the amendments
described above, shall remain in full force and effect.
GARDENBURGER, INC.
By: /s/E. Kay Stepp By: /s/Lyle G. Hubbard
------------------------------- -------------------------------
E. Kay Stepp Lyle G. Hubbard
Chair of the Board of Directors
Dated: 3/9/99 Dated: 3/5/99
2
EXHIBIT 10.36
FORM OF
INDEMNIFICATION AGREEMENT
This Agreement is made this 19th day of February 1999, between
Gardenburger, Inc., an Oregon corporation (the "Company"), and
______________________ ("Director").
RECITALS
A. Director is a member of the board of directors ("Board") of the Company
and in such capacity is performing a valuable service for the Company.
B. Section 60.414 of the Oregon Business Corporation Act (the "Act") by its
terms recognizes that the indemnification and advancement of expenses provisions
of ORS 60.387 to ORS 60.411 are not exclusive and that agreements may be entered
into between a corporation and its directors with respect to indemnification.
C. Both the Company and Director recognize the substantial risk of
litigation and other claims being asserted against directors of public
corporations.
D. The Company has determined that it is in the best interests of the
Company to enter into this Agreement in recognition of Director's need for
substantial protection against personal liability in order to assure Director's
continued service to the Company in an effective manner and to provide
contractual assurance that such protection will be available to Director
notwithstanding any amendment of the Act or the Company's articles of
incorporation or bylaws.
AGREEMENTS
NOW, THEREFORE, in consideration of Director's continued service as a
member of the Board after the date of this Agreement, the parties hereto agree
as follows:
1. BASIC INDEMNITY. Subject to the exclusions in Section 6, the Company
hereby agrees to hold harmless and indemnify Director and the estate or personal
representative of Director from and against all Liability and Expenses actually
and necessarily incurred by Director in any threatened, pending, or completed
actions, suits, or proceedings, whether civil, criminal, administrative, or
investigative, involving Director by reason of the fact that he or she is or was
a director or agent of the Company and/or any of the Company's subsidiaries to
the broadest and maximum extent permitted by Oregon law.
2. MAINTENANCE OF INSURANCE. The Company presently has in effect policies
of director and officer liability insurance ("D&O Insurance") in amounts
satisfactory to Director. Subject to Section 3, the Company agrees that, so long
as Director continues to serve as a director of the Company and thereafter so
long as Director is subject to any possible Claim (as hereinafter defined), it
will purchase and maintain in effect for the benefit of Director one or more
valid, binding and enforceable policies of D&O Insurance providing coverage at
least comparable to the coverage provided by the existing policies.
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3. SELF INSURANCE. Notwithstanding Section 2, the Company shall not be
required to maintain in effect policies of D&O Insurance if such insurance is
not reasonably available or if, in the reasonable business judgment of the then
members of the Board, either (i) the premium cost for such insurance is
substantially disproportionate to the amount of coverage or (ii) the coverage
provided by such insurance is so limited by exclusions, deductions or otherwise
that there is insufficient benefit to warrant the cost of maintaining such
insurance. In the event the Company does not maintain such insurance in effect,
the Company agrees to hold harmless and indemnify Director and the estate and
personal representative of Director to the full extent of the coverage provided
by the existing policies of D&O Insurance. Anything in this Agreement to the
contrary notwithstanding, to the extent and so long as the Company or any parent
of the Company shall choose to maintain in effect any policy or policies of D&O
Insurance while Director is subject to any possible Claim, the Company shall be
required to maintain in effect similar and equivalent policies for the benefit
of Director, whether more or less favorable to Director than the existing
policies of D&O Insurance.
4. ADDITIONAL INDEMNITY. Subject to the exclusions in Section 6 and without
limiting the Company's obligations under Section 1, the Company hereby agrees to
indemnify Director and the estate and personal representative of Director
against all Liability (as hereinafter defined) incurred in connection with any
Claim including, without limiting the generality of the foregoing, a Claim by or
in the right of the Company.
5. ADVANCEMENT OF EXPENSES. The Company shall, if requested by Director,
pay all Expenses (including attorney fees) incurred by Director in
investigating, defending or appealing any Claim in advance of the final
disposition of a Claim. If required by the Act or other applicable statute, any
such request shall be accompanied by a written affirmation of Director's good
faith belief that Director has met the standard of conduct described in ORS
60.391. The Company shall pay any statement for such Expenses within 20 days
after receipt of the statement. Director shall reimburse the Company for all
Expenses paid by the Company pursuant to this Section 5 in the event and only to
the extent that it is ultimately determined that Director is not entitled to be
indemnified by the Company for such Expenses.
6. EXCLUSIONS. No indemnity pursuant to Sections 1 or 4 shall be paid by
the Company:
6.1 If a final nonappealable decision by a court having jurisdiction
in the matter shall determine that such indemnification is not lawful;
6.2 On account of acts or omissions by Director which are adjudged to
have been not in good faith or to have involved intentional misconduct or a
knowing violation of law;
6.3 For which and to the extent payment is actually made to or on
behalf of Director under a valid and enforceable insurance policy; 6.4 In
connection with a proceeding by or in the right of the Company in which Director
was adjudged liable to the Company; 6.5 In connection with a proceeding charging
improper personal benefit to Director in which Director was adjudged liable on
the basis that personal benefit was improperly received by Director; 6.6 For
Liability or Expenses in any proceeding brought by Director against the Company
unless the proceeding results in a finding of improper conduct by the Company
resulting in injury to the Director or the proceeding is brought as a proceeding
for indemnity under this Agreement and Director is successful in whole or in
part in such proceeding; or
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6.7 On account of any Liability arising under Section 16(b) of the
Securities Exchange Act of 1934 and amendments thereto or any similar provision
of federal or state statutory law.
7. NOTIFICATION AND DEFENSE OF CLAIMS. Promptly after receipt by Director
of notice of the commencement of any action, suit or proceeding, Director will,
if a Claim in respect thereof is to be made under this Agreement, notify the
Company of the commencement thereof; but the omission to so notify the Company
will not relieve it from its obligations to Director under this Agreement unless
the Company shall be prejudiced by reason of such omission. With respect to any
such action, suit or proceeding as to which Director notifies the Company of the
commencement thereof:
7.1 The Company shall be entitled to participate therein at its own
expense.
7.2 Except as otherwise provided below, the Company jointly with any
other indemnifying party similarly notified will be entitled to assume the
defense thereof, with counsel reasonably satisfactory to Director. After notice
from the Company to Director of its election to assume the defense thereof, the
Company will not be liable to Director under this Agreement for any legal or
other expenses subsequently incurred by Director in connection with the defense
thereof other than reasonable costs of investigation or as otherwise provided
below. Director shall have the right to employ counsel in such action, suit or
proceeding, but the fees and expenses of such counsel incurred after notice from
the Company of its assumption of the defense thereof shall be at the expense of
Director unless (i) the employment of counsel by Director has been authorized by
the Company, (ii) Director shall have reasonably concluded that there may be a
conflict of interest between the Company and Director in the conduct of the
defense of such action or (iii) the Company shall not in fact have employed
counsel reasonably satisfactory to Director to assume the defense of such
action, in each of which cases the fees and expenses of counsel employed by
Director shall be at the expense of the Company; provided, however, that the
Company shall not, in connection with any one such action, claim or proceeding
or separate but substantially similar or related actions, claims or proceedings
in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (together with appropriate local counsel) at any time
for all such directors of the Company, unless in the reasonable judgment of any
such director a conflict of interest may exist between such director and any
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other of such directors with respect to such action, claim or proceeding, in
which event the Company shall be obligated to pay the fees and expenses of such
additional counsel. The Company shall not be entitled to assume the defense of
any action, suit or proceeding brought by or on behalf of the Company or as to
which Director shall have the right to employ counsel at the Company's expense
pursuant to clause (ii) or (iii) above.
7.3 The Company shall not be liable to indemnify Director under this
Agreement for any amounts paid in settlement of any Claim effected without its
written consent. The Company shall not settle any Claim in any manner which
would impose any penalty or limitation on Director without Director's written
consent. Neither the Company nor Director will unreasonably withhold its consent
to any proposed settlement.
8. PARTIAL INDEMNITY; BURDEN OF PROOF. If Director is entitled under any
provision of this Agreement to indemnification by the Company for a portion of
the Expenses or Liability incurred in connection with a Claim, but not for the
total amount thereof, the Company shall nevertheless indemnify Director for the
portion thereof to which Director is entitled. Moreover, notwithstanding any
other provision of this Agreement, to the extent that Director has been
successful on the merits or otherwise in defense of any Claim or in defense of
any issue or matter therein, including dismissal without prejudice, Director
shall be indemnified against the Expenses incurred by Director in connection
therewith. In connection with any determination by the Board or otherwise as to
whether Director is entitled to be indemnified under this Agreement, the burden
of proof shall be on the Company to establish that Director is not so entitled.
