================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from January 1, 1999 to September 30, 1999
COMMISSION FILE NUMBER: 0-20330
GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0886359
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1411 SW MORRISON STREET, SUITE 400, PORTLAND, OREGON 97205
(Address of principal executive offices)
Registrant's telephone number, including area code: (503)-205-1500
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
---------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant is $42,481,247 as of November 30, 1999 based upon the last closing
price as reported by the Nasdaq National Market System ($7.875).
The number of shares outstanding of the Registrant's Common Stock as of November
30, 1999 was 8,850,451 shares.
---------------
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant has incorporated into Part III of Form 10-K by reference portions
of its Proxy Statement for its 2000 Annual Meeting of Shareholders.
================================================================================
<PAGE>
GARDENBURGER, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 2
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
25
PART III
Item 10. Directors and Executive Officers of the Registrant 25
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and
Management 25
Item 13. Certain Relationships and Related Transactions 25
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 26
Signatures 27
1
<PAGE>
PART I
ITEM 1. BUSINESS
- ------- --------
GENERAL
Gardenburger, Inc. (the "Company" or "Gardenburger") was organized in 1985 as an
Oregon corporation under the name Wholesome & Hearty Foods, Inc. and completed
its initial public offering in 1992. The Company changed its name to
Gardenburger, Inc., in October 1997. The Company's Common Stock trades on the
National Market Tier of the Nasdaq Stock Market under the symbol "GBUR."
COMPANY OVERVIEW
Gardenburger is the leading producer and marketer of branded veggie burgers. The
Company's Gardenburger(R) product line, featuring the grain-based original
Gardenburger veggie burger, is the number one national brand in market share in
the retail grocery, food service, club store and natural foods channels of
distribution. The Company's net sales grew to $100.1 million for the year ended
December 31, 1998, a 76% increase over the same period of 1997. During 1999 the
Company elected to change its fiscal year to a September 30 fiscal year-end.
Results for 1999 will thus be reflected in a nine-month "stub" year. Sales for
the nine-month stub year were $60.1 million. The Company operates in one
segment. See Note 1 to the Company's financial statements included in this
report in accordance with Item 8.
As a result of innovative product development and its consumer and trade
marketing, the Company has emerged as the leader in the rapidly growing veggie
burger segment of the meat alternative category, which is one of the fastest
growing categories in the food industry. By making the Gardenburger brand the
premier name in this market segment and establishing broad distribution of its
products, the Company believes it is well-positioned to benefit as the veggie
burger increasingly becomes a mainstream consumer product.
The Company's objective is to be the leading provider of veggie burgers in the
four primary distribution channels in which the Company distributes its
products--retail grocery stores; food service, including restaurants,
universities and other commercial outlets; club stores; and natural foods
outlets. The Company currently distributes its products through more than 27,000
retail outlets, 35,000 food service outlets, 600 club store locations and 4,000
natural foods stores.
In 1997, the Company began a strategic initiative to penetrate the retail
grocery channel, which is the largest channel of distribution. At that time, the
Company had approximately 20,000 retail grocery placements of its products,
representing an all commodity volume ("ACV")1 penetration of 30%, and an average
of 1.8 product variations available in each retail outlet. Each product line is
commonly referred to as a stock keeping unit ("SKU"). As of September 30, 1999,
there were over 169,000 retail grocery placements of the Company's products in
more than 27,000 grocery stores, representing an ACV penetration level of 89%,
with an average of 5.4 SKUs per store. This rapid expansion in the availability
of the Company's products occurred following an aggressive national television
advertising campaign in 1998 and 1999.
- -------------------------
1 All commodity volume compares the total sales volume of the stores carrying
the Company's products to the total sales volume throughout the retail grocery
channel.
2
<PAGE>
BUSINESS STRATEGY
Gardenburger's objective has been to capitalize on what it believes to be a
significant growth opportunity for veggie burgers by increasing household
penetration, consumer usage and product distribution throughout all channels of
distribution. Accordingly, Gardenburger's business strategy over the past two
years has consisted of the following key elements:
MAINSTREAMING OF VEGGIE BURGERS. The Company believes that its national
advertising efforts have acted as a significant catalyst for the conversion of
the veggie burger from a niche to a mainstream product. During 1998 the Company
captured over 80% of the unit volume increase in total veggie burger sales in
the retail grocery channel for that year, which in total were up 55 percent for
the year. During 1999, category growth slowed compared to the previous year
despite Gardenburger's continued aggressive national advertising campaign, with
unit volume up only 4 percent through September 30, 1999, according to A.C.
Nielsen Scantrak data. For this same period, the Gardenburger brand was up 21
percent on a dollar basis and 10 percent on a unit basis.
The Company believes that its success during 1998 was partially attributable to
exposure it received from airing one of its television commercials during the
last episode of the comedy series "Seinfeld", which was viewed by 106 million
people and led to over 400 media stories. In addition, during 1998 several
unusual external events transpired that likely aided the Company's sales
efforts, including several beef-related e. Coli outbreaks in the U.S. and Mad
Cow disease in the United Kingdom.
Based on 1999 results, Gardenburger has determined to reduce its advertising and
other discretionary marketing spending in fiscal 2000 as it evaluates the
availability of other growth opportunities in the category.
CAPTURE THE VEGGIE BURGER SEGMENT. Gardenburger's goal has been to make the
Gardenburger brand the premier name in the meat alternative category. By doing
so, the Company believes it can maximize its share of this category on a
long-term basis and sustain the premium pricing levels associated with
category-leading branded products. The Company's objective has been for
consumers to associate the Gardenburger brand name with the veggie burger in the
way consumers associate Campbell's with soups, Heinz with ketchup and Gatorade
with sports drinks. As a result of its efforts over the last two years,
Gardenburger has achieved a 45 percent market share in the grocery channel at
September 30, 1999 and market-leading positions in its other channels of
distribution.
PENETRATE MULTIPLE DISTRIBUTION CHANNELS. The Company is already the leader in
the retail grocery, food service, club store and natural foods distribution
channels. The Company's goal is to maintain its market leadership position in
these channels. In addition, Gardenburger believes other distribution channels,
such as convenience stores, present growth opportunities.
3
<PAGE>
INTRODUCE NEW PRODUCTS TO REINFORCE BRAND AWARENESS. Gardenburger intends to
continue to improve its existing products as well as develop new product
varieties. The Company has introduced a number of new flavor varieties during
the last two years, including four gourmet, veggie-grain based products and
several soy-based hamburger analogs. Gardenburger believes that innovative
product improvements and new product introductions will support its efforts to
increase shelf space in retail grocery stores and reinforce the Gardenburger
brand.
FUTURE FOCUS ON ACHIEVING PROFITABILITY. During fiscal 2000, Gardenburger's
management plans to shift from a strategy of rapid growth to one focused on
achieving near-term profitability. To achieve this goal, Gardenburger intends to
spend substantially less on product advertising. This business model is expected
to result in slower growth and could even lead to a reduction in sales revenue.
There can be no assurance that Gardenburger will be able to successfully execute
its shift in strategy to one of maintaining sales levels while significantly
reducing discretionary spending on advertising.
PRODUCTS
Gardenburger is committed to offering healthy, great tasting and convenient
meatless food choices to consumers. The Company's principal products are veggie
burgers, either veggie-grain based or soy based, which are currently offered in
eight flavors. Gardenburger also offers specialized products in certain
channels, including Gardenburger Sub(R), GardenSausage(R) and GardenVegan(R).
Gardenburger's recipes for its products are proprietary although they contain
commonly known ingredients. Veggie-grain based burgers contain fresh mushrooms,
brown rice, onions, rolled oats, low-fat cheeses, bulgur wheat, egg whites,
natural seasonings and spices and contain no artificial additives. Soy based
burgers are seasoned to taste like ground beef. All of the Company's veggie
burgers are considerably lower in fat and calories than hamburgers of comparable
weight.
4
<PAGE>
The Company's products are as follows:
<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
Santa Fe(R) flavor burger Anaheim chilies, red and
yellow bell peppers,
cilantro
Gardenburger Veggie Medley(R) Vegetable emphasis Soy cheese, broccoli, No fat 100
burger carrots, red and yellow
bell peppers
Gardenburger Savory Mushroom(TM) Gourmet burger Portabella mushrooms, Low fat 120
wild rice
Gardenburger Fire Roasted Gourmet burger Roasted garlic, Low fat 120
Vegetable(TM) sun-dried tomatoes
Gardenburger Classic Greek(TM) Gourmet burger Kalamata olives, feta Low fat 120
cheese
Gardenburger Tayburn Smoked Gourmet burger Hardwood smoked cheddar Low fat 120
Cheddar(TM) cheese
</TABLE>
<TABLE>
<CAPTION>
2.5 OZ. SOY BASED PRODUCTS
CHARACTERIZING
PRODUCT DESCRIPTION INGREDIENTS LOW/NO FAT CALORIES
- ------------------------------------ -------------------- ------------------------ ------------------- --------------
<S> <C> <C> <C> <C>
Gardenburger Hamburger Style(R) Hamburger analog Soy, wheat gluten No fat 90
burger
Gardenburger Hamburger Style(R) Hamburger analog Soy, wheat gluten, Low fat 110
Sauteed Onion burger sauteed onions
</TABLE>
- --------------------------
All of the Company's products are frozen. The Company believes that its colorful
product packaging, which features recipes and prominent Gardenburger script logo
on all sides of the package, contributes to brand recognition and easy consumer
identification of Gardenburger products, and is superior to that of its
competitors.
Gardenburger veggie burgers sold in retail grocery stores weigh 2.5 ounces and
come in boxes containing four patties. Gardenburger veggie burgers sold in the
food service channel are available in both 3.4-ounce and 5-ounce sizes.
Gardenburger veggie burgers are distributed to club stores in packages of 12 or
15 burgers of 3.4 ounces each.
5
<PAGE>
DISTRIBUTION
The Company primarily distributes its products into four channels: retail
grocery, food service, club stores and natural foods stores.
RETAIL GROCERY. Beginning in 1997, the Company began aggressively expanding
distribution of its veggie burgers in the retail grocery channel, and
Gardenburger veggie burgers can now be found in more than 27,000 grocery stores.
The Company's ACV penetration in the U.S. retail grocery channel has risen from
less than 30% at the beginning of 1996, with an average of 1.8 SKUs, to an ACV
penetration of 89% as of September 30, 1999, with an average of 5.4 SKUs. The
Company has increased its retail grocery placements from approximately 20,000 at
the beginning of 1997 to over 169,000 as of September 30, 1999. The Company's
products are currently carried in most major U.S. retail grocery chains.
FOOD SERVICE. The Company distributes its products to more than 35,000 food
service outlets throughout the U.S. and Canada, including restaurant chains such
as Applebee's, Denny's, Fuddruckers, Marie Callenders, Red Robin, Subway and
T.G.I. Friday's. In many of these restaurants, the Gardenburger brand name
appears directly on the menu. Additional points of food service distribution
include academic institutions, hotels and other outlets, including amusement
parks and sports stadiums. In the United States, there are approximately 800,000
outlets in the food service channel. The Company relies primarily on
distributors such as Sysco for distribution to this channel.
CLUB STORES. The Company's products are distributed to club stores with over 600
locations, including Costco and Sam's Club. Currently, these stores carry the
Gardenburger Original veggie burger in the 3.4 ounce food service size.