9. NONEXCLUSIVITY. The rights of Director hereunder shall be in addition to
any other rights Director may have under the articles of incorporation or bylaws
of the Company, the Act or otherwise.
10. AMENDMENTS; WAIVER. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar), nor shall such waiver constitute a continuing waiver.
11. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Director, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. CONTINUATION OF AGREEMENT. All agreements and obligations of the
Company contained herein shall continue during the period Director is a director
of the Company and shall continue thereafter so long as Director is subject to
any possible Claim.
13. HEIRS, SUCCESSORS, AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the heirs, successors and assigns of the Company and
Director.
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14. ATTORNEY FEES. In the event any suit, action or arbitration is brought
to enforce rights or to collect moneys due under this Agreement, the prevailing
party shall be entitled to recover from the other party the prevailing party's
reasonable fees and expenses incurred at or prior to trial and on appeal.
15. SEVERABILITY. Wherever possible, each provision in this Agreement shall
be interpreted in such manner as to be effective and valid under the laws of the
state of Oregon, but if any provision of this Agreement shall be invalidated by
any court of competent jurisdiction, such provision shall be ineffective only to
the extent of such prohibition or invalidity without invalidating the remainder
of such provision or the remaining provisions of this Agreement.
16. CERTAIN DEFINITIONS. For the purposes of this Agreement, the following
terms have the meanings indicated:
16.1 "Claim" means any threatened, pending or completed action, suit
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal, arising out of or related to the fact that Director
is or was a director, officer, fiduciary, employee or agent of the Company or is
or was serving at the Company's request as a director, officer, partner,
fiduciary, trustee, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise.
16.2 "Expenses" shall include, without limitation, attorney fees and
all other costs, expenses, and obligations paid or incurred in connection with
investigations, judicial or administrative proceedings, or appeals that occur in
connection with a Claim, and expenses incurred in establishing a right to
indemnification under this Agreement.
16.3 "Liability" means the obligation to pay a judgment, settlement,
penalty or fine, including any excise tax assessed with respect to any employee
benefit plan, or reasonable expenses (including attorney fees).
17. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the state of Oregon without giving
effect to principles of conflicts of laws that would result in this Agreement
being governed by the law of some other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Agreement as of the date first above written.
GARDENBURGER, INC.
____________________________ By: _________________________________
Director Lyle G. Hubbard
President and Chief Executive Officer
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EXHIBIT 10.37
GARDENBURGER, INC.
1999 SENIOR MANAGEMENT BONUS PROGRAM
PURPOSE:
Gardenburger's senior management team is compensated by three primary methods:
- - - market-based salary, as gauged against other targeted competitors for our
talent;
- - - an equity opportunity that is reflected in a meaningful stock option grant
program that encourages ownership and commitment to long-term goals; and
- - - a bonus opportunity that reflects reward for accomplishing intermediate-
term goals.
The bonus program is specifically designed to reward the full team when
pre-determined targets are met. The business drivers are primarily GROWTH OF
REVENUE and PROFITABILITY. The focus of the company today is to continue the
successful evolution of the branding strategy first implemented by Mr. Hubbard
and to capture as large a portion of the market share as possible to reduce
competition and to thwart entry by other possible competitors. Therefore, the
present key driver is building revenue, with profitability as a component but
impacted by the importance of capturing market share. Subsequent year plans will
see this mix shift to create a greater balance between the drivers.
The agreed approach to awards has been to acknowledge the value in team-driven,
as opposed to individual, accomplishment. This fosters sharing of goals between
various business components (e.g., retail grocery, club, natural, foodservice)
and attainment of overall company success. This approach will continue in 1999,
with use of an individual component that allows the CEO to assess team member
contribution to this broader effort. It will also reward for reaching specific,
agreed goals and team participation.
APPROACH AND PROCESS
The key drivers that impact business are developed in advance of the beginning
of the fiscal year, and agreement is reached with all members of the team
surrounding their portion of the overall goal(s). Specific targets are discussed
and negotiated until the best possible business results are agreed upon, with
consideration to the needs of stockholders, customers, business partners and
employees.
The principal driver is growth of revenues, with operating income as a secondary
but essential part. Targets for FY1999 are:
- - - Revenue goal of $145 million
- - - Operating income target of $1 million
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The bonus targets for the senior team include 55% of base salary for CEO, and
45% of base salary for all other team members. Additionally, the award is
divided into two parts for the second group:
- - - 75% of total: Business drivers (revenue/profitability).
- - - 25% of total: CEO discretionary award based on individual contribution.
This means that the first component may grow or shrink as a function of the
calculation, while the second is fixed as a maximum amount relative to base
salary.
The first component would be paid for business driver accomplishment. While
revenue continues as the major factor in FY1999 business strategy, a matrix
calculation will be used to track the percent accomplishment of each driver
against the other. There is no distinction between business product areas;
overall sales accomplishment is used. This relationship is expressed as a
geometric grid, which has been established utilizing the business plan and
laying out rates of payout against the two axis. The two factors work in tandem
with each other so that success in one may partially offset lack of full
attainment in the other. Benchmark points for this relationship include:
- - - An uncapped maximum on sales growth to reward "exceptional" performance.
- - - A one-times-salary (100%) payout potential at $160 million in sales and $5
million in operating income.
- - - A minimum threshold, with no payout, at $120 million in sales and a loss of
$5 million or greater.
The second component would be paid based upon the CEO's evaluation of the
individual team member's contribution to the overall business success. Factors
which may be used by the CEO could include (but are not limited to) completion
of agreed departmental goals, leadership on company-wide tasks, or participation
and leadership in senior team business processes. The award could be at any
percentage between 0-25%. Benchmark points for this component include:
- - - An absolute maximum of 25% against base salary for the discretionary award,
independent of the revenue and profitability calculation.
All rewards would be paid at conclusion of the FY, and after completion and
verification of the year-end results by the company's Finance team.
An example of the bonuses created by this calculation is included as Attachment
1.
2
<PAGE>
1999 SENIOR MANAGEMENT BONUS PROGRAM
PAYOUT CALCULATION SCENARIOS
FOR 75% BUSINESS FACTOR
BUSINESS RESULTS: GEOMETRIC FORMULA:
$160 million & $9 million 136% $2,503,488
$150 million & $5 million 78% $1,435,824
$145 million & $1 million 45% $ 828,360
$140 million & $2 million 46% $ 846,748
$130 million & $0.5 million 28% $ 515,424
$130 million & <$2 million> 17% $ 312,936
$120 million & <$5 million> 0% $ - 0 -
3
EXHIBIT 10.38
FORM OF
Option No. _______
No. of Shares _______
GARDENBURGER, INC.
INCENTIVE STOCK OPTION AND
INCENTIVE STOCK OPTION AGREEMENT
This Incentive Stock Option is granted and this Incentive Stock Option
Agreement (the "Agreement") is executed by and between Gardenburger, Inc., an
Oregon corporation (the "Company"), and _________________ (the "Optionee"),
effective _______________.
RECITALS
A. The Company has duly adopted that certain GARDENBURGER, INC., 1992 FIRST
AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN, a copy of which is attached
hereto as Exhibit A (the "Plan").
B. The Plan authorizes a committee appointed by the Board of Directors of
the Company (the "Administrative Committee") to grant incentive stock options to
officers and employees of the Company.
C. The Administrative Committee has selected the Optionee to receive an
incentive stock option under the Plan.
NOW, THEREFORE, THE COMPANY AND THE OPTIONEE COVENANT AND AGREE AS FOLLOWS:
1. NUMBER OF SHARES SUBJECT TO OPTION AND OPTION PRICE. The Company hereby
grants to the Optionee an incentive stock option (the "Option") to purchase from
the Company _______ shares of the no par value common stock of the Company (the
"Common Stock") at an exercise price of $________ per share. The Option is
exercisable upon the terms and conditions contained herein.
-1-
<PAGE>
2. ADDITIONAL TERMS OF THE OPTION. Subject to the provisions of Paragraph 3
below, the Option shall have the following terms:
2.1 The effective date of the grant of the Option shall be the date
first set forth above.
2.2 The Option shall vest as follows:
Cumulative
Date Percentage Vested
---- -----------------
__________________ __________%
__________________ __________%
__________________ __________%
2.3 The foregoing vesting schedule notwithstanding, this Option shall
immediately vest as to any Option shares that have not then become vested upon:
(i) the termination of the employment of the Optionee by the Company
as a result of the Optionee's death or disability; or
(ii) a "Change in Control" of the Company, which for the purposes
hereof shall be deemed to have occurred upon the earlier of:
(a) the date that any "person" (as that term is defined in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Act")), other than a trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, becomes a beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Act), directly
or indirectly, of securities of the Company representing 25%
or more of the combined voting power of the Company's then
outstanding securities; or
(b) the date of any annual or special meeting of stockholders at
which a majority of the directors then elected are not
individuals nominated by the Company's then incumbent Board;
or
-2-
<PAGE>
(c) the date of approval by the stockholders of the Company of a
plan of merger or consolidation of the Company in which such
stockholders will not hold at least 75% of the combined
voting power of the resulting entity immediately following
such merger or consolidation, or the approval by the
stockholders of the Company of a plan of complete
liquidation of the Company or an agreement for the sale of
substantially all of the Company's assets.