NATURAL FOODS. The Company's products are distributed to more than 4,000 natural
food stores, including Whole Foods and Wild Oats. The Company utilizes food
brokers that specialize in natural foods stores.
The Company's ability to expand distribution in each of the described channels
will depend in part on consumer preferences, and to a certain extent on
continuation of the current trends of health awareness, emphasis on a reduced
fat diet and reduced consumption of red meat, as well as safety concerns
associated with red and white meat. There is always a risk that further
development of low fat red or white meat products or technological advances that
limit food-borne disease risks may lead to a change in consumer preferences and
reduce demand for meat replacement products. Demand for the Company's products
may be adversely affected by such changes, which may occur rapidly and without
warning. Because of the Company's dependence on a single product line, any
change in consumer preferences or increase in competition in the veggie burger
market segment would adversely affect the Company's business to a greater degree
than if it had multiple product lines.
The Company sells its products in North America primarily through approximately
60 independent, commissioned food brokers and 500 active distributors. The
retail food brokers have close working relationships with the leading grocery
chains, club stores and natural food stores and arrange for sales of
Gardenburger products, which the Company then ships directly to the retailers'
warehouses. Products sold into the food service channel are purchased from the
Company by distributors who arrange for shipment by temperature-controlled truck
to their frozen storage warehouses in principal cities throughout the United
States and Canada for distribution to food service outlets. The Company has no
long-term contracts with its food brokers and distributors and occasionally
6
<PAGE>
changes brokers or distributors in an effort to increase coverage in a
geographic region. The Company could experience a substantial temporary or
permanent decline in net sales if one or more of the Company's major food
brokers or distributors were to discontinue handling the Company's products, go
out of business or decide to emphasize distributing products of the Company's
competitors.
The following table lists selected retailers, distributors and food service
outlets that offer the Company's products for sale to consumers:
RETAIL FOOD SERVICE (CONTINUED)
- ------ ------------------------
GROCERY RESTAURANTS
A&P Applebee's
Albertsons Arctic Circle
Burris Foods Wholesale A&W
C&S Wholesale Burgerville
Dominick's BW3
Fleming Wholesale Carrows
Food Lion Coco's
Fred Meyer Dairy Queen
Giant Eagle Damon's
Giant Food Denny's
HEB Flamers
Hannaford Foster Freeze
Jewel Fuddruckers
Kroger IHOPruckers
Meijers Lyons
Nash Finch Wholesale Marie Callendars
Publix Super Markets Red Robin
Raley's Sizzler
Ralph's Subway
Safeway T.G.I. Friday's
Shaw's
Supervalu Wholesale
Thriftway HOTELS
Von's Holiday Inn
Wakefern Marriott
Wal-Mart Sheraton
White Rose Wholesale
Winn-Dixie UNIVERSITIES
Stanford
NATURAL FOODS UCLA
Wild Oats University of California, Berkeley
Whole Foods Harvard
MIT
CLUB STORES DePaul
Costco Princeton
Sam's Club USC
University of Chicago
FOOD SERVICE Purdue
DISTRIBUTORS Indiana University
Sysco Johns Hopkins University
U.S. Food Service (formerly Rykoff-Sexton)
SPORTS/ENTERTAINMENT
CONTRACT MANAGEMENT COMPANIES Dodger Stadium
ARAMARK Yankee Stadium
Bon Apetit Rose Garden
Compass Six Flags
Gukenheimer Universal Studios
Sodexho/Marriott
7
<PAGE>
Prior to 1997, the Company focused primarily on distribution of its products in
the Western United States. However, in connection with the Company's penetration
into the retail grocery channel, product sales have become increasingly
broad-based:
% OF NET SALES
--------------
REGION FY 1999 FY 1998 FY 1997
- ------ ------- ------- -------
Northeast 27% 32% 26%
Southwest 9% 9% 9%
Midwest 14% 14% 11%
Northwest 34% 28% 38%
Southeast 13% 14% 11%
Canada 3% 3% 5%
---- ---- ----
100% 100% 100%
To date, the Company has focused its sales efforts primarily in North America,
and international sales have not been material. The Company believes, however,
that opportunities exist for international distribution of Gardenburger
products.
SALES AND MARKETING
SALES. Gardenburger's sales objective is to maintain its veggie burgers as the
number one brand in the retail grocery, food service, club store and natural
foods store channels. The Company's use of regional food brokers as its
representatives allows it to maintain contact with the nation's major retail
grocery chains and food service outlets without a large internal sales force.
Brokers are paid sales commissions on all volume sold. Commission rates as a
percentage of net sales have declined as the Company has grown.
Gardenburger's Vice President of Retail Sales and Senior Vice President of Food
Service Sales and Marketing, located in Portland, Oregon and Chicago, Illinois,
respectively, coordinate the Company's sales efforts. Gardenburger's regional
sales force, located strategically in the Company's primary geographic sales
regions and in proximity to its brokers, is divided into a food service division
and a retail grocery division. The regional sales managers, who joined the
Company from major food products companies such as Campbell's, Nestle, Quaker
Oats and Sara Lee, have substantial sales and industry experience. These
regional sales managers coordinate the efforts of the food brokers and
distributors.
MARKETING. Gardenburger's primary marketing objective has been to build
awareness of the veggie burger in general and the Gardenburger brand in
particular in order to increase the market for veggie burgers and to make the
Gardenburger brand the premier name in the veggie burger segment. Gardenburger
spent approximately $14.6 million on media advertising in 1998 and approximately
$11.8 million in 1999. Advertising and marketing strategies are directed by the
Company's Vice President of Marketing and developed in collaboration with an
outside advertising agency. The Company has advertised through a wide variety of
media, including television, print, restaurant menus and point-of-sale displays.
Gardenburger's marketing efforts have been timed to take advantage of seasonal
increases in demand attributable to the summer grilling season and the tendency
of Americans to renew their commitment to a healthy life style each January.
Gardenburger's plan to reduce advertising and other discretionary marketing
expenses in fiscal 2000 could adversely affect the Company's ability to continue
increasing sales and brand awareness.
8
<PAGE>
In 1998 and 1999, Gardenburger undertook a significant national television ad
campaign, featuring three animated commercials, some of which aired during
prime-time on NBC, CBS, Fox and selected cable networks. The pinnacle of this
campaign was a 30-second spot that aired during the final episode of "Seinfeld"
in May 1998. This spot received national attention prior to airing, including
articles in THE WALL STREET JOURNAL and news stories on NBC Nightly News with
Tom Brokaw and CNN Financial News.
Print advertisements for the Gardenburger brand have appeared in a number of
magazines with national circulation. In 1998, the Company used five different
"cartoon" print ads. There was no print advertising during 1999.
During 1999, Gardenburger's marketing included four free-standing newspaper
inserts with coupons, which appeared throughout the United States. Gardenburger
also invested heavily in grocery trade programs including product
demonstrations, introductory allowances and temporary price reductions to
support its rapid distribution gains and to encourage trial of the Company's
products. The Company expects investment in trade programs to continue,
especially in the short-term, as advertising and coupon programs will likely be
scaled back due to the Company's move to a profit-driven business model.
RESEARCH AND DEVELOPMENT
Gardenburger's research and development activities are focused on the
development of new varieties of the Gardenburger(R) veggie burger and the
improvement of existing flavors, as well as improvement and increased efficiency
in the manufacturing process. In addition to its permanent R&D staff, the
Company involves other employees as well as outside consultants on an as-needed
basis for specific projects. Gardenburger's R&D staff developed the Gardenburger
Hamburger Style(R) and the gourmet flavors of veggie burgers introduced during
the last two years. The Company is also working on expanding its line of
soy-based hamburger analogs as soy continues to garner positive national
attention. Recently, the Company introduced into the natural foods channel the
Gardenburger LifeBurgerTM, which is a burger high in soy protein. In promoting
the LifeBurger (and its other soy-based products), Gardenburger is relying on
the October 1999 announcement by the U.S. Food and Drug Administration ("FDA")
that certain amounts of soy consumed as part of a healthy diet may reduce the
risk of heart disease. The Company conducts its research and development
activities at its facilities in both Portland, Oregon and Clearfield, Utah.
In 1999, 1998 and 1997, the Company spent approximately $553,000, $1,121,000 and
$565,000, respectively, on research and development activities.
MANUFACTURING
The Company historically produced its line of veggie burgers using a batch
process in its Portland, Oregon plant. The Portland facility was shut down in
March 1999, and all manufacturing was moved to the Clearfield, Utah plant. The
Company operates the Clearfield plant under a five-year lease, with an option to
renew for two successive five-year terms.
9
<PAGE>
The 120,000 square-foot Clearfield facility handles multiple manufacturing lines
for the Company's products. The first line commenced operations in early 1998. A
second line began producing in June 1999. The Company believes the Clearfield
facility will be able to support up to approximately $240 million of annual net
sales at current price levels. Clearfield, Utah is a more central location than
Portland, Oregon, with better distribution routes.
The production process involves cleaning, chopping and mixing the ingredients,
then forming, baking and quick-freezing the veggie burgers and finally packaging
them. Gardenburger's manufacturing process at its Clearfield facility is highly
automated, mixing and baking products in assembly-line fashion with minimal
human interaction. The Clearfield facility also utilizes newly-developed,
proprietary ovens that quickly cook the products. Products are shipped fully
cooked, frozen and packaged via temperature controlled truck to distributors
throughout North America and by temperature controlled container to Europe.
A significant disruption in the Clearfield facility's production capacity as a
result of, for instance, fire, severe weather, regulatory actions, work
stoppages or other factors could disable the Company's capacity to manufacture
its products. If Gardenburger veggie burgers became less available, consumers
may switch to another brand of veggie burger and grocery stores may reduce shelf
space allocated to Gardenburger's products. Any significant disruption in
manufacturing would likely have a material adverse effect on the Company's
results of operations and financial condition.
COMPETITION
The market for veggie burgers and other meat alternative products is highly
competitive. The Company's products compete primarily on the basis of taste,
quality of natural ingredients, ease of preparation, availability, price,
consumer awareness and brand preference.
Gardenburger believes that its products compare favorably to those offered by
its competitors. The Company prices its products competitively or at a slight
premium to its primary competitors. The calorie and fat content of
Gardenburger(R) products is generally equivalent to that of competitors'
products.
The Company believes that its principal competitors are Worthington Foods, Inc.,
which distributes its products under the "Morningstar Farms" label to the food
service and retail grocery channels, and Boca Burger, Inc., which distributes
soy-based meat analog burgers primarily in the retail grocery and natural food
channels. In January 1999, Worthington Foods acquired the "Harvest Burger" brand
from Archer Daniels Midland and began marketing and selling the brand in early
1999. Previously, Harvest Burger was marketed and sold by Pillsbury under the
"Green Giant" brand name pursuant to a joint venture with Archer Daniels
Midland. On October 1, 1999, Worthington Foods, Inc. announced that it had
entered into an agreement to be acquired by The Kellogg Company. In addition,
other major national food products companies could decide to produce veggie
burgers at any time in the future.
10
<PAGE>
The Company's products also compete indirectly with low fat meat products, such
as ConAgra's Healthy Choice 96 percent Extra Lean Ground Beef burger, and
chicken or turkey based low fat products distributed by several large companies
such as Tyson Foods, and with frozen, mass-produced low calorie/low fat entrees,
including national brands such as Healthy Choice, Lean Cuisine and Weight
Watchers. These products are produced by large companies with substantially
greater financial resources, name recognition and marketing experience than the
Company.