2.4 The Option shall expire on October 26, 2008 (the "Expiration
Date").
2.5 To the extent vested, the Option may be exercised in whole or in
part at any time and from time to time prior to the Expiration Date.
2.6 The Option must be exercised, if at all, as to a whole number of
shares.
3. INCORPORATION BY REFERENCE OF THE TERMS AND CONDITIONS OF THE PLAN. The
terms and conditions of this Option shall be subject to all of the terms and
conditions of the Plan, which terms and conditions are expressly incorporated by
reference into this Agreement to the same extent and with the same effect as if
such terms and conditions were set forth herein. In the event of a conflict or
inconsistency between the terms and conditions set forth in this Agreement and
the terms and conditions of the Plan, those of the Plan shall control.
4. EXERCISE OF THE OPTION; DELIVERY OF CERTIFICATES.
4.1 The Option may be exercised only in accordance with the terms and
conditions of Section 9 of the Plan and by (1) delivery to the Company of a
Notice of Exercise substantially in the form of Exhibit B attached hereto
specifying the number of shares of Common Stock for which the exercise is to be
effective, and (2) tendering full payment of the Option Price for such shares.
4.2 Within a reasonable time after its receipt of the Optionee's
Notice of Exercise, the Company shall deliver to the Optionee a certificate for
the shares of Common Stock for which exercise of the Option was effective.
5. TRANSFERABILITY OF THE OPTION. The Option is transferable only in
accordance with Section 10 of the Plan.
-3-
<PAGE>
6. WARRANTIES AND REPRESENTATIONS OF THE OPTIONEE. By executing this
Agreement, the Optionee accepts the Option and agrees to be bound by all of the
terms of this Agreement and the Plan. In addition, the Optionee acknowledges
that exercise of the Option and the sale of the shares of Common Stock acquired
upon exercise thereof may have tax implications for which the Optionee should
seek individual advice by his or her own tax counselor or advisor.
7. INDEMNIFICATION BY THE OPTIONEE. The Optionee agrees to indemnify and
hold the Company harmless from any loss or damage, including attorney's fees or
other legal expenses, incurred in the defense or payment of any such claim
against the Company resulting from a breach by the Optionee of the
representations, warranties or provisions contained in this Agreement.
8. NO RIGHT TO CONTINUED RELATIONSHIP. Nothing herein shall confer upon the
Optionee the right to continue as an officer or employee of or with the Company,
nor affect any right which the Company may have to terminate its relationship
with the Optionee.
9. RIGHTS AS SHAREHOLDERS. The Optionee shall have no rights as a
shareholder of the Company on account of the Option nor on account of shares of
Common Stock subject hereto until such time as the Company shall have issued and
delivered stock certificates to the Optionee.
10. FURTHER ASSURANCES. From time to time and upon request by the Company,
the Optionee agrees to execute such additional documents as the Company may
reasonably require in order to effect the purposes of the Plan and this
Agreement.
11. BINDING EFFECT. This Agreement shall be binding upon the Optionee and
the Optionee's heirs, successors and assigns, including the Qualified Successor
of the Optionee (as that term is defined in Section 10.2 of the Plan).
12. WAIVERS/MODIFICATIONS. No waivers, alterations or modifications of this
Agreement shall be valid unless in writing and duly executed by the party
against whom enforcement of such waiver, alteration or modification is sought.
The failure of any party to enforce any of its rights against the other party
for breach of any of the terms of this Agreement shall not be construed a waiver
of such rights as to any continued or subsequent breach.
13. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Oregon.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
GARDENBURGER, INC.: OPTIONEE:
By:_______________________________ ______________________________
Richard C. Dietz [Name]
Administrative Committee Member
-5-
<PAGE>
EXHIBIT A
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN
[previously filed]
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF INCENTIVE OPTION
UNDER THE GARDENBURGER, INC.,
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN
I, _________________, hereby exercise the option to purchase ________shares of
no par value common stock (the "Shares"), of Gardenburger, Inc. (the "Company"),
granted to me pursuant to the terms and conditions of the GARDENBURGER, INC.,
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN (the "Plan") and
the Incentive Stock Option and Incentive Stock Option Agreement dated
__________, 199____, bearing Option No. ___ (the "Option").
Accompanying this Notice is: [select one]
- cash, certified or cashier's check in the amount of $________,
- _____ shares of the Company's Common Stock valued at $_______ (their
fair market value as of this date), or
- I hereby request that this Option be exercised through a cashless
transaction and have provided the name and address of my broker below.
I understand that if I elect a cashless transaction, the Company will
request and authorize its stock transfer agent to issue the
certificate(s) in the name of my broker to facilitate the completion of
the transaction.
_______________________ Date: ___________
(Optionee's Signature)
Optionee's Name:_____________________________
Optionee's Address:__________________________
__________________________
Broker's Name:__________________________
Broker's Address: ______________________
______________________
-1-
<PAGE>
RECEIPT FOR STOCK CERTIFICATE
I hereby acknowledge receipt of Stock Certificate No.___ from the
Company on _________, 199___, representing ___ shares of the Company's common
stock acquired upon exercise of the Option bearing Option No. ___.
_______________________ Date: ___________
Optionee Signature
-2-
Option No.___________
No. of Shares________
GARDENBURGER, INC.
NONSTATUTORY STOCK OPTION
AND
NONSTATUTORY STOCK OPTION AGREEMENT
This Nonstatutory Stock Option is granted and this Nonstatutory Stock
Option Agreement (the "Agreement") is executed by and between Gardenburger,
Inc., an Oregon corporation (the "Company"), and ____________ (the "Optionee"),
effective ________, ____.
RECITALS
A. The Company has duly adopted that certain GARDENBURGER, INC., 1992 FIRST
AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN, a copy of which is attached
hereto as Exhibit A (the "Plan").
B. The Plan authorizes a committee appointed by the Board of Directors of
the Company (the "Administrative Committee") to grant nonstatutory stock options
(referred to in the Plan as "Non ISOs") to employees, officers, directors,
agents, consultants and independent contractors of the Company.
C. The Administrative Committee has selected the Optionee to receive a
nonstatutory stock option under the Plan.
NOW, THEREFORE, THE COMPANY AND THE OPTIONEE COVENANT AND AGREE AS FOLLOWS:
1. Number of Shares Subject to Option and Option Price. The Company hereby
grants to the Optionee a nonstatutory stock option (the "Option") to purchase
from the Company ________ shares of the no par value common stock of the Company
(the "Common Stock") at an exercise price of $______ per share. The Option is
exercisable upon the terms and conditions contained herein.
-1-
<PAGE>
2. Additional Terms of the Option. Subject to the provisions of Paragraph 3
below, the Option shall have the following terms:
2.1 The effective date of the grant of the Option shall be the date
first set forth above.
2.2 The Option shall vest as follows:
Cumulative
Date Percentage Vested
---- -----------------
-----------, ---- -----%
-----------, ---- -----%
-----------, ---- -----%
2.3 The foregoing vesting schedule notwithstanding, this Option shall
immediately vest as to any Option shares that have not then become vested upon:
(i) the termination of the employment of the Optionee by the Company
as a result of the Optionee's death or disability; or
(ii) a "Change in Control" of the Company, which for the purposes
hereof shall be deemed to have occurred upon the earlier of:
(a) the date that any "person" (as that term is defined in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act
of 1934, as amended (the "Act")), other than a trustee or
other fiduciary holding securities under an employee benefit
plan of the Company, becomes a beneficial owner (within the
meaning of Rule 13d-3 promulgated under the Act), directly
or indirectly, of securities of the Company representing 25%
or more of the combined voting power of the Company's then
outstanding securities; or
(b) the date of any annual or special meeting of stockholders at
which a majority of the directors then elected are not
individuals nominated by the Company's then incumbent Board;
or
-2-
<PAGE>
(c) the date of approval by the stockholders of the Company of a
plan of merger or consolidation of the Company in which such
stockholders will not hold at least 75% of the combined
voting power of the resulting entity immediately following
such merger or consolidation, or the approval by the
stockholders of the Company of a plan of complete
liquidation of the Company or an agreement for the sale of
substantially all of the Company's assets.
2.4 The Option shall expire on ___________, _____ (the "Expiration
Date").
2.5 To the extent vested, the Option may be exercised in whole or in
part at any time and from time to time prior to the Expiration Date.
2.6 The Option must be exercised, if at all, as to a whole number of
shares.
3. Incorporation By Reference of the terms and Conditions of the Plan. The
terms and conditions of this Option shall be subject to all of the terms and
conditions of the Plan, which terms and conditions are expressly incorporated by
reference into this Agreement to the same extent and with the same effect as if
such terms and conditions were set forth herein. In the event of a conflict or
inconsistency between the terms and conditions set forth in this Agreement and
the terms and conditions of the Plan, those of the Plan shall control.
4. Exercise of the Option; Delivery of Certificates.
4.1 The Option may be exercised only in accordance with the terms and
conditions of Section 9 of the Plan and by (1) delivery to the Company of a
Notice of Exercise substantially in the form of Exhibit B attached hereto
specifying the number of shares of Common Stock for which the exercise is to be
effective, (2) tendering full payment of the Option Price for such shares, and
(3) tendering to the Company, or otherwise making arrangements satisfactory to
the Company, of any amounts that the Company determines must be withheld for
federal and state income tax purposes as the result of the exercise of the
Option and the issuance of shares hereunder.
-3-
<PAGE>
4.2 Within a reasonable time after its receipt of the Optionee's
Notice of Exercise, the Company shall deliver to the Optionee a certificate for
the shares of Common Stock for which exercise of the Option was effective.
5. Transferability of the Option. The Option is transferable only in
accordance with Section 10 of the Plan.
6. Warranties and Representations of the Optionee. By executing this
Agreement, the Optionee accepts the Option and agrees to be bound by all of the
terms of this Agreement and the Plan. In addition, the Optionee acknowledges
that exercise of the Option and the sale of the shares of Common Stock acquired
upon exercise thereof may have tax implications for which the Optionee should
seek individual above by his or her own tax counselor or advisor.
7. Indemnification by the Optionee. The Optionee agrees to indemnify and
hold the Company harmless from any loss or damage, including attorney's fees or
other legal expenses, incurred in the defense or payment of any such claim
against the Company resulting from a breach by the Optionee of the
representations, warranties or provisions contained in this Agreement.
8. No Right to Continued Relationship. Nothing herein shall confer upon the
Optionee the right to continue as an officer or employee of or with the Company,
nor affect any right which the Company may have to terminate its relationship
with the Optionee.
9. Rights as Shareholders. The Optionee shall have no rights as a
shareholder of the Company on account of the Option nor on account of shares of
Common Stock subject hereto until such time as the Company shall have issued and
delivered stock certificates to the Optionee.
10. Further Assurances. From time to time and upon request by the Company,
the Optionee agrees to execute such additional documents as the Company may
reasonably require in order to effect the purposes of the Plan and this
Agreement.
11. Binding Effect. This Agreement shall be binding upon the Optionee and
the Optionee's heirs, successors and assigns, including the Qualified Successor
of the Optionee (as that term is defined in Section 10.2 of the Plan).
12. Waivers/Modifications. No waivers, alterations or modifications of this
Agreement shall be valid unless in writing and duly executed by the party
-4-
<PAGE>
against whom enforcement of such waiver, alteration or modification is sought.
The failure of any party to enforce any of its rights against the other party
for breach of any of the terms of this Agreement shall not be construed a waiver
of such rights as to any continued or subsequent breach.
13. Governing Law. This Agreement shall be governed by the laws of the
State of Oregon.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
GARDENBURGER, INC.: OPTIONEE:
By_______________________________ _______________________
Stock Option Plan Administrator Signature
-5-
<PAGE>
EXHIBIT A
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN
[previously filed]
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF NONSTATUTORY OPTION
UNDER THE GARDENBURGER, INC.,
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN
I, _________________, hereby exercise the option to purchase ________shares of
no par value common stock (the "Shares"), of Gardenburger, Inc. (the "Company"),
granted to me pursuant to the terms and conditions of the GARDENBURGER, INC.,
1992 FIRST AMENDED AND RESTATED COMBINATION STOCK OPTION PLAN (the "Plan") and
the Nonstatutory Stock Option and Nonstatutory Stock Option Agreement dated
__________, 199_, bearing Option No. ___ (the "Option").
Accompanying this Notice is: [select one]
- cash, certified or cashier's check in the amount of $________;,
- _____ shares of the Company's Common Stock valued at $_______ (their
fair market value as of the date of this Notice); or
- I hereby request that this Option be exercised through a cashless
transaction and have provided the name and address of my broker below.
I understand that if I elect a cashless transaction, the Company will
request and authorize its stock transfer agent to issue the
certificate(s) in the name of my broker to facilitate the completion of
the transaction.
Optionee acknowledges that, absent an agreement with the Company as to an
alternative source for the payment of any federal and state withholding taxes
owing with respect to this exercise, the Company shall be entitled to withhold
from any amounts tendered by the Optionee such amounts as the Company shall
determine necessary to satisfy any such withholding obligations.
______________________ Date: _________
(Optionee's Signature)
Optionee's Name:_____________________________
Optionee's Address:__________________________
__________________________
Broker's Name:_______________________________
Broker's Address:____________________________
____________________________
-1-
<PAGE>
RECEIPT OF STOCK CERTIFICATE
I hereby acknowledge receipt of Stock Certificate No.___ from the
Company on _________, 199_, representing ___ shares of the Company's common
stock acquired upon exercise of the Option bearing Option No.____.
_______________________ Date: ___________
(Optionee's Signature)
-2-
EXHIBIT 10.49
Building: E-12
Section: 4-A
Square Feet: 16,000
Term: 02/15/99 - 12/31/2002
Option: 1 - Three (3) Year
FREEPORT CENTER ASSOCIATES
CLEARFIELD, UTAH
LEASE
This Lease made and entered into this 25th day of January 1999, by and
between FREEPORT CENTER ASSOCIATES, hereinafter called "Landlord", and
GARDENBURGER, INC., hereinafter called "Tenant."
WITNESSETH:
In consideration of the covenants and agreements of the respective parties
herein contained, the parties hereto do hereby agree as follows:
DEMISED PREMISES
Landlord hereby leases to Tenant, and Tenant hires from Landlord the
premises described on Exhibit "A" annexed hereto as a part hereof, together with
the improvements thereon (hereinafter referred to as the "demised premises" or
"premises") for the term and upon the rental and the covenants and agreements of
the respective parties herein set forth. Said premises are located in the City
of Clearfield, County of Davis, State of Utah.
TERM
The term of this Lease shall be Forty-Six and One Half Months beginning on
the 15th day of February 1999, and ending on the day 21st day of December 2002,
both dates inclusive, unless sooner terminated as herein provided.
<PAGE>
TERMS AND CONDITIONS OF LEASE
This Lease is made on the following terms and conditions which are
expressly covenanted and agreed to by Landlord and Tenant:
1. RENT: Tenant agrees to pay as rental to Landlord at the office of
Landlord, Clearfield, Utah, or at such other place as Landlord may from time to
time designate in writing, without any offset or deduction whatsoever, the total
sum of One Hundred Forty-Eight Thousand Eight Hundred and No/100 Dollars
($148,800.00) over the term of this Lease in lawful money of the United States
in monthly installments as follows:
02/15/1999 - 02/28/1999 $1,600
03/01/1999 - 12/31/2002 $3,200/Month
Rents are due and payable on the first day of each month (the "Rent"). Any other
amounts or expenses payable by Tenant to Landlord under this Lease, including
amounts payable under Paragraphs 13 and 24, shall be payable upon the rendition
of the Landlord's Statement therefor. If Tenant shall fail to pay the Rent
within five (5) days after the first day of the month, or shall fail to pay any
other amounts payable by Tenant pursuant to the provisions of this Lease within
ten (10) days after the rendition of the Landlord's Statement, Tenant shall pay
Landlord interest thereon at the rate of 18% per annum, which interest shall run
from either (a) the day when the Rent was due, (b) the date Landlord's Statement
for certain increases under Paragraph 13 is sent to Tenant, or (c) for any other
amounts or expenses payable by Tenant, the date of Landlord's expenditures.
Notwithstanding the foregoing, Landlord shall have all legal remedies available
for the enforcement of the payment of Rent and other expenses of Tenant
hereunder, including the power to evict for nonpayment of Rent or other expenses
of tenant as provided in Paragraph 24.
2. AUTHORIZED USE: Tenant shall use the premises for the following purpose
and for no other purpose whatsoever, without the written consent of the Landlord
first had and obtained:
Storage and distribution of Tenant's products and materials and related
activities thereto.
Tenant shall not cause or permit any hazardous or toxic waste or substance,
petroleum product, PCB, dioxin or asbestos (collectively a "Hazardous
Substance") to be manufactured, discharged, leaked or emitted on, in or under
the premises. Tenant shall not store or use any hazardous substance on the
premises without first disclosing such to Landlord and obtaining Landlord's
approval, which will not be unreasonably withheld. Landlord may reasonably
withhold approval if such storage or use would not be in compliance with all
applicable laws and regulations, if Landlord believes in its absolute discretion
that such use or storage will create an unreasonable risk to Landlord or other
tenants, if Landlord is not assured of Tenant's financial ability to be
responsible for any damages and clean-up in the event of a discharge, leak,
emission or other mishap involving such Hazardous Substance, or if the presence
of the Hazardous Substance will increase Landlord's insurance premiums. Tenant
shall not commit any waste on the premises nor permit any noxious odors or loud
noises which interfere with other tenants' use of their premises to emanate from
the premises.