SIGNIFICANT CUSTOMERS
For the nine months ended September 30, 1999, one customer, Norpac Food Sales,
accounted for approximately 11 percent of revenue and 5 percent of the accounts
receivable balance at September 30, 1999.
SOURCES OF SUPPLY
Gardenburger uses natural ingredients such as mushrooms, oats, rice, onions, and
egg whites. These are common agricultural items typically available in most
parts of the United States. In addition, Gardenburger uses packaging and other
materials that are common in the food industry. As a result, the Company
believes, but cannot assure, that its sources of supply are reasonably reliable
and that the Company is at no greater risk regarding supply issues than other
similar food processors and producers.
EMPLOYEES
As of November 30, 1999, the Company had approximately 205 full-time equivalent
employees, including 54 employees at its headquarters in Portland and 127 at its
Clearfield facility. None of the Company's employees is subject to a collective
bargaining agreement, and the Company considers its relations with its employees
to be excellent.
INTELLECTUAL PROPERTY
Gardenburger has approximately 19 U.S. registered trademarks, including
"Gardenburger," "Gardenburger Hamburger Style," "Gardenburger Sub" and
"GardenSausage." The Company has registered certain trademarks in Australia,
Canada, France, Germany and the United Kingdom, along with other smaller
countries, and applied for registration of certain trademarks in various other
foreign countries, including but not limited to Japan, Mexico and Thailand.
The Company actively monitors use of its trademarks by food service customers
and others and takes action it believes appropriate to halt infringement or
improper usage. The Company defends its intellectual property aggressively and,
from time to time, has been engaged in infringement protection activities.
Nonetheless, in the event third parties infringe or misappropriate the Company's
trademarks, the Company may have to incur substantial costs to protect its
intellectual property or risk losing its rights. Any large expenditure or loss
of rights could have a material adverse effect on the Company's results of
operations and financial position.
The Company generally does not hold any patents covering its recipes or
production methods and, therefore, can protect them only as trade secrets. Some
or all of these trade secrets could be obtained by others or could enter the
public domain, which could place the Company at a competitive disadvantage.
11
<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The Company has utilized a number of computer systems in its business. In March
1999, the Company upgraded its existing systems by replacing its Cimpro, general
ledger, and EDI systems with a single Baan enterprise resource planning system.
This upgrade is expected to meet the Company's information systems needs for the
next several years. In addition to integrating manufacturing, sales and
accounting functions, the new Baan system will increase the availability of
real-time information for management analysis and use in operations. The Baan
system will enhance the Company's production planning (planning of raw material
purchases) and demand forecasting (matching supply to distribution centers with
order volume) capabilities. The Baan system also includes pallet tagging, bar
coding and scanning applications that will facilitate tracking of raw materials
and finished goods through the Company's manufacturing operation. The new system
should enable the Company to expand its use of EDI if desired by customers and
suppliers, which the Company believes will expedite order entry, payment and
cash collection processes.
Gardenburger's Clearfield, Utah manufacturing facility is highly automated,
using a number of computerized process level controllers. The Company is
considering implementing a manufacturing enterprise system to further facilitate
integration of manufacturing information with information available through the
Baan system.
GOVERNMENT REGULATION
The manufacturing, packaging, storage, distribution and labeling of food
products are subject to extensive federal and state laws and regulations. The
FDA has issued regulations governing the ingredients that may be used in food
products, the content of labels on food products and the labeling claims that
may be made for foods. Foods may only include additives, colors and ingredients
that are either approved by the FDA or generally recognized as safe.
Gardenburger(R) veggie burgers must be manufactured in compliance with the FDA's
current Good Manufacturing Practice regulations applicable to food.
Regulators have broad powers to protect public health, including the power to
inspect the Company's products and facilities, to order the shutdown of a
facility or to seize or stop shipment of the Company's products and order a
recall of previously shipped products, as well as the power to impose
substantial fines and seek criminal sanctions against the Company or its
officers. The Company does not currently carry insurance against the cost of a
product recall, and a significant recall would have an adverse effect on the
Company's results of operations and financial condition. In addition, negative
publicity may result if regulators take any of the foregoing actions against the
Company or if the Company were to voluntarily recall products to avoid
regulatory enforcement.
INSURANCE
The Company maintains insurance against various risks related to its business.
This includes property and casualty, business interruption, director and officer
liability, food spoilage, products liability (but not product recalls) and
workers' compensation insurance. The Company currently maintains $2 million of
product liability insurance coverage and $20 million of general umbrella
coverage. The Company considers its policies adequate to cover the major risks
in its business, but there can be no assurance that this coverage will be
sufficient to cover the cost of defense or damages in the event of a significant
product liability claim.
12
<PAGE>
ITEM 2. PROPERTIES
- ------- ----------
The Company leases approximately 19,000 square feet of administrative office
space at 1411 SW Morrison, Suite 400 in Portland, Oregon, pursuant to a two-year
extension to its original lease that terminates on December 31, 2000. Current
monthly rent is approximately $24,100.
The Company leases additional space for research and development and production
at 1416 S.E. Eighth Avenue in Portland, Oregon. The facility is leased pursuant
to a one-year lease agreement from Frank S. Card, a shareholder of the Company,
at a rental rate of $2,700 per month, which the Company considers to be
consistent with rental rates charged by unaffiliated property owners in the same
market area. The lease has been renewed on a month-to-month basis with 60 days'
notice required for termination beginning January 1, 2000.
The Company leases 120,000 square feet of production space at Freeport Center,
Building A-16, in Clearfield, Utah, pursuant to a five-year lease that
terminates on December 31, 2002. The Company has the option to renew the lease
for two successive five-year terms. The Company began utilizing such space for
production in the first quarter of 1998. The monthly rent on this facility is
currently $28,000.
The Company also leases 16,000 square feet of storage space at the Freeport
Center in Clearfield. The lease commenced February 15, 1999 and will expire
December 31, 2002. The Company has an option to renew the lease for an
additional three-year term. The monthly rent for the storage space is $3,200.
The Company previously owned approximately 18 acres of land near the Portland
International Airport. The property was originally purchased as a site for
expansion of the Company's manufacturing capabilities, but the Company decided
in 1997 to lease the Clearfield facility rather than build a new manufacturing
plant in Portland. The Company sold this property in November 1999.
The Company also owns and previously utilized a 40,000 square foot production
facility at 1005 S.E. Washington Street, Portland, Oregon, and a 1,200 square
foot annex at the same location.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
There are currently no material, pending legal proceedings to which the Company
or its subsidiaries are a party. From time to time, the Company becomes involved
in ordinary, routine or regulatory legal proceedings incidental to the business
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
September 30, 1999.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------- ---------------------------------------------------------------------
The Company's Common Stock trades on the National Market tier of The Nasdaq
Stock Market under the symbol GBUR. The Common Stock traded under the symbol
WHFI until October 17, 1997, when the symbol was changed to GBUR in connection
with the change in the Company's name from Wholesome & Hearty Foods, Inc. to
Gardenburger, Inc.
The high and low sales prices for the two years in the period ended September
30, 1999 were as follows:
Fiscal 1998 High Low
------------------------------------------- ---------- --------
Quarter 1 $12.00 $ 8.13
Quarter 2 13.88 8.00
Quarter 3 16.13 10.13
Quarter 4 15.13 9.25
Fiscal 1999 High Low
------------------------------------------- ---------- --------
Quarter 1 $13.75 $ 8.63
Quarter 2 12.50 9.50
Quarter 3 10.25 7.50
Quarter 4 9.00 5.00
The number of shareholders of record and approximate number of beneficial owners
of the Company's Common Stock at December 10, 1999 were 833 and 10,500,
respectively.
There were no cash dividends declared or paid in 1999 or 1998 on the Company's
Common Stock. The Company does not anticipate declaring cash dividends on its
Common Stock in the foreseeable future. The Company may not, without the consent
of Dresdner Kleinwort Benson Private Equity Partners, LP ("Dresdner"), declare
or pay any cash dividends or make any distributions with respect to its capital
stock or other equity securities to the extent that at least $5,000,000 in
principal amount remains outstanding under the Company's convertible senior
subordinated notes and Dresdner owns a majority of the then outstanding
principal amount.
In addition, no cash dividends may be paid on the Company's Common Stock unless
dividends have been paid on all outstanding shares of the Company's Series A and
Series B Convertible Preferred Stock in an amount equal to 12% cumulative
dividends accrued on such preferred shares through the record date for the
common stock dividend (or, if greater, the amount of the common stock dividend
payable on the preferred shares on an as-converted basis). The quarterly
dividend accruing on the preferred shares is $975,000.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
-----------------------------------------------------
IN THOUSANDS, SEPTEMBER 30,
EXCEPT PER SHARE AMOUNTS 1999 1998 1997 1996 1995
- ------------------------------------------ ----------------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Net sales $ 60,106 $100,120 $ 56,837 $ 40,527 $ 36,818
Gross margin 25,772 49,550 29,601 20,621 18,720
Sales and marketing expense 48,021 58,513 26,191 13,583 11,151
General and administrative expense 5,064 5,387 5,471 4,963 3,871
Restructuring and other charges 2,684 - - 612 -
Operating income (loss) (29,997) (14,350) (2,061) 1,463 3,698
Preferred dividends 1,980 - - - -
Net income (loss) available for common
shareholders $(22,146) $(10,042) $ (1,393) $ 1,063 $ 2,510
Basic net income (loss) per share $ (2.51) $ (1.16) $ (0.16) $ 0.13 $ 0.33
Diluted net income (loss) per share $ (2.51) $ (1.16) $ (0.16) $ 0.12 $ 0.29
BALANCE SHEET DATA
Working capital $ 11,741 $ 7,354 $ 11,504 $ 13,393 $ 11,978
Total assets 52,702 55,048 26,470 24,934 19,325
Long-term convertible notes payable 15,000 15,000 - - -
Convertible redeemable preferred stock
32,147 - - - -
Shareholders' equity (deficit) (10,319) 10,926 19,839 20,979 16,955
</TABLE>
(1)Statement of operations data for 1999 includes only nine months of activity
due to the Company's change in its fiscal year during 1999 from a calendar
year to a fiscal year ended September 30.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve known and
unknown risks and uncertainties. The Company's actual results, performance, or
achievements could differ materially from historical results or from any future
results anticipated by the forward-looking statements. In addition to statements
that explicitly describe such risks and uncertainties, readers should consider
statements containing words like "believes," "expects," "intends," "anticipates"
or "plans" to be uncertain and forward-looking. Important risks that could cause
actual results, performance or achievements to differ from those expressed or
implied by the forward-looking statements are described below and elsewhere in
this Form 10-K. Investors are cautioned not to place undue reliance on the
forward-looking statements.
15
<PAGE>
GENERAL
The Company's net sales are attributable almost entirely to the Gardenburger(R)
veggie burger (and related veggie patty products). If demand for the
Gardenburger veggie burger declines or does not increase at the rate currently
anticipated, whether as a result of competition, lower consumer demand or other
unforeseen events, the Company's business will be adversely affected to a
greater degree than if it had multiple product lines. Any decrease in the
Company's net sales levels may lead to reductions in the amount of shelf space
allocated to the Company's products at grocery stores, or menu space devoted to
such products at food service outlets.