-2-
<PAGE>
3. INCREASING INSURANCE RISK: Tenant will not permit the demised premises
to be used for any purpose, other than those noted in Paragraph 2, which would
cause an increase in insurance premiums, render the insurance thereon void or
cause cancellation thereof. In the event the insurance is canceled solely
because of a change in Tenant's use of the premises, Tenant will be liable for
any loss or damage to the building occurring before reinstatement or replacement
of that insurance.
4. CONDITION OF THE PREMISES:
A. Tenant has inspected the demised premises including all equipment which
is a part thereof and accepts the premises in the condition they are in as of
the date of this Lease subject to Landlord's obligations under this Lease, as
hereinafter defined, and the warranties and representations of Landlord set
forth in subsection B below and elsewhere in this Lease.
B. Landlord represents and warrants as follows:
(i) Landlord has no notice of any liens to be assessed against the
premises;
(ii) Landlord has no knowledge of any violation of any laws relating
to the premises;
(iii) The execution, delivery, and performance of this Lease by
Landlord will not result in any breach of, or constitute any default under,
or result in the imposition of, any lien or encumbrance on the premises
under any agreement or other instrument to which Landlord is a party or by
which Landlord or the premises might be bound;
(iv) There are no legal actions, suites, or other legal or
administrative proceedings, including condemnation cases, pending or
threatened, against the premises, and Landlord is not aware of any fact
that might result in any such action, suit, or other proceeding;
(v) Landlord knows of no fact or condition of any kind or character
whatsoever that adversely affects the intended use of the premises by
Tenant;
(vi) To Landlord's knowledge, without verification, Tenant's intended
use of the premises will not violate the applicable zoning classification
of the premises, and Landlord does not have any knowledge of any action or
proceeding, whether actual, pending, or threatened, relating to zoning or
use of the premises; and
(vii) To Landlord's knowledge, without verification there has been no
leak, spill, realease, discharge, emission or disposal of Hazardous
Substances on the premises to date; and the premises are free of Hazardous
Substances in actionable quantities as of the date of this Lease.
All the foregoing statements are true and correct. Landlord shall indemnify and
hold Tenant harmless from and against any and all damage resulting from any
material misrepresentation or breach of warranty. If any claim is asserted
-3-
<PAGE>
against Tenant that would give rise to a claim by Tenant against Landlord for
indemnification under the provisions of this section, then Tenant shall promptly
give written notice to Landlord concerning such claim and Landlord shall, at no
expense to Tenant, defend the claim.
5. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS: Tenant shall, at Tenant's own
expense, comply in its use of the premises with all present and future laws,
ordinances, regulations or orders of any federal, state, county, municipal or
other public authority affecting the Tenant's use of the premises, including but
not limited to, the Occupational Safety and Health Act ("OSHA"), the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
the Resource Conservation and Recovery Act ("RCRA") the Federal Water Pollution
Control Act, the Clean Air Act, the Hazardous Materials Transportation Act, the
Toxic Substances Control Act, the Safe Drinking Water Act, the Americans With
Disabilities Act ("ADA"), and any similar laws, ordinances and regulations.
Tenant shall promptly correct any non-compliance upon discovery thereof and
Landlord hereby consents to any action reasonably taken by Tenant to correct
such non-compliance.
6. CARE OF BUILDING BY TENANT: Tenant agrees to keep the interior of the
building and the improvements on the premises inside and outside the building
and the grounds in good condition and repair including proper servicing and
maintenance of all equipment. The equipment and fixtures to be maintained
include without limitation, lighting fixtures, heating and air conditioning
equipment, truck dock bumpers, overhead freight doors (including all repairs
thereto) and electrical wiring and plumbing systems. Tenant agrees to contract
with a qualified heating and air conditioning service company for periodic
maintenance and service of HVAC equipment. Such work by Tenant also includes
cleaning and painting the interior of the premises as Tenant deems necessary in
order to maintain said premises in a clean, attractive and sanitary condition.
Tenant shall keep the vehicular parking areas, pedestrian walkways, entranceways
and docks reasonably free from icicles, ice and snow and shall keep the ground
surrounding the demised premises clean, promptly removing therefrom all trash,
rubbish, cartons or other debris. Tenant shall maintain and repair the floors of
the premises but shall not be responsible for repairing any damage to the floors
that is caused by or results from a structural defect. If the Tenant fails to do
any of the foregoing as herein required Landlord may elect to proceed under one
or more of its remedies as set forth in Paragraph 24 of this Lease after giving
appropriate notice to Tenant.
7. REPAIR OF BUILDING BY LANDLORD: Landlord agrees for the term of this
Lease to maintain in good condition and repair the exterior walls, foundation,
roof, gutters and downspouts, abutting sidewalks, and other structural
components of the demised premises. Landlord also shall repair any damage to the
floors of the premises that is caused by or results from a structural defect.
Landlord shall not, however, be obligated to make any such repairs until written
notice of the need of repair shall have been given to the Landlord by the
Tenant. After such notice is so given, Landlord shall promptly make such
repairs.
8. INSTALLATION, ALTERATIONS AND REMOVALS: It is expressly agreed and
understood that the Tenant will make no alterations, additions or betterments
to, or installations ("alterations") upon the leased premises without the prior
written approval of the Landlord which approval shall not be unreasonably
withheld. Such alterations, if approved, shall be made at Tenant's expense. All
such alterations shall become a part of the premises and may not be removed by
Tenant at termination of this Lease unless Landlord gives written notice to
Tenant to remove all or some part of such alterations, in which event Tenant
shall remove such alterations upon termination.
-4-
<PAGE>
Tenant shall cause drawings and specifications to be prepared for, and
shall cause to be performed, the construction of the alterations or additions in
accordance with all applicable laws, ordinances and regulations of all duly
constituted authorities, including, with limitation, Title III of the Americans
with Disabilities Act of 1990, all regulations issued thereunder and the
Accessibility Guidelines for Buildings and Facilities issued pursuant thereto,
as the same are in effect on the date hereof and may be hereafter modified,
amended or supplemented ("Applicable Laws"). Notwithstanding Landlord's review
of such drawings and specifications, and whether or not Landlord approves or
disapproves such drawings and specifications, Tenant and not Landlord shall be
responsible for compliance of such drawings and specifications for additions or
alterations with all applicable laws.
9. ERECTION AND REMOVAL OF SIGNS: Subject to the restrictions of this
Paragraph, Tenant may place suitable signs on the leased premises for the
purpose of indicating the nature of the business carried on by the Tenant in
said premises. Such signs shall be approved by the Landlord in writing prior to
their erection, which approval shall not be unreasonably withheld, and shall not
damage the leased premises in any manner. Tenant shall remove all signs prior to
the expiration of the term.
10. GLASS: Tenant agrees to immediately replace all glass broken or damaged
during the term of this Lease with glass of the same quality as that broken or
damaged.
11. RIGHT OF ENTRY BY LANDLORD: The Tenant at any time during the term of
this Lease shall permit inspection including environmental sampling or testing
of the demised premises during reasonable business hours by the Land-lord's
agents or representatives for the purpose of ascertaining the condition of the
demised premises and compliance with governmental laws and regulations, and in
order that the Landlord may make such repairs as may be required to be made by
the Landlord under the terms of this Lease. Sixty (60) days prior to the
expiration of this Lease, Landlord may post suitable notices on the demised
premises that the same are "To Let" and may show the premises to prospective
tenants at reasonable times. Landlord shall not, however, thereby unnecessarily
interfere with the use of demised premises by the Tenant.
12. PAYMENT OF UTILITIES: Tenant shall pay all charges for water, sewer,
natural gas, electricity, telephone and other public utilities used on the
premises.
13. PAYMENT OF CERTAIN INCREASES IN PROPERTY TAXES AND INSURANCE:
A. Tenant shall further pay to Landlord any amount by which the real
property taxes on the premises (Building E-12, Section 4-A - 16,000 Square Feet)
for any year during the term of this Lease commencing with the calendar year
1999, exceed those for 1998 (the "base year"). Taxes for the base year on the
premises (land and improvements, which is proportionately allocated among the
several premises contained within each tax parcel) are calculated as follows:
-5-
<PAGE>
- - ----------------------------------------------------------------------------
0.704 Acres x 18,868.00 = 13,283.07
- - ----------------------------------------------------------------------------
Demised Premise Fair Market Value = 38,112.00
- - ----------------------------------------------------------------------------
51,395.07
- - ----------------------------------------------------------------------------
Tax Rate = 0.012746
- - ----------------------------------------------------------------------------
Base Year Taxes Due on Demised Premises = 655.08
- - -----------------------------------------------------------------------------
The same method of calculation shall be used for each subsequent year,
including adjustments for alterations and new improvements made to the premises.