RESULTS OF OPERATIONS
The following table is derived from the Company's Statements of Operations for
the periods indicated and presents the results of operations as a percentage of
net sales.
<TABLE>
<CAPTION>
Year ended (1) September 30, 1999 December 31, 1998 December 31, 1997
- ------------------------------- ----------------------- --------------------- ---------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 57.1 50.5 47.9
----------------------- --------------------- ---------------------
Gross margin 42.9 49.5 52.1
Sales and marketing expense
79.9 58.4 46.1
General and administrative
expense 8.4 5.4 9.6
Restructuring charges 4.5 -- --
----------------------- --------------------- ---------------------
Operating loss (49.9) (14.3) (3.6)
Other expense (2.3) (1.5) --
----------------------- --------------------- ---------------------
Loss before income taxes (52.2) (15.8) (3.6)
Income tax benefit 18.7 5.8 1.1
----------------------- --------------------- ---------------------
Income before preferred
dividends (33.5) (10.0) (2.5)
Preferred dividends (3.3) -- --
----------------------- --------------------- ---------------------
Net loss (36.8)% (10.0)% (2.5)%
======================= ===================== =====================
</TABLE>
(1) Statement of operations data for 1999 includes only nine months of activity
due to the Company's change in its fiscal year during 1999 from a calendar year
to a fiscal year ended September 30.
1999 COMPARED TO 1998
GENERAL During 1999, the Company changed its fiscal year end to September 30
from December 31. Accordingly, the following discussion compares the nine-month
period ended September 30, 1999 (herein referred to as "fiscal 1999") with the
twelve-month period ended December 31, 1998, herein referred to as the change in
the Company's fiscal year.
NET SALES Net sales for fiscal 1999 decreased to $60.1 million from $100.1
million for 1998. The decrease is attributable to both the change in the
Company's fiscal year and a decrease in unit sales. During the 1998 period
external events, such as e. coli outbreaks in the U.S. and mad cow disease in
the U.K., brought attention to the dangers of eating red meat. Management
believes that these events worked synergistically with the Company's advertising
campaign during 1998 to increase unit sales. No similar events occurred during
1999. In addition, the Company experienced lower than anticipated new consumer
trial during 1999 and unfavorable weather conditions adversely affected the 1999
grilling season. In addition, to a lesser extent, the lower sales figures in
fiscal 1999 reflect the impact of the Company's strong December 1998 sales, as
16
<PAGE>
customers, especially in the grocery channel, stocked up on product in
anticipation of extensive January 1999 consumer promotions.
The Company's market share in the grocery channel averaged 46 percent during
1999 compared to 42 percent during 1998. During 1999, the Company maintained its
U.S. All Commodity Volume ("ACV") at 89 percent. ACV compares the total sales
volume of the stores carrying the Company's products to the total sales volume
throughout the retail grocery channel.
GROSS MARGIN Gross margin decreased to $25.8 million (42.9 percent of net sales)
for fiscal 1999 from $49.6 million (49.5 percent of net sales) for 1998. The
decrease in the gross margin is a result of the reduction in sales discussed
above as well as a lower gross margin percentage. The decrease in the gross
margin percentage is primarily a result of start-up costs related to bringing up
the second production line at the Clearfield facility and of operating
manufacturing facilities at less than 100 percent of capacity in order to reduce
product inventories due to lowered sales expectations for 1999. The Company
expects its gross margin percentage to return to 48% to 50% during fiscal 2000.
SALES AND MARKETING EXPENSE Sales and marketing expense decreased to $48.0
million (79.9 percent of net sales) for fiscal 1999 from $58.5 million (58.4
percent of net sales) for 1998. The decrease in spending in fiscal 1999 is
primarily a result of the change in fiscal year. Of the $48.0 million spent in
fiscal 1999, approximately $35.8 million was for discretionary spending such as
television advertising, couponing and trade programs. The Company expects to
substantially reduce sales and marketing expenses going forward as it changes to
a more profit driven business model.
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("g&a")
decreased to $5.1 million (8.4 percent of net sales) for fiscal 1999 from $5.4
million (5.4 percent of net sales) for 1998. The decrease is due primarily to
the change in the Company's fiscal year, offset in part by costs related to
implementing a new year 2000 compliant management information system and the
associated depreciation expense.
RESTRUCTURING CHARGE The Company incurred a restructuring charge of $2.7 million
during fiscal 1999 related to the closure of its Portland, Oregon production
facility, a fair market value adjustment for one of the Company's Portland,
Oregon area properties and the write-off of an older information system. At
September 30, 1999, no amounts remained in accrued liabilities related to these
charges. In November 1999, the Company sold the Portland area property referred
to above for net proceeds of approximately $1.5 million and recognized a gain on
the sale of approximately $174,000 in the first quarter of fiscal 2000.
OPERATING LOSS Operating loss was $30.0 million in fiscal 1999 compared to an
operating loss of $14.4 million for 1998 as a result of the individual line item
changes discussed above, including in particular the decreased gross margin
percentage and increased sales and marketing expense as a percentage of net
sales.
17
<PAGE>
<PAGE>
INCOME TAXES Income taxes are based on an estimated rate of approximately 36
percent for fiscal 1999 compared to the approximately 37 percent rate used for
1998.
PREFERRED DIVIDENDS The Company accrues a 12 percent cumulative annual
dividend on its convertible preferred stock payable upon redemption of the
stock. The convertible preferred stock was issued in April 1999. The quarterly
dividend is $975,000. In addition, the $2.3 million of related issuance costs
are being accreted over five years, the life of the preferred stock, and total
approximately $117,000 per quarter.
NET LOSS AVAILABLE FOR COMMON SHAREHOLDERS Net loss available for common
shareholders was $22.1 million in fiscal 1999 compared to a net loss of $10.0
million in 1998 as a result of the individual line item changes discussed above.
The Company believes that the impact of inflation was not material for fiscal
years 1999 and 1998.
1998 COMPARED TO 1997
NET SALES Net sales for 1998 increased 76.2 percent to $100.1 million from $56.8
million for 1997. The Company increased its sales levels in its retail grocery,
food service and club store channels during 1998. The increase in overall net
sales is primarily related to increased unit sales in the Company's grocery
channel as a result of the Company's investment in efforts to expand this
channel, including its national advertising campaign. The Company increased
prices on certain products in its grocery channel an average of 7 percent in the
fourth quarter of 1997, which also contributed to the increase in net sales in
1998. Net sales were higher in the 1998 third and fourth quarters than in the
second quarter. The Company's market share in the grocery channel reached an
all-time high of 56 percent during the third quarter of 1998 and averaged 42
percent during all of 1998. During 1998, the Company increased its U.S. ACV to
89 percent from 68 percent at the end of 1997.
GROSS MARGIN Gross margin increased 67.4 percent to $49.6 million (49.5 percent
of net sales) for 1998 from $29.6 million (52.1 percent of net sales) for 1997.
The decrease in the annualized gross margin percentage is primarily a result of
start-up costs associated with the Company's new manufacturing facility in
Clearfield, Utah. The Company achieved a gross margin percentage of 51.9 percent
in the fourth quarter of 1998. The improvement in gross margin during the fourth
quarter of 1998 compared to the average for the year was primarily a result of
declining start-up costs and increased manufacturing efficiencies at the
Clearfield facility.
SALES AND MARKETING EXPENSE Sales and marketing expense increased to $58.5
million (58.4 percent of net sales) for 1998 from $26.2 million (46.1 percent of
net sales) for 1997. The increase in spending in 1998 was primarily a result of
costs associated with the Company's aggressive 1998 advertising plan, including
a national television advertising campaign during the second and third quarters,
and the introduction of new products into the retail grocery channel. The
Company spent approximately $11.0 million on media advertising during the first
half of 1998 and approximately $3.6 million on media advertising during the
second half of 1998.
18
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense ("g&a")
decreased to $5.4 million (5.4 percent of net sales) for 1998 from $5.5 million
(9.6 percent of net sales) for 1997. The Company was able to maintain its g&a
expenditures at 1997 levels while increasing sales, thereby decreasing g&a as a
percentage of net sales. The Company received a $240,000 insurance settlement in
the first quarter of 1997 that lowered g&a expense in 1997.
OPERATING LOSS Operating loss was $14.4 million in 1998 compared to an operating
loss of $2.1 million for 1997 as a result of the individual line item changes
discussed above, including in particular the increased advertising expenses
incurred by the Company in 1998.
OTHER INCOME (EXPENSE) Other income (expense) was a net expense of $1.5 million
in 1998 compared to net income of $9,000 in 1997 primarily as a result of
increased interest expense during 1998 related to debt incurred during 1998 to
help fund the Company's increased sales and marketing activities.
INCOME TAXES Income taxes are based on an estimated rate of approximately 37
percent for 1998 compared to the approximately 32 percent rate used for 1997.
The increase in the rate is primarily attributable to a decrease in meals and
entertainment expense and non-deductible goodwill amortization in relation to
the reported net loss of the Company, offset in part by a decrease in tax exempt
dividends and interest.
NET LOSS Net loss was $10.0 million in 1998 compared to a net loss of $1.4
million in 1997 as a result of the individual line item changes discussed above.
The Company believes that the impact of inflation on the net loss was not
material for fiscal years 1998 and 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of $11.7 million, which
included $7.0 million of cash and cash equivalents, compared to $7.4 million in
working capital at December 31, 1998, including $2.3 million of cash and cash
equivalents. The $4.3 million increase in available working capital is primarily
due to the issuance of $30.2 million of convertible preferred stock, net of
issuance costs, offset by $14.9 million used in operations, $10.0 million net
payments on the Company's line of credit and purchases of $1.0 million of
property and equipment.
Accounts receivable decreased $8.8 million to $6.1 million at September 30, 1999
from $15.0 million at December 31, 1998, due primarily to significantly higher
sales during the fourth quarter of 1998 compared to the quarter ended September
30, 1999. Days sales outstanding decreased to 32 at September 30, 1999 from 43
at December 31, 1998.
Inventories decreased $5.2 million to $7.3 million at September 30, 1999 from
$12.5 million at December 31, 1998 as a result of efforts to reduce finished
goods inventories in order to bring them in line with current sales
expectations. Inventory turned 5.5 times on an annualized basis during the
quarter ended September 30, 1999, compared to 5.3 times on an annualized basis
during the fourth quarter of 1998.
19
<PAGE>
Deferred taxes increased to $17.5 million at September 30, 1999 from $6.2
million at December 31, 1998 primarily as a result of tax benefits relating to
net operating loss carryforwards. The Company has tax net operating loss
carryforwards (NOLs) totaling approximately $41.2 million, which expire as
follows: 2018 - $11.8 million and 2019 - $29.4 million. Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" (SFAS 109) requires
that the tax benefit of such NOLs be recorded as an asset to the extent that
management assesses the utilization of such NOLs to be "more likely than not".
Otherwise, a valuation allowance is required to be recorded. Management has
determined, based primarily on a strategic shift in the third quarter of fiscal
1999 to a more profit driven business model, as outlined below, that taxable
income of the Company will more likely than not be sufficient to utilize fully
the $41.2 million of NOLs in the next three to five years. Accordingly, no
valuation allowance has been recorded.
The NOLs available for future utilization were generated principally as a result
of the Company's strategic initiative, begun in 1997, to penetrate the retail
grocery channel, which is the largest channel of distribution. The Company began
a more aggressive advertising and marketing program, including a national
television advertising program in 1998 and 1999, in order to expand distribution
and grow the veggie burger category. The Company invested over $40 million in
discretionary marketing spending during fiscal 1998 and an additional $35.8
million in discretionary marketing spending during fiscal 1999. Prior to this
strategic initiative, the Company had historically been profitable, but had
spent very little on discretionary advertising and marketing. The increased
advertising and marketing spending resulted in more than doubling the sales
levels that existed back in 1996. The Company plans to adjust its rapid growth
strategy during fiscal 2000 to a lower expense, more profit driven business
model. This will be accomplished primarily by a substantial reduction in the
discretionary advertising and marketing spending that has occurred during the
last three years. Management does not believe that such reductions will have a
significant impact on recent historical sales levels. Additionally, the Company
has already begun streamlining its operations at its Clearfield plant, through
reductions in workforce of approximately 25% along with workforce reductions at
its corporate headquarters of 20%. At the same time, the Company anticipates
achieving greater operating efficiencies at its Clearfield plant as a result of
the consolidation of manufacturing locations and the automation of the Company's
manufacturing processes. Operating efficiencies gained by the changes in
operations are expected to result in improved performance, measured primarily by
gross margin dollars.
Realization of the future tax benefits is dependent on the Company's ability to
generate taxable income within the carryforward period. Management anticipates
that increases in taxable income, as a result of the changes in operating
strategy outlined above, will be sufficient to utilize fully the NOLs prior to
their ultimate expiration date.
Future levels of operating income are dependent upon general economic
conditions, including continued growth of the meatless burger category,
competitive pressures on sales and gross margins and other factors beyond the
Company's control, and no assurance can be given that sufficient taxable income
will be generated for full utilization of the NOLs. Management has considered
the above factors in reaching its conclusion that it is likely that taxable
income will be sufficient to utilize fully the NOLs in the near term and prior
to their ultimate expiration date. However, the Company may be required to
record a valuation allowance against the deferred tax asset for net operating
losses in future periods if its revised business goals are not achieved.
20
<PAGE>
Accounts payable decreased to $6.7 million at September 30, 1999 from $9.7
million at December 31, 1998 primarily as a result of lower expenditures for
inventories as a result of the Company's efforts to reduce inventory levels.
Payroll and related liabilities decreased to $0.9 million at September 30, 1999
from $1.8 million at December 31, 1998 primarily as a result of bonus accruals
at December 31, 1998 that did not exist at September 30, 1999.
Capital expenditures of $1.0 million during 1999 primarily resulted from
expenditures for the Company's new management information system and for
production equipment in Clearfield not covered under the Company's operating
leases. Capital expenditures are estimated to be approximately $2.4 million in
fiscal 2000 primarily for information systems and production equipment.
The Company has outstanding $15 million of 7 percent Convertible Senior
Subordinated Notes (the "Notes") held by Dresdner Kleinwort Benson Private
Equity Partners L.P. ("Dresdner"). The Notes are convertible into shares of the
Company's Common Stock at the option of the holder until maturity in 2003, at
which time they will be due in full if not previously converted. The Company may
also elect to redeem the Notes, if not previously converted, at any time after
March 27, 2000. The conversion price of the Notes at September 30, 1999 was
$12.10 per share, as adjusted to reflect the issuance of convertible preferred
stock as discussed below and stock option grants. Upon adjustment of the
conversion price of the Company's Series B convertible preferred stock as
discussed below, the conversion price of the Notes will likely decrease to
$11.49 per share. Under the terms of the Note Purchase Agreement relating to the
Notes, the Company must comply with certain covenants and maintain certain
financial ratios as follows:
1. current assets to current liabilities of at least 1.575 to 1.0,
measured monthly;
2. total liabilities, exclusive of the Notes and convertible redeemable
preferred stock, to tangible net worth, inclusive of the Notes and
convertible redeemable preferred stock, not to exceed 1.1 to 1.0,
measured monthly; and
3. a minimum fixed charge coverage ratio, as defined in the Note Purchase
Agreement, of 1.08 to 1.0, measured annually.
At September 30, 1999, the Company was in compliance with all of its financial
ratio covenants under the Notes.
In April 1999, the Company closed a stock purchase agreement selling $32.5
million of convertible preferred stock to several investors. Under the terms of
the agreement, the Company sold an aggregate of 2,763,000 shares of Series A
convertible preferred stock and 487,000 shares of Series B convertible preferred
stock to members of the investor group, at a price of $10 per share for each
series, or an aggregate consideration of $32.5 million, and received net
proceeds of $30.2 million. At September 30, 1999, the preferred shares were
convertible at a price of $10 per share (subject to antidilution adjustments) at
any time following issuance at the discretion of the holder. The Company is
required to meet certain performance targets for the twelve months ending
December 31, 1999 under the Series B preferred stock agreement. These targets
are: 1) $135.0 million in net sales, and 2) an operating loss of not more than
$1.0 million. It is anticipated that the Series B conversion price will be
adjusted to $3.75 per share due to the likelihood that the Company will not meet
the specified performance targets for calendar 1999. If the conversion price is
21
<PAGE>
adjusted, the Company will be required to record approximately $8.1 million of
additional preferred dividends to account for this beneficial conversion
feature. Such non-cash charge represents the implied value of the beneficial
conversion feature and would be recorded in the first quarter of fiscal 2000.
Both series of preferred stock are entitled to a 12 percent cumulative annual
dividend payable upon redemption of the stock or in the event of a sale or
liquidation of the Company. Shares may not be redeemed until five years after
the original date of issuance, at which time they may be redeemed at the
election of the holders or, under certain conditions, at the discretion of the
Company. The redemption value of the Series A and Series B convertible preferred
stock is $27.6 million and $4.9 million, respectively. The difference between
the carrying amount and the redemption value of the convertible preferred stock
is being accreted as additional preferred dividends over the period until
redemption.
In April 1999, the Company entered into an Amended and Restated Business Loan
Agreement (the "Agreement") with Bank of America NT & SA. The Agreement provides
for a credit line of up to $20 million with interest at the Bank's Reference
Rate or, at the option of the Company, at LIBOR plus 1.25 percentage points or
at the Offshore Rate plus 1.25 percentage points. The line of credit is
available until June 1, 2000. The Agreement also provides for a standby letter
of credit of up to $400,000 (included in the $20 million limit) with a maximum
maturity of March 31, 2001. The Agreement provides that the line of credit is to
be secured by all machinery, equipment, inventory, receivables and intangible
assets of the Company. At September 30, 1999, the Company had $5.0 million
outstanding under this line of credit at a per annum interest rate of 6.65
percent.
The Company is required to meet certain financial covenants under the Agreement
as follows:
1. to maintain a current ratio of at least 1.5:1.0 measured monthly;
2. not to incur an operating loss of more than $5 million for the year
ending December 31, 1999; and
3. to maintain a minimum fixed charge coverage ratio of at least 1.25:1.00
measured on a rolling four-quarter basis, beginning December 31, 2000.
At September 30, 1999, the Company anticipated being out of compliance with the
operating loss covenant at December 31, 1999. In December 1999, the Company
signed a letter of commitment for a new line of credit. See "Note 14. Subsequent
Events" of the Notes to Financial Statements.
The Company leases various food processing, production and other equipment in
use at its Clearfield, Utah production facility pursuant to two lease agreements
between the Company and BA Leasing & Capital Corporation ("BA Capital"), an
affiliate of Bank of America. Each lease agreement contains a cross-default
provision stating that any default under any other borrowing or credit agreement
that includes a failure to make payment when due or gives the holder a right of
acceleration constitutes an event of default under each lease agreement. If any
event of default by the Company occurred under the lease agreements with BA
Capital, the Company's manufacturing capacity would be significantly curtailed
or even eliminated if BA Capital were to exercise its right to sell the
equipment. In addition, neither lease agreement contains express provisions
giving the Company a right to purchase the equipment at the end of the lease
term, which terms range from five to seven years, depending upon the equipment.
22
<PAGE>
Management believes that the Company's existing working capital, in combination
with cash flow from operations and funds available under credit facilities, will
be sufficient to support working capital requirements in the near term.
YEAR 2000
INFORMATION SYSTEMS The Company utilizes packaged application strategies for all
critical information systems functions, which have all been certified to be year
2000 compliant by the vendors. This includes enterprise software, operating
systems, networking components, application and data servers, PC hardware, and
core office automation software. The Company performed various component tests
to verify full year 2000 operational readiness and modification was completed on
all non-compliant equipment. In addition to the information system component
testing, the Company has conducted a system wide test, including all components
from the desktop to the data center, to ensure that all of the compliant
components will function properly as a whole. The focus of these tests was to
assure that the Company's business processes will run end-to-end with no year
2000 errors or issues.
SUPPLIER AND CUSTOMER BASE The Company has completed a year 2000 supplier and
customer audit program. As a part of this program, the Company contacted all of
its critical suppliers and significant customers to inform them of the Company's
year 2000 expectations and requested copies of their compliance programs.
Although the Company discovered a number of non-compliant products and vendors,
none of these vendors or products were key to the Company's operations.
COST The Company incurred approximately $20,000 of incremental costs to assess
year 2000 readiness of its information systems. All system hardware and software
upgrades were budgeted in the normal course of business regardless of the year
2000 issue.
RISKS Despite the Company's efforts to identify all internal systems with year
2000 issues, it is likely that unexpected problems will arise. As with most
businesses, the Company will also be at risk from external infrastructure
failures that could arise from year 2000 failures. It is possible, for example,
that electrical power, telephone and financial networks across the nation will
experience breakdowns in the days and weeks following January 1, 2000. There is
also a real possibility of failures of key components in the national
transportation infrastructure or delays in rail, over-the-road and air shipments
due to failures in transportation control systems due to the year 2000 problem.
Investigation and assessment of risks associated with such ubiquitous and
interconnected utility systems and transportation systems are beyond the
resources of the Company. The failure by the Company or third parties to correct
a material year 2000 problem could result in an interruption in, or a failure
of, certain of the Company's normal business activities or operations. Such
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition.
23
<PAGE>
CONTINGENCY PLANS The Company intends to have two weeks of inventory on hand to
support a possible interruption in production. The Company is also scheduling
work and projects so that an interruption of either the information system or
production would not cause a work stoppage. An emergency call list will be in
place when the system comes up on January 2, 2000 in case of an emergency.
NEW ACCOUNTING PRONOUNCEMENT
In June 1999, the FASB issued Statement of Financial Accounting Standards No.
137, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
137"). SFAS 137 is an amendment to Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
137 establishes accounting and reporting standards for all derivative
instruments. SFAS 137 is effective for fiscal years beginning after June 15,
2000. The Company does not currently have any derivative instruments and,
accordingly, does not expect the adoption of SFAS 137 to have an impact on its
financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company's only financial instrument with market risk exposure is its
variable rate line of credit. At September 30, 1999, the Company had $5.0
million outstanding under this credit line at an annual interest rate of 6.65
percent. A hypothetical 10 percent change in interest rates would not have a
material impact on the Company's cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
The financial statements and notes thereto required by this item begin on page
F-1 as listed in Item 14 of Part IV of this document.