Landlord will provide Tenant each year with a complete computation of the
taxes for the demised premises and within thirty (30) days thereafter Tenant
will pay Landlord the increase in taxes over the base year taxes.
Real property taxes include all assessments and other governmental levies,
ordinary and extraordinary, foreseen and unforeseen, which are assessed or
imposed upon the premises or become payable during the term of this Lease. With
respect to any assessment or governmental levy for improvements that may be paid
in installments, Landlord shall elect to pay such assessment or levy in
installments and shall pay the installments that become due and payable after
the term of this Lease expires, and Tenant shall pay all such installments that
become due and payable at any time during the term of this Lease. Landlord
warrants that as of the date this Lease is executed there are no special
assessments taxed or imposed against the premises, and that Landlord has no
knowledge of any planned, proposed, or impending assessments against the
premises.
All amounts payable by Tenant under the provisions of this Paragraph shall
be prorated during the first and last years of this Lease on the basis of a
360-day year, 30-days allocated to each month.
Tenant shall also have the right at its own cost and expense, and for its
sole benefit, to initiate and prosecute any proceedings permitted by law for the
purpose of obtaining an abatement of or otherwise contesting the validity or
amount of taxes assessed to or levied upon the demised premises and requested to
be paid by Tenant and to defend any claims for lien that may be asserted against
Landlord's estate, and, if required by law, Tenant may take such action in the
name of the Landlord who shall cooperate with Tenant to such extent as Tenant
may reasonable require, to the end that such proceedings may be brought to a
successful conclusion; provided, however, that Tenant shall fully indemnify and
save Landlord harmless for all loss, cost, damage and expense incurred by or to
be incurred or suffered by Landlord in the premises arising out of such tax
protest.
B. Tenant shall also pay to Landlord any amount by which the property
insurance premiums allocable to the demised premises for any year during the
term of this Lease exceed the annual premium of $155.06 presently paid by
Landlord for the demised premises prior to Tenant's occupancy. In determining
whether increased premiums are allocable to the demised premises, any schedules
or rating procedures, as well as general rate increases, as determined by the
organization issuing the insur-ance shall be conclusive evidence of the several
items and charges which make up the insurance rates and premiums on the demised
premises. Landlord will provide Tenant with a complete computation of any
premium increase on the demised premises and within thirty (30) days thereafter
Tenant will pay Landlord the insurance premium increase as set forth in the
computation in Exhibit D.
-6-
<PAGE>
C. If this Lease is terminated at other than the end of a calendar year,
all amounts payable by Tenant to Landlord under the provisions of this Paragraph
13 shall be prorated on the basis of a 360-day year, 30 days allocated to each
month.
14. ASSIGNMENT AND SUBLETTING: Tenant shall not transfer or assign this
Lease or any interest therein nor sublet or otherwise make available
("transfer") to any third party any part of the demised premises without first
notifying Landlord in writing and receiving the written consent of Landlord to
such transfer, which consent will not be unreasonably withheld, delayed, or
qualified. The written notice to Landlord shall describe the area to be
transferred and the rent and other consideration receivable for such transfer. A
transfer by Tenant without the written consent of Landlord first received shall
permit Landlord to terminate this Lease pursuant to Paragraph 24.
No transfer consented to by Landlord shall relieve Tenant of its
obligations hereunder, and Tenant shall continue to be liable as principal as
though no transfer had been made. It is agreed that a transfer by corporate
merger or to an affiliated corpor-ation shall not be subject to the provisions
of this Paragraph 14 so long as the transferee has a net worth equal to or in
excess of the net worth of Tenant.
15. DAMAGE OR DESTRUCTION:
A. If the demised premises or any part thereof shall be damaged or
destroyed by fire or other casualty, Landlord shall promptly repair all such
damage and restore the demised premises without expense to Tenant, subject to
delays due to adjustment of insurance claims, strikes and other causes beyond
Landlord's control. If such damage or destruction shall render the premises
untenable in whole or in part, the rent shall be abated wholly or
proportionately as the case may be until the damage shall be repaired and the
premises restored. If the damage or destruction shall be so extensive as to
require the substantial rebuilding (i.e., expenditure of twenty-five (25%)
percent or more of replacement costs) of any one building included in the
demised premises, or if the leased premises cannot reasonably be rebuilt or
repaired within one hundred twenty (120) days from the date of such damage, or
if the damage occurs within the last twelve (12) months of the term of this
Lease, either party may elect to terminate this Lease by written notice to the
other within thirty (30) days after the occurrence of such damage or
destruction.
B. Neither Landlord nor Tenant shall be liable to the other (or to the
other's successors or assigns) for any loss or damage caused by fire or any of
the risks enumerated in a standard fire insurance policy with an extended
coverage endorsement, and in the event of insured loss, neither party's
insurance company shall have a subrogated claim against the other. All such
claims for any and all loss, however caused, are hereby waived. Such absence of
liability shall exist whether or not the damage or destruction is caused by the
negligence of Landlord or Tenant or by any of their respective agents, servants,
employees, or sublessees.
-7-
<PAGE>
16. AUTOMATIC SPRINKLER SYSTEM: Landlord agrees to maintain the Automatic
Sprinkler System to conform with the requirements of the Utah Fire Rating Bureau
for grading the building as an Automatic Sprinklered Building. Tenant agrees to
repair any damage to this system arising out of its occupancy, ordinary wear and
tear excepted, and to hold Landlord free and harmless from damage to or
destruction of any and all property resulting from leakage of said Automatic
Sprinkler System, during the term of this Lease or any extension thereof, or any
holdover occupancy.
17. INDEMNIFICATIONS:
A. Tenant shall indemnify Landlord and Landlord's partners, employees, and
agents against and hold harmless and defend them from all claims, costs,
damages, demands, expenses, fines, judgments, liabilities, and losses (including
reasonable attorney fees, paralegal fees, expert witness fees, consultant fees,
and other costs of defense) arising out of or related to any activity of Tenant
or its contractors, agents, employees, invitees, or licensees on the premises or
any condition of the premises in the possession or under the control of Tenant
except to the extent caused by Landlord's negligence or willful misconduct.
B. Landlord shall indemnify Tenant and Tenant's directors, officers,
employees, and agents against and hold harmless and defend them from all claims,
costs, damages, demands, expenses, fines, judgments, liabilities, and losses
(including reasonable attorney fees, paralegal fees, expert witness fees,
consultant fees, and other costs of defense) arising out of or related to any
negligence or willful misconduct of Landlord, or the contractors, agents,
employees, invitees, or licensees of Landlord, in or about the premises either
prior to or during the term of this Lease.
18. INSURANCE: Tenant agrees to carry adequate Workmen's Compensation
Insurance to comply with the legal requirements of the State of Utah. Tenant
agrees to carry adequate or appropriate Commercial General Liability insurance
insuring against all liability exposure to third parties arising out of Tenant's
operations or use of the premises, in a company or companies authorized to issue
insurance in Utah, and to furnish to the Landlord Certificates of such insurance
which include a thirty (30) day notice to the Landlord prior to any cancellation
or reduction thereof by the company or companies.
19. SURRENDER OF PREMISES: Tenant agrees to surrender up the demised
premises at the expiration, or sooner termination of this Lease, or any
extension thereof, in the same condition, as when said premises were delivered
to the Tenant, or as altered, pursuant to the provisions of this Lease, ordinary
wear, tear and damage by the elements excepted. Tenant shall also remove all of
its personal property from the demised premises not later than the time of
termination. Tenant specifically covenants that upon termination the premises
will be free of any hazardous waste material that Tenant brought into the
premises.
20. HOLDOVER: Should Tenant holdover the demised premises or any part
thereof after the expiration of the term of this Lease, unless otherwise agreed
in writing, such holding over shall constitute a tenancy from month-to-month
only, and Tenant shall pay a sum equal to one and one-half (1-1/2) times the
monthly rental provided herein, payable monthly in advance, but otherwise on the
same terms and conditions as herein provided, except as to any provisions
hereof relating to renewals or extensions.
-8-
<PAGE>
21. QUIET ENJOYMENT: If and so long as the Tenant pays the rents reserved
by this Lease and performs and observes all the covenants and provisions hereof
the Landlord will, throughout the term of this Lease, warrant and defend the
Tenant in the enjoyment and peaceful possession of the demised premises against
all parties claiming a title to the premises superior to Landlord's and against
all parties claiming by through or under Landlord.
22. WAIVER OF COVENANTS: It is agreed that the waiving of any of the
covenants of this Lease by either party shall be limited to the particular
instance and shall not be deemed to waive any other breaches of such covenant or
any provision herein contained; nor shall waiver of any breach by another tenant
be deemed to waive any breach by Tenant.