Unaudited quarterly financial data for each of the seven quarters in the period
ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER(1)
- ----------------------------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
1999
Net sales $ 13,563 $ 22,228 $ 24,315 n/a
Gross margin 6,210 9,177 10,385 n/a
Net loss (2) 5,456) (11,428) (5,262) n/a
Basic and diluted net loss per share (0.62) (1.29) (0.60) n/a
1998
Net sales $ 13,040 $ 25,739 $ 32,630 $ 28,711
Gross margin 6,153 12,302 16,192 14,903
Net income (loss) (4,318) (6,240) 182 334
Basic net income (loss) per share (0.50) (0.72) 0.02 0.04
Diluted net income (loss) per share (0.50) (0.72) 0.02 0.03
</TABLE>
(1) Quarterly statement of operations data for 1999 includes only three quarters
of activity due to the Company's change in its fiscal year during 1999 from a
calendar year to a fiscal year ended September 30. (2)Included in net loss in
the first and second quarters of 1999, respectively, is a restructuring charge
totaling $1,100 and $1,584 on a pre-tax basis.
24
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
Information required by this item is included under the captions ELECTION OF
DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE, in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
Information required by this item is included under the captions EXECUTIVE
COMPENSATION, DIRECTOR COMPENSATION, EMPLOYMENT CONTRACTS AND SEVERANCE AND
CHANGE-IN-CONTROL ARRANGEMENTS and COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS in the Company's Proxy Statement for its
2000 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------- --------------------------------------------------------------
Information required by this item is included under the caption SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT in the Company's Proxy
Statement for its 2000 Annual Meeting of Shareholders and is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
Information required by this item is included under the caption COMPENSATION
COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS AND
MANAGEMENT TRANSACTIONS in the Company's Proxy Statement for its 2000 Annual
Meeting of Shareholders and is incorporated herein by reference.
25
<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 - September 30, 1999 and December 31, 1998 F-2
Statements of Operations - nine months ended September 30, 1999
and years ended December 31, 1998 and 1997 F-3
Statements of Shareholders' Equity (Deficit) - nine months ended
September 30, 1999 and years F-4 ended December 31, 1998 and 1997
Statements of Cash Flows - nine months ended September 30, 1999 and
years ended December 31, 1998 and 1997 F-5
Notes to Financial Statements F-6
Report of Independent Public Accountants on Financial Statement
Schedule
F-17
Schedule II Valuation and Qualifying Accounts F-18
(b) REPORTS ON FORM 8-K
There was one report on Form 8-K filed during the quarter ended September 30,
1999 under Item 8. Change in Fiscal Year, dated July 13, 1999 and filed July 23,
1999.
(c) EXHIBITS
Exhibits are listed on the Index to Exhibits following the financial statements
included in this report.
26
<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: December 24, 1999
-----------------
GARDENBURGER, INC.
By: /s/ Lyle G. Hubbard
--------------------------------
Lyle G. Hubbard
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on December 24, 1999.
Signature Title
- --------- -----
/s/ Lyle G. Hubbard Director, President and Chief Executive Officer
- ------------------------ (Principal Executive Officer)
Lyle G. Hubbard
/s/ Richard C. Dietz Executive Vice President,
- ------------------------ Chief Financial Officer, Secretary and Treasurer
Richard C. Dietz (Principal Financial and Accounting Officer)
/s/ Kyle A. Anderson Director
- ------------------------
Kyle A. Anderson
/s/ Alexander P. Coleman Director
- ------------------------
Alexander P. Coleman
/s/ Jason M. Fish Director
- ------------------------
Jason M. Fish
/s/ Ronald C. Kesselman Director
- ------------------------
Ronald C. Kesselman
/s/ Richard L. Mazer Director
- ------------------------
Richard L. Mazer
/s/ Mary O. McWilliams Director
- ------------------------
Mary O. McWilliams
/s/ Michael L. Ray Director
- ------------------------
Michael L. Ray
/S/ E. Kay Stepp Chairman of the Board
- ------------------------
E. Kay Stepp
/s/ Paul F. Wenner Founder, Chief Creative Officer
- ------------------------ and Director
Paul F. Wenner
27
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
3.1 Restated Articles of Incorporation, as amended April 14, 1999 (18)
3.2 1995 Restated Bylaws, as amended July 13, 1999 (20)
10.1 Amended and Restated Rights Agreement between the Company and
First Chicago Trust Company of New York, dated July 15, 1999 (20)
10.2 Purchase and Sale Agreement and Receipt For Earnest Money between
the Iseli Family Partnership (Seller) and the Company (Buyer), as
amended, dated May 8, 1995 (5)
10.3 Purchase and Sale Agreement and Receipt for Earnest Money between
the Company and Ironwood Investments, dated August 11, 1999
10.4 Amended and Restated Business Loan Agreement, dated April 14,
1999, between Bank of America NT & SA and Gardenburger, Inc. (18)
10.5 Amendment No. 1, dated May 21, 1999, to Business Loan Agreement,
dated April 14, 1999, between the Company and Bank of America NT
& SA (19)
10.6 Amendment No. 2, dated July 9, 1999, to Business Loan Agreement,
dated April 14, 1999, between the Company and Bank of America NT
& SA (19)
10.7 Plant Lease-1416 S.E. 8th, Portland, Oregon (1)
10.8 First Amendment to Plant Lease - 1416 S.E. 8th, Portland,
Oregon (11)
10.9 Second Amendment to Plant Lease - 1416 S.E. 8th, Portland,
Oregon (12)
10.10 Third Amendment to Plant Lease - 1416 S.E. 8th, Portland, Oregon,
dated January 1, 1999 (17)
10.11 Consent to Assignment and Option to purchase 1005 S.E. Washington,
Portland, Oregon (1)
10.12 Morrison Plaza Office Lease, dated October 29, 1996 (10)
10.13 First Amendment to Morrison Plaza Office Lease, dated December 9,
1997 (11)
10.14 Lease extension for Morrison Plaza Office Building, dated
September 11, 1998 (14)
10.15 Facility Lease by and between Freeport Center Associates, a Utah
general partnership and the Company, dated May 28, 1997 (9)
10.16 Addendum, dated August 1, 1997, to Facility Lease by and between
Freeport Center Associates, and the Company (11)
10.17 Warehouse Lease between Freeport Center Associates and the
Company, dated January 25, 1999 (17)
10.18 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of December 17, 1997 (11)
10.19 First Amendment, dated June 4, 1998, to Lease Agreement, dated
December 17, 1997 between BA Leasing & Capital Corporation and the
Company (13)
E-1
<PAGE>
Exhibit No.
- -----------
10.20 Lease Agreement between BA Leasing & Capital Corporation and the
Company, dated as of May 28, 1998 (14)
10.21 First Amendment, dated January 14, 1999, to Lease Agreement
between BA Leasing & Capital Corporation and the Company, dated as
of May 28, 1998 (17)
10.22 Purchase Agreement Assignment, dated June 23, 1999, between
Gardenburger, Inc. and BA Leasing & Capital Corporation (19)
10.23 Note Purchase Agreement, dated as of March 27, 1998, between
the Company and Dresdner Kleinwort Benson Private Equity
Partners L.P. (12)
10.24 Convertible Senior Subordinated Note, dated March 27, 1998 (12)
10.25 Registration Rights Agreement, dated as of March 27, 1998, between
the Company and Dresdner Kleinwort Benson Private Equity
Partners L.P. (12)
10.26 Stock Purchase Agreement, dated March 29, 1999, by and between
Gardenburger, Inc. and Rosewood Capital III, L.P., Farallon
Capital Management LLC, Gruber & McBaine Capital Management, LLC,
BT Capital Investors LP and certain other purchasers identified
therein (16)
10.27 Amendment and Waiver of Stock Purchase Agreement, dated April 14,
1999, by and between Gardenburger, Inc., and the Purchasers
identified on Exhibit A thereto (18)
10.28 Investor Rights Agreement, dated April 14, 1999, by and between
Gardenburger, Inc., and the investors identified on Exhibit A
thereto (18)
10.29 1992 First Amended and Restated Combination Stock Option Plan, as
amended (15)(19)
10.30 Form of Incentive Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)(17)
10.31 Form of Non-Statutory Stock Option Agreement for Option grants to
executive officers after May 24, 1995 (15)(17)
10.32 Paul F. Wenner Stock Option Agreement (2)(15)
10.33 Lyle Hubbard Employment Agreement, dated April 14, 1996 (10)(15)
10.34 Agreement to Extend and Amend Employment Agreement, dated November
16, 1998, to Lyle Hubbard Employment Agreement, dated April 14,
1996 (15)(17)
10.35 Agreement to Extend and Amend Employment Agreement, dated March
5, 1999, to Lyle Hubbard Employment Agreement, dated April 14,
1996 (15)(17)
10.36 Third Amendment to Employment Agreement, dated December 9, 1999,
between the Company and Lyle Hubbard (15)
10.37 Paul F. Wenner Employment Agreement and Amendment thereto (1)(15)
10.38 Form of Severance Agreement for Executive Officers (10)(15)
10.39 Form of Indemnification Agreement between the Company and its
Officers and Directors (15)(17)
10.40 2000 Executive Annual Incentive Plan (15)
E-2
<PAGE>
Exhibit No.
- -----------
10.41 Retention Incentive Agreement, dated December 9, 1999, between the
Company and Lyle Hubbard (15)
10.42 Form of Retention Incentive Agreement between the Company and nine
senior executives (15)
10.43 Form of Change in Control Agreement between the Company and nine
senior executives (15)
23 Consent of Arthur Andersen LLP
27 Financial Data Schedule
99 Description of Common Stock of Gardenburger, Inc. (18)
(1) Incorporated by reference to the Company's Form S-1 Registration Statement
(Commission File No. 33-46623), filed May 6, 1992.
(2) Incorporated by reference to the Company's 1992 Form 10-K Annual Report,
filed March 23, 1993.
(3) Incorporated by reference to the Company's 1993 Form 10-K Annual Report,
filed March 23, 1994.
(4) Incorporated by reference to the Company's 1994 Form 10-K Annual Report,
filed March 30, 1995.
(5) Incorporated by reference to the Company's 1995 Form 10-K Annual Report,
filed March 29, 1996.
(6) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1996, filed November 4, 1996.
(7) Incorporated by reference to the Company's Form 8-K Current Report, filed
May 8, 1996.
(8) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended September 30, 1997, filed November 4, 1997.
(9) Incorporated by reference to the Company's Form 10-Q Quarterly Report for
the quarter ended June 30, 1997, filed August 14, 1997.
(10) Incorporated by reference to the Company's 1996 Form 10-K Annual Report,
filed March 25, 1997.
(11) Incorporated by reference to the Company's 1997 Form 10-K Annual Report,
filed March 31, 1998.
(12) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1998, filed May 15, 1998.
(13) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1998, filed August 12, 1998.
(14) Incorporated by reference to the Company's Form 10-Q for the quarter ended
September 30, 1998, filed November 5, 1998.
(15) Management contract or compensatory plan or arrangement.
(16) Incorporated by reference to the Company's Form 8-K Current Report, filed
April 1, 1999.
(17) Incorporated by reference to the Company's Form 10-K for the year ended
December 31, 1998, filed March 31, 1999.
(18) Incorporated by reference to the Company's Form 10-Q for the quarter ended
March 31, 1999, filed May 17, 1999.
(19) Incorporated by reference to the Company's Form 10-Q for the quarter ended
June 30, 1999, filed August 13, 1999.
(20) Incorporated by reference to the Company's Registration Statement on Form
S-8 (No. 333-92665), filed December 13, 1999.
E-3
<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 September 30, 1999 and December 31, 1998 and the related
statements of operations, shareholders' equity (deficit) and cash flows for the
nine months ended September 30, 1999 and for each of the two years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gardenburger, Inc. as of
September 30, 1999 and December 31, 1998, and the results of its operations and
its cash flows for the nine months ended September 30, 1999 and each of the two
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Portland, Oregon,
November 5, 1999 (except for the matters discussed in Note 14, as to which the
date is December 8, 1999).
F-1
<PAGE>
GARDENBURGER, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 7,033 $ 2,320
Accounts receivable, net of allowances of
$301 and $148 6,133 14,969
Inventories, net 7,268 12,457
Prepaid expenses 2,207 4,515
Deferred income taxes 4,775 1,989
------------------- -------------------
Total Current Assets 27,416 36,250
Property, Plant and Equipment, net of accumulated
depreciation of $3,960 and $3,174 10,275 12,238
Deferred Income Taxes 12,691 4,242
Other Assets, net of accumulated amortization of
$804 and $534 2,320 2,318
------------------- -------------------
Total Assets $ 52,702 $ 55,048
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term note payable $ 5,000 $ 15,000
Accounts payable 6,669 9,708
Payroll and related liabilities payable 941 1,822
Other current liabilities 3,065 2,366
------------------- -------------------
Total Current Liabilities 15,675 28,896
Other Long-Term Liabilities 199 226
Convertible Notes Payable 15,000 15,000
Convertible Redeemable Preferred Stock 32,147 -
Shareholders' Equity (Deficit):
Preferred Stock, no par value, 5,000,000 shares
authorized - -
Common Stock, no par value, 25,000,000 shares
authorized; shares issued and outstanding:
8,841,451 and 8,733,811 10,619 9,717
Additional paid-in capital 4,277 4,275
Retained deficit (25,215) (3,066)
------------------- -------------------
Total Shareholders' Equity (Deficit) (10,319) 10,926
------------------- -------------------
Total Liabilities and Shareholders' Equity (Deficit) $ 52,702 $ 55,048
=================== ===================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-2
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Nine
Months Ended
September 30, For the Year Ended December 31,
------------------------------------------
1999 1998 1997
------------------- -------------------- -------------------
<S> <C> <C> <C>
Net sales $ 60,106 $ 100,120 $ 56,837
Cost of goods sold 34,334 50,570 27,236
------------------- -------------------- -------------------
Gross margin 25,772 49,550 29,601
Operating expenses:
Sales and marketing 48,021 58,513 26,191
General and administrative 5,064 5,387 5,471
Restructuring charge 2,684 - -
------------------- -------------------- -------------------
55,769 63,900 31,662
------------------- -------------------- -------------------
Operating loss (29,997) (14,350) (2,061)
Other income (expense):
Interest income 197 115 185
Interest expense (1,596) (1,404) (40)
Other, net 7 (200) (136)
------------------- -------------------- -------------------
(1,392) (1,489) 9
------------------- -------------------- -------------------
Loss before benefit from income taxes (31,389) (15,839) (2,052)
Benefit from income taxes 11,223 5,797 659
------------------- -------------------- -------------------
Loss before preferred dividends (20,166) (10,042) (1,393)
Preferred dividends (1,980) - -
=================== ==================== ===================
Net loss available for common shareholders $ (22,146) $ (10,042) $ (1,393)
=================== ==================== ===================
Net loss per share - basic and diluted $ (2.51) $ (1.16) $ (0.16)
=================== ==================== ===================
Shares used in per share calculations 8,812 8,659 8,584
=================== ==================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
For the Nine Months Ended September 30, 1999
and the Years Ended December 31, 1998 and 1997
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Additional Retained Total
--------------------------- Paid-In Earnings Shareholders'
Shares Amount Capital (Deficit) Equity (Deficit)
------------ ------------ ------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 8,566,456 $ 8,468 $ 4,139 $ 8,372 $ 20,979
Exercise of common stock options 41,798 183 - - 183
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 64 - 64
Foreign currency translation - - - 6 6
Net loss - - - (1,393) (1,393)
------------ ------------ ------------- ------------- ----------------
Balance at December 31, 1997 8,608,254 8,651 4,203 6,985 19,839
Exercise of common stock options 74,586 541 - - 541
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 72 - 72
Issuance of shares in exchange for
interest on convertible notes payable 50,971 525 - - 525
Foreign currency translation - - - (9) (9)
Net loss - - - (10,042) (10,042)
------------ ------------ ------------- ------------- ----------------
Balance at December 31, 1998 8,733,811 9,717 4,275 (3,066) 10,926
Exercise of common stock options 55,660 377 - - 377
Income tax benefit of non-qualified stock
option exercises and disqualifying
dispositions - - 2 - 2
Issuance of shares in exchange for
interest on convertible notes payable 51,980 525 - - 525
Accrual of preferred dividends - - - (1,980) (1,980)
Foreign currency translation - - - (3) (3)
Loss before preferred dividends - - - (20,166) (20,166)
------------ ------------ ------------- ------------- ----------------
Balance at September 30, 1999 8,841,451 $ 10,619 $ 4,277 $ (25,215) $ (10,319)
============ ============ ============= ============= ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine
Months Ended For the Year Ended December 31,
September 30, ------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Loss before preferred dividends $ (20,166) $ (10,042) $ (1,393)
Effect of exchange rate on operating accounts (3) (9) 6
Adjustments to reconcile loss before preferred
dividends to net cash flows used in operating activities:
Depreciation and amortization 1,600 1,637 977
Non-cash portion of restructuring charge 1,584 - -
Other non-cash expenses 212 409 -
Loss on sale of fixed assets 19 75 145
Deferred income taxes (11,235) (5,956) (307)
(Increase) decrease in:
Accounts receivable, net 8,836 (6,896) (5,273)
Inventories, net 5,189 (9,254) 1,587
Prepaid expenses 2,308 (2,194) (1,943)
Income taxes receivable, net - 475 178
Increase (decrease) in:
Accounts payable (3,039) 6,543 992
Payroll and related liabilities (881) 206 937
Other accrued liabilities 699 1,264 501
---------------- ---------------- -----------------
Net cash used in operating activities (14,877) (23,742) (3,593)
Cash flows from investing activities:
Payments for purchase of property and equipment (1,031) (11,282) (12,141)
Proceeds from sale of equipment 33 5,355 10,477
Other assets, net 42 (102) (143)
---------------- ---------------- -----------------
Net cash used in investing activities (956) (6,029) (1,807)
Cash flows from financing activities:
Proceeds from (payments on) line of credit, net (10,000) 15,000 -
Proceeds from issuance of convertible notes payable - 15,000 -
Financing fees from issuance of convertible notes payable - (1,124) -
Issuance of preferred stock, net of issuance costs 30,167 - -
Proceeds from exercise of common stock options and warrants 377 541 183
Income tax benefit of non-qualified stock option
exercises and disqualifying dispositions 2 72 64
---------------- ---------------- -----------------
Net cash provided by financing activities 20,546 29,489 247
---------------- ---------------- -----------------
Increase (decrease) in cash and cash equivalents 4,713 (282) (5,153)
Cash and cash equivalents:
Beginning of period 2,320 2,602 7,755
---------------- ---------------- -----------------
End of period $ 7,033 $ 2,320 $ 2,602
================ ================ =================
</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.
CHANGE IN REPORTING PERIOD
In July 1999, the Company changed its fiscal year end to September 30. Fiscal
1999 ended on September 30, 1999 and fiscal 2000 began October 1, 1999. For
purposes of these footnotes, the nine month period ended September 30, 1999 will
be referred to herein as the year ended September 30, 1999. See Note 8.
Unaudited Fiscal Year Operating Results. Summary operating results for the nine
months ended September 30, 1998 are as follows:
Net sales $ 71,409
Cost of goods sold 36,762
Gross margin 34,647
Operating expenses 50,031
Operating loss (15,384)
Net loss available for common shareholders (10,362)
Net loss per share - basic and diluted $ (1.20)
Shares used in per share calculations 8,639
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Management believes that the estimates used
are reasonable.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with maturities at the
date of purchase of 90 days or less.
INVENTORIES
Inventories are valued at standard cost, which approximates the lower of cost
(using the first-in, first-out (FIFO) method), or market, and include materials,
labor and manufacturing overhead.
F-6
<PAGE>
OTHER ASSETS
Other assets consist principally of $1,151 and $1,085 in deferred financing
fees, net of accumulated amortization, as of September 30, 1999 and December 31,
1998, respectively. Other assets also includes $780 and $873 in goodwill, net of
accumulated amortization, as of September 30, 1999 and December 31, 1998,
respectively. Deferred financing fees are being amortized over the maturity
period of the related debt and goodwill is being amortized using the
straight-line method over ten years.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives of
the assets. Leasehold improvements are amortized over the lease term or the
estimated useful life of the asset, whichever is shorter. Estimated useful lives
are as follows:
BUILDINGS AND IMPROVEMENTS 3-40 YEARS MACHINERY AND EQUIPMENT 7-30 YEARS
OFFICE FURNITURE AND EQUIPMENT 3-10 YEARS VEHICLES 5 YEARS
LONG-LIVED ASSETS
In accordance with SFAS 121, long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. For purposes of
evaluating the recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows of the asset.
SEGMENT REPORTING
The Company adopted Statement of Financial Accounting Standards No. 131 (SFAS
131), DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION for
the year ended December 31, 1998. Based upon definitions contained within SFAS
131, the Company has determined that it operates in one segment. In addition,
virtually all sales are domestic.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS The Company invests its
excess cash with high credit quality financial institutions, which bear minimal
risk, and, by policy, limits the amount of credit exposure to any one financial
institution.
For the year ended September 30, 1999, one customer accounted for approximately
11 percent of revenue and 5 percent of the accounts receivable balance at
September 30, 1999.
For the year ended December 31, 1998, one customer accounted for approximately
14 percent of revenue and 8 percent of the accounts receivable balance at
December 31, 1998.
For the year ended December 31, 1997, two customers accounted for approximately
19 percent and 10 percent of revenue and 10 percent and 7 percent of the
accounts receivable balance at December 31, 1997, respectively.
Historically, the Company has not incurred significant losses related to its
accounts receivable.
F-7
<PAGE>
REVENUE RECOGNITION
Revenue from the sale of products is generally recognized at time of shipment to
the customer. Promotional and other discounts are accrued at time of shipment
based on historical experience.
ADVERTISING COSTS
Advertising costs, including media advertising, couponing and other advertising,
which are included in sales and marketing expense, are expensed when the
advertising first takes place. Advertising expense was approximately $17,313,
$19,904 and $3,844 in 1999, 1998 and 1997, respectively.
SLOTTING FEES
Slotting fees associated with a new product or new territory are initially
recorded as an asset and the related expense is recognized ratably over the
12-month period beginning with the initial introduction of the product. Slotting
agreements refer to oral arrangements pursuant to which the retail grocer allows
the Company's products to be placed on the store's shelves in exchange for a
slotting fee. If a slotting fee agreement were breached, the Company would
pursue available legal remedies to enforce the agreement as appropriate.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Research and
development expense was approximately $553 in 1999, $1,121 in 1998 and $565 in
1997.