23. DEFAULT PROVISIONS:
A. The following events shall be considered events of default by Tenant:
(i) Failure to pay any rent or other sums payable under this Lease or
any part thereof, within ten (10) days of the date when due, provided that
the failure to pay rent when due four times in any twelve month period
shall be an event of default; or
(ii) Tenant's failure to perform or comply with any of the covenants,
agreements, terms or provisions contained in this Lease for which it is
responsible, when such failure shall have continued for a period of thirty
(30) days after written notice thereof from Landlord to Tenant, except that
in connection with a default not susceptible of being cured with due
diligence within thirty days, the time within which Tenant shall cure the
same shall be extended for such time as may be necessary to cure the same
with all due diligence, provided Tenant commences within 7 days of the date
of receipt of such notice to cure the same and proceeds diligently to
affect such cure; or
(iii) Abandoning or vacating the leased premises or if Tenant shall be
dispossessed therefrom by or under any authority other than Landlord.
B. Upon the occurrence of any such events of default, Landlord shall have
the right to pursue any one or more of the following remedies:
(i) Make performance for Tenant of any covenant or condition which
Tenant is in default of and for the purpose advance such amounts as may be
necessary. Any amounts so advanced or any expense incurred by Landlord by
reason of the failure of Tenant to comply with any covenant, agreement,
obligation or provision of this Lease or in defending any action to which
Landlord may be subjected by reason of any such failure shall be due and
payable to Landlord on demand, and interest shall accrue thereon from the
date of expenditure at the rate of 18% per annum.
(ii) Terminate this Lease and end the term hereof by giving to Tenant
written notice of such termination, in which event Landlord shall be
entitled to recover from Tenant the amount of rent and other amounts then
due in this Lease and damages and attorney's fees; or
-9-
<PAGE>
(iii) Without retaking possession of the premises or terminating this
Lease, to sue monthly for and recover all rents, other required payments
due under this Lease, and other sums, including damages and legal fees, at
any time and from time to time accruing hereunder; or
(iv) Upon notice to all interested parties, re-enter and take
possession of the premises or any part thereof and repossess the same as of
Landlord's former estate and expel Tenant and those claiming through or
under Tenant and remove the effects of both or either (with use of
reasonable force) without liability for trespass and without prejudice to
any remedies for arrears of Rent and the Rent for the balance of the term
of this Lease. Landlord may relet the premises or any part thereof for such
term or terms and at such rental or rentals and upon such other terms and
conditions as Landlord may deem advisable with the right to make
alterations and repairs to the premises. Such re-entry or taking of
possession of the premises by Landlord shall not be construed as an
election on Landlord's part to terminate this Lease unless a written notice
of termination be given to Tenant or unless the termination thereof be
decreed by a court of competent jurisdiction. In the event of Landlord's
election to proceed under this subparagraph, then such repossession shall
not relieve Tenant of its obligations and liabilities under this Lease, all
of which shall survive such repossession, and Landlord shall be entitled to
recover the following amounts as damages:
(a) The loss of rental from the date of default until the date on
which a new tenant is, or with the exercise of reasonable efforts
could have been, secured and paying rent (the "New Tenant Date").
(b) The reasonable costs of reentry and reletting including
without limitation the cost of any cleanup, refurbishing, removal of
Tenant's property and fixtures, or any other expense occasioned by
Tenant's default including but not limited to, any remodeling or
repair costs, attorney fees, court costs, and broker commissions.
(c) The difference between the Rent reserved in this Lease for
the balance of the Lease term after the New Tenant Date and the fair
rental value of the premises for the same period, both discounted as
of the New Tenant Date at a rate equal to the prime loan rate of major
Utah banks in effect at the time of the award.
(v) Use of any of the foregoing remedies shall not preclude pursuit of
any of the other remedies provided for herein. Failure by Landlord to
enforce one or more of the remedies herein provided upon an event of
default shall not be deemed or construed to constitute a waiver of such
default, or of any other violation or breach of any of the terms,
provisions and covenants herein contained.
24. BANKRUPTCY OR INSOLVENCY:
A. No election by Tenant's trustee or the debtor-in-possession to assume
this Lease, whether under Chapter 7 or chapter 11, shall be effective unless all
defaults under this Lease have been cured and Landlord has received adequate
assurance that it will be compensated for any actual pecuniary loss incurred by
Landlord arising from the default of Tenant.
-10-
<PAGE>
B. When, pursuant to the Bankruptcy Code, Tenant's trustee or the
debtor-in-possession shall be obliged to pay reasonable use and occupancy
charges for the use of the premises, such charges shall not be less than the
Rent payable by Tenant under this Lease.
25. ATTORNEY'S FEES: In the event either party shall sue or bring an action
or proceeding in connection with any controversy arising out of this Lease, the
prevailing party shall be entitled to recover from the losing party the
reasonable costs and reasonable attorney fees incurred by the prevailing party
prior to and at trial and on any appeal.
26. FAILURE TO PERFORM COVENANT: Except for Tenant's obligation to pay Rent
and to pay other monies including maintenance of insurance, any failure on the
part of either party to perform any obligation hereunder, and any delay in doing
any act required hereby shall be excused if such failure or delay is caused by
any strike, lockout or governmental restriction to the extent and for the period
that such continues.
27. RIGHTS OF SUCCESSORS AND ASSIGNS: The covenants and agreements
contained in this Lease shall apply to, inure to the benefit of, and be binding
upon the parties hereto and upon their respective successors in interest and
legal representatives.
28. TIME: Time is of the essence of this Lease and every term, covenant
and condition herein contained.
29. LIENS: Tenant agrees not to permit any lien for monies owing by Tenant
to remain against the premises for a period of more than thirty (30) days
following discovery of the same by Tenant; provided, however, that nothing
herein contained shall prevent Tenant, in good faith and for good cause, from
contesting in the courts the claim or claims of any person, firm or corporation
growing out of Tenant's operation of the demised premises or costs of
improvements by Tenant on the said premises, and the postponement of payment of
such claim or claims, until such contest shall finally be decided by the courts,
shall not be a violation of this Lease or any covenant hereof. Should any such
lien be filed and not released or discharged or action not commenced to declare
the same invalid within thirty (30) days after discovery of same by Tenant,
Landlord may at Landlord's option (but without any obligation so to do) pay or
discharge such lien and may likewise pay and discharge any taxes, or other
charges against the premises which Tenant is obligated hereunder to pay and
which may or might become a lien on said premises. Tenant agrees to repay any
sums so paid by the Landlord upon demand therefor, together with interest at the
rate of eighteen (18%) percent per annum from the date any such payment is made.
30. LIMITATION OF LANDLORD'S LIABILITY: The obligations of Landlord under
this Lease do not constitute personal obligations of the individual partners of
Landlord and Tenant shall look solely to the real property known as the Freeport
Center and to no other assets of the Landlord for satisfaction of any liability
in respect of this Lease and will not seek recourse against the individual
partners of Landlord or any of their personal assets for such satisfaction.
31. EMINENT DOMAIN:
A. In the event any power of eminent domain shall ever be used by any
government authority, federal, state, county or municipal, or by any other party
-11-
<PAGE>
vested by law with such power, for the taking of the premises or any
substantial portion thereof, or if such taking shall materially prevent the use
and enjoyment of the premises by Tenant for the purposes set forth herein,
Tenant shall have the right thereupon to terminate this Lease by giving written
notice to Landlord. Rent shall abate from the date of such taking, and any
prepaid Rent and other charges for any period beyond such date shall be returned
to Tenant.
B. In the event of the taking of a substantial portion less than the whole
of the premises, Tenant may elect, in lieu of exercising its right of
termination, to continue in possession, under the terms of this Lease, of the
portion of the premises not so taken, and the Rent hereunder shall be abated by
such proportion as the number of square feet of area taken bears to the total
number of square feet of area included in the premises. In such event, if any
portion of any building or buildings comprising the premises shall have been
taken, Landlord shall restore such building or buildings by repairing and
enclosing the same to the extent necessary and possible to provide an integral
and complete building suitable for the purposes set forth in Paragraph 3 of this
Lease, giving effect to the reduced size of the premises. During the restoration
period, Rent and other charges shall abate for the period during which the
premises are not suitable for Tenant's business needs.
C. In the event of a taking that does not affect a substantial portion of
the premises or materially prevent the use and enjoyment of the premises of
Tenant for the purposes set forth herein, this Lease shall not terminate but
Landlord shall, at its sole cost and expense, with due diligence, restore the
premises as speedily as practical to its condition before the taking including
without limitation any tenant improvements constructed by Landlord. During the
restoration period, the Rent and other charges shall abate for the period during
which the premises are not suitable for Tenant's business needs. The Rent and
other charges shall abate proportionately based upon the portion of the premises
that are not suitable for Tenant's business needs.
D. Any award or compensation for damages, whether resulting by judgment
or verdict after trial or by agreement under threat of condemnation, applying to
the leasehold interest created hereby, shall be paid to Landlord, and Tenant
hereby authorizes Landlord as attorney-in-fact of Tenant to enter into any
agreement or compromise, execute any instrument of transfer or assignment or
otherwise, and do any other acts in connection with such leasehold interest and
such eminent domain proceedings as Landlord, in its discretion, shall determine;
provided, however, Landlord shall hold the proceeds of any such compensation,
award or settlement (other than severance damages which may be awarded to
Landlord by reason of the severance of the premises or a portion thereof from
other lands owned by Landlord) in trust for the benefit of Landlord, Tenant any
mortgagee as their interests may appear.
E. When Tenant claims an interest in any such proceeds, Tenant's leasehold
interest for purposes of measuring Tenant's interest in such proceeds shall be
deemed limited to the remainder of the term of this Lease then in effect, and
no future right of extension or renewal at Tenant's option shall be construed
to enlarge Tenant's leasehold interest for such purposes.
32. SUBORDINATION OF LEASE TO MORTGAGES ON THE DEMISED PREMISES: This Lease
shall be subject and subordinate to any mortgage (or trust deed) now existing or
hereafter placed on the demised premises given to secure a loan made by a lender
to Landlord, and to any renewals, replacements, extensions or consolidations
-12-
<PAGE>
thereof, which shall contain a provision that, so long as Tenant shall not be in
default in the performance of its obligations under this Lease in such manner
and after such notice as would entitle Landlord to terminate this Lease, the
holder of such mortgage or trust deed shall not disturb the possession of Tenant
or terminate this Lease. Landlord shall obtain and deliver to Tenant from any
future mortgagee or trust deed beneficiary a written subordination and
nondisturbance agreement in recordable form providing that so long as Tenant
performs all of the terms, covenants and conditions of this Lease and agrees to
attorn to the mortgagee or beneficiary of the deed of trust, Tenant's rights
under this Lease shall not be disturbed and shall remain in full force and
effect for the term of this Lease and Tenant shall not be joined by the holder
of any mortgage or deed of trust in any action or proceeding to foreclose
thereunder. Landlord represents and warrants that, as of the date hereof, the
only mortgage or trust deed existing against the premises is a deed of trust in
the original principal amount of $30,750,000 in favor of Northwestern Mutual
Life Insurance Company.
33. REPRESENTATIONS: Tenant acknowledges that the Landlord has made no
agreement or promise concerning the alteration, improvement, adaptation or
repair of any part of the premises which has not been set forth herein, and that
this Lease contains all the agreements made and entered into between the Tenant
and the Landlord.
34. LIGHTS ON EXTERIOR OF BUILDING: Tenant shall burn the lights affixed to
the exterior of any building it occupies from one (1) hour after sunset to one
(1) hour before sunrise nightly.
35. OUTSIDE STORAGE: Tenant shall not store any personal property outside
the building on the premises except for self-propelled vehicles, containers used
for trash and garbage collection and disposal, and items required to support the
premises' utility systems. Other items may be stored only with Landlord's
consent, which will not be unreasonable withheld or delayed.
36. SECURITY DEPOSIT:
Delete
37. GARBAGE COLLECTION: Cost of garbage collection shall be borne by
Tenant. Arrangement for such service shall be made by Tenant, subject to
approval of Landlord which approval shall not be unreasonably withheld, delayed,
or qualified.
38. RULES AND REGULATIONS: Landlord has found it necessary to post
vehicular traffic control signs on streets and may from time to time impose
certain traffic and parking rules and regulations at Freeport Center. Tenant
agrees to comply with, and use reasonable efforts to cause its employees and
other personnel, to comply with such posted signs and rules and regulations, and
Tenant shall be responsible for causing its employees to park in designated
areas and to operate their motor vehicles within posted speed limits and in
accordance with other traffic signs.
39. CONSTRUCTION OF LEASE: Words of any gender used in this Lease shall be
held to include any other gender, and words in the singular number shall be held
to include the plural when the sense requires. Interpretation, construction and
performance of this Lease shall be governed by the laws of Utah.
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<PAGE>
40. PARAGRAPH HEADINGS: The paragraph headings as to the contents of
particular paragraphs herein are inserted only for convenience and are in no way
to be construed as part of such paragraph or as a limitation on the scope of the
particular paragraph to which they refer.
41. NOTICES: Any notice required or permitted to be given hereunder shall
be deemed sufficient if given by communication in writing by hand-delivery,
express over-night mail, by public or private carrier, postage prepaid and
certified, and addressed as follows:
If to the Landlord, at the following address:
FREEPORT CENTER ASSOCIATES
P.O. BOX 160466 - FREEPORT CENTER
CLEARFIELD, UT 84016
If to the Tenant, at the following address:
GARDENBURGER, INC.
1411 S.W. MORRISON STREET - FOURTH FLOOR
PORTLAND, OR 97205
42. OPTION: Provided that Tenant is not in default of the terms of this
Lease at the time of notification or the effective date of the extended term of
this Lease, Tenant shall have the right to renew and extend the term of this
Lease for one successive three-year period, which right shall be exercised by
Tenant delivering to Landlord written notice of its exercise of such option to
renew at least ninety (90) days prior to the expiration of the Lease. Such
renewed and extended term shall be subject to the conditions set forth in this
Lease except the rent shall be as set forth below:
01/01/2003 - 12/31/2005 $ 3,500/Month
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed the day and year first above written.
TENANT: LANDLORD:
GARDENBURGER, INC. FREEPORT CENTER ASSOCIATES
By /s/James W. Linford By /s/Gordon Olch
---------------------------------- --------------------------------
Its V.P. Operations Its Partner
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<PAGE>
Exhibit "A"
PREMISES
16,000 square feet of floor space, more or less, in Building Number E-12,
Section 4-A together with the underlying and immediately adjacent land and such
use of the surrounding walls and roof as may be necessary for use of the space
for the purposes herein set out, such land and building being more completely
delineated on a map entitled "General Plan", Revised attached hereto as Exhibit
"B" and made a part hereof, and the location of such floor space within such
building being more completely delineated on a drawing entitled Building E-12,
attached hereto as Exhibit "C" and made a part hereof.
Together with the necessary rights of ingress and egress and the right to
use in common with other tenants of Freeport Center, all of the roadways serving
the above described buildings to the extent necessary to enable the Tenant to
utilize the property for the purposes herein set forth.
Exhibit "A"
<PAGE>
Exhibit B
[Map of Demised Premises]
Exhibit "B"
<PAGE>
Exhibit "C"
[Floor Plan of Building E-12]
Exhibit "C"
<PAGE>
Exhibit D
================================================================================
PROPERTY INSURANCE CALCULATION
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
100% Insurance Values 07/01/1998 - 06/30/1999 73,902.00
- - --------------------------------------------------------------------------------
100% Insurance Values Insurance 160,472,060.00
- - --------------------------------------------------------------------------------
Insurance Cost Attributable to Building E-12
- - --------------------------------------------------------------------------------
Total Premium E-12 Premium
------------- = -------------
Total Value E-12 Value
-----------------------------------------------
73,902 X
------------- = -------------
160,472,060 2,520,000
-----------------------------------------------
X = 1163 Annual Premium
- - --------------------------------------------------------------------------------
Building E-12 (16,000/120,000 Square Feet) $155.06
- - --------------------------------------------------------------------------------
================================================================================
Exhibit "D"
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent public accountants, we hereby consent to the incorporation of our
reports dated January 26, 1999, included in this Form 10-K into the Company's
previously filed Registration Statements Nos. 33-64622, 33-64624 and 33-76764 on
Form S-8 and 333-56775 on Form S-3.
ARTHUR ANDERSEN LLP
Portland, Oregon,
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
Company's balance sheets and related statements of operations for the
periods ended December 31, 1998 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 2,320
<SECURITIES> 0
<RECEIVABLES> 15,117
<ALLOWANCES> 148
<INVENTORY> 12,457
<CURRENT-ASSETS> 36,250
<PP&E> 15,412
<DEPRECIATION> 3,174
<TOTAL-ASSETS> 55,048
<CURRENT-LIABILITIES> 28,896
<BONDS> 30,000
0
0
<COMMON> 9,717
<OTHER-SE> 1,209
<TOTAL-LIABILITY-AND-EQUITY> 55,048
<SALES> 100,120
<TOTAL-REVENUES> 100,120
<CGS> 50,570
<TOTAL-COSTS> 50,570
<OTHER-EXPENSES> 63,900
<LOSS-PROVISION> 146
<INTEREST-EXPENSE> 1,404
<INCOME-PRETAX> (15,839)
<INCOME-TAX> (5,797)
<INCOME-CONTINUING> (10,042)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,042)
<EPS-PRIMARY> (1.16)
<EPS-DILUTED> (1.16)
</TABLE>