NET LOSS PER SHARE
Basic earnings per share (EPS) is calculated using the weighted average number
of common shares outstanding for the period and diluted EPS is computed using
the weighted average number of common shares and dilutive common equivalent
shares outstanding.
Basic EPS and diluted EPS are the same for all periods presented since the
Company was in a loss position in all periods.
Potentially dilutive securities that are not included in the diluted EPS
calculation because they would be antidilutive are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------
1999 1998 1997
------------------- ----------- ------------
<S> <C> <C> <C>
Stock options 3,247 2,768 2,447
Convertible notes 1,237 1,163 -
Convertible preferred stock 3,250 - -
=================== =========== ============
Total 7,734 3,931 2,447
=================== =========== ============
</TABLE>
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
conform to the current year presentation.
F-8
<PAGE>
2. INVENTORIES
- ----------------
Detail of inventories at September 30, 1999 and December 31, 1998 is as follows:
1999 1998
---------------- -----------------
Raw materials $ 2,672 $ 2,843
Packaging and supplies 538 275
Finished goods 4,058 9,339
================ =================
$ 7,268 $12,457
================ =================
3. PROPERTY, PLANT AND EQUIPMENT
- ----------------------------------
Detail of property, plant and equipment at September 30, 1999 and December 31,
1998 is as follows:
1999 1998
------------------ --------------------
Land 721 $ 787
Building and improvements 2,504 3,104
Machinery and equipment 6,807 7,320
Office furniture and equipment 4,203 4,201
------------------ --------------------
14,235 15,412
Less accumulated depreciation (3,960) (3,174)
================== ====================
$10,275 $12,238
================== ====================
4. LINE OF CREDIT
- -------------------
In April 1999, the Company entered into an Amended and Restated Business Loan
Agreement (the "Agreement") with Bank of America NT & SA. The Agreement provides
for a credit line of up to $20 million with interest at the Bank's Reference
Rate or, at the option of the Company, at LIBOR plus 1.25 percentage points or
at the Offshore Rate plus 1.25 percentage points. The line of credit is
available until June 1, 2000. The Agreement also provides for a standby letter
of credit of up to $400 (included in the $20 million limit) with a maximum
maturity of March 31, 2001. The Agreement provides that the line of credit is to
be secured by all machinery, equipment, inventory, receivables and intangible
assets of the Company. At September 30, 1999, the Company had $5,000 outstanding
under the line of credit at an annual interest rate of 6.65 percent.
The Company is required to meet certain financial covenants under the Agreement
as follows:
- - To maintain a current ratio of at least 1.5:1.0 measured monthly;
- - Not to incur an operating loss of more than $5 million for the year ending
December 31, 1999; and
- - To maintain a minimum fixed charge coverage ratio of at least 1.25:1.00
measured on a rolling four-quarter basis, beginning December 31, 2000.
At September 30, 1999, the Company anticipated being out of compliance with the
operating loss covenant at December 31, 1999. In December 1999, the Company
signed a letter of commitment for a new line of credit.
See Note 14. Subsequent Events.
F-9
<PAGE>
5. LEASE COMMITMENTS
- ----------------------
Future minimum lease payments at September 30, 1999 are as follows:
YEAR ENDED SEPTEMBER 30,
- --------------------------------------
2000 $ 3,714
2001 3,473
2002 3,558
2003 3,345
2004 3,244
Thereafter 3,589
------------
Total $20,923
============
Rental expense for the years ended September 30, 1999, December 31, 1998 and
1997 was $2,355, $2,613 and $601, respectively.
6. CONVERTIBLE NOTES PAYABLE
- ------------------------------
The Company has outstanding $15 million of 7 percent Convertible Senior
Subordinated Notes (the "Notes") held by Dresdner Kleinwort Benson Private
Equity Partners L.P. ("Dresdner"). The Notes are convertible into shares of the
Company's Common Stock at the option of the holder until maturity in 2003, at
which time they will be due in full if not previously converted. The Company may
also elect to redeem the Notes, if not previously converted, at any time after
March 27, 2000. The conversion price of the Notes at September 30, 1999 was
$12.10 per share, as adjusted to reflect the issuance of convertible preferred
stock as discussed in Note 9 and stock option grants. Upon adjustment of the
conversion price of the Company's Series B convertible preferred stock as
discussed in Note 9, the conversion price of the Notes will likely decrease to
$11.49 per share. Under the terms of the Note Purchase Agreement relating to the
Notes, the Company must comply with certain covenants and maintain certain
financial ratios as follows:
- - current assets to current liabilities of at least 1.575 to 1.0, measured
monthly;
- - total liabilities, exclusive of the Notes and convertible redeemable
preferred stock, to tangible net worth, inclusive of the Notes and
convertible redeemable preferred stock, not to exceed 1.1 to 1.0, measured
monthly; and
- - a minimum fixed charge coverage ratio, as defined in the Note Purchase
Agreement, of 1.08 to 1.0, measured annually.
At September 30, 1999, the Company was in compliance with all of its financial
ratio covenants under the Notes.
7. INCOME TAXES
- -----------------
The Company accounts for income taxes under Statement of Financial Accounting
Standards 109, ACCOUNTING FOR INCOME TAXES. The Company realizes tax benefits as
a result of the exercise of nonqualified stock options and the exercise and
subsequent sale of certain incentive stock options (disqualifying dispositions).
For financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits is credited to additional paid-in capital. Tax
F-10
<PAGE>
benefits of $2, $72 and $64 were credited to additional paid-in capital in 1999,
1998 and 1997, respectively. The provision for (benefit from) income taxes is as
follows:
1999 1998 1997
------------ ----------- ----------
CURRENT:
Federal $ - $ 129 $ (352)
State 12 30 -
------------ ----------- ----------
12 159 (352)
DEFERRED (11,235) (5,956) (307)
============ =========== ==========
$(11,223) $ (5,797) $ (659)
============ =========== ==========
Total deferred income tax assets were $17,907 and $6,751 and liabilities were
$441 and $520 at September 30, 1999 and December 31, 1998, respectively.
Individually significant temporary differences are as follows:
1999 1998
------------ ------------
Net operating loss carryforwards $15,055 $ 4,602
Provision for trade promotions and discounts 558 1,046
The Company recorded a benefit from income taxes of $15.0 million related to
$41.2 million of net operating loss carryforwards. No valuation allowance has
been recorded against the deferred tax asset for the Company's net operating
losses because the Company believes it is more likely than not that the net
operating losses will be recognized as a result of future operating profits. The
Company's basis for such assertion is due to its expectation that the high level
of discretionary expenses incurred in recent years will decline substantially as
the Company moves to a more profit driven business model. In addition, the
Company believes its recent workforce downsizing and production facility
consolidation will have a significant positive impact on future results of
operations. However, the Company may be required to record a valuation allowance
against the deferred tax asset for net operating losses in future periods if its
revised business goals are not achieved. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained elsewhere
in this document for additional information regarding the Company's strategy and
assertions regarding the realization of the net operating loss carryforwards.
At September 30, 1999, the Company had available federal and state income tax
carryforwards, net of tax, of $14,116 and $939, respectively. The federal and
state income tax carryforwards expire through the fiscal years 2019 and 2014,
respectively.
The reconciliation between the effective tax rate and the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ------------ ----------
<S> <C> <C> <C>
Statutory federal income tax rate (34.0)% (34.0) % (34.0) %
State taxes, net of federal income tax benefit (1.3) (3.9) (3.5)
Tax exempt interest and dividends -- (0.1) (1.7)
Trademark and goodwill amortization 0.1 0.2 1.5
Meals and entertainment 0.1 0.4 1.8
Revision of prior year estimates -- -- 1.6
Other (0.7) 0.8 2.2
---------- ------------ ----------
Effective tax rate (35.8)% (36.6) % (32.1) %
========== ============ ==========
</TABLE>
F-11
<PAGE>
8. UNAUDITED FISCAL YEAR OPERATING RESULTS
- --------------------------------------------
The following statement of operations data is included for informational
purposes only and is unaudited.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30, 1999 1998 1997 1996 1995
- --------------------------------------- ----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net sales $ 88,817 $ 88,406 $48,144 $ 40,258 $ 36,141
Cost of goods sold 48,141 44,295 23,888 19,924 17,339
Gross margin 40,676 44,111 24,256 20,334 18,802
Operating expenses 69,639 57,755 28,465 18,247 14,521
Operating income (loss) (28,963) (13,644) (4,209) 2,087 4,281
Net income (loss) available for
common shareholders (21,826) (9,384) (2,667) 1,675 2,913
</TABLE>
9. CONVERTIBLE PREFERRED STOCK
- --------------------------------
In April 1999, the Company closed a stock purchase agreement selling $32.5
million of convertible preferred stock to several investors. Under the terms of
the agreement, the Company sold an aggregate of 2,763 shares of Series A
convertible preferred stock and 487 shares of Series B convertible preferred
stock to members of the investor group, at a price of $10 per share for each
series, or an aggregate consideration of $32.5 million, and received net
proceeds of $30.2 million. At September 30, 1999, the preferred shares were
convertible at a price of $10 per share (subject to antidilution adjustments) at
any time following issuance at the discretion of the holder. The Company is
required to meet certain performance targets for the twelve months ending
December 31, 1999 under the Series B preferred stock agreement. These targets
are: 1) $135.0 million in net sales, and 2) an operating loss of not more than
$1.0 million. It is anticipated that the Series B conversion price will be
adjusted to $3.75 per share due to the likelihood that the Company will not meet
the specified performance targets for calendar 1999. If the conversion price is
adjusted, the Company will be required to record approximately $8.1 million of
additional preferred dividends to account for this beneficial conversion
feature. Such non-cash charge represents the implied value of the beneficial
conversion feature and would be recorded in the first quarter of fiscal 2000.
Both series of preferred stock are entitled to a 12 percent cumulative annual
dividend payable upon redemption of the stock or in the event of a sale or
liquidation of the Company. Shares may not be redeemed until five years after
the original date of issuance, at which time they may be redeemed at the
election of the holders or, under certain conditions, at the discretion of the
Company. The redemption value of the Series A and Series B convertible preferred
stock is $27.6 million and $4.9 million, respectively. The difference between
the carrying amount and the redemption value of the convertible preferred stock
is being accreted as additional preferred dividends over the period until
redemption.
10. RELATED PARTY TRANSACTIONS
- -------------------------------
The Company leases its S.E. 8th Avenue plant facility from a shareholder of the
Company for $3 per month. The lease is for a one-year term ending December 31,
1999, which has been renewed on a month-to-month basis terminable upon 60 days'
notice.
F-12
<PAGE>
11. SHAREHOLDERS' EQUITY
- -------------------------
PREFERRED STOCK
The Company has authorized 5,000 shares of preferred stock, of which 3,250
shares have been issued (see Note 9). Such stock may be issued by the Board of
Directors in one or more series, with the preferences, limitations and rights of
each series to be determined by the Board of Directors.
PREFERRED SHARE PURCHASE RIGHTS
In April 1996, the Company declared a dividend distribution of one preferred
share purchase right on each outstanding share of the Company's Common Stock.
Each right, when exercisable, will entitle shareholders to buy one one-hundredth
of a share of Series A Junior Participating Preferred Stock of the Company at an
exercise price of $47 per share. The rights will become exercisable if a person
or group (an "Acquiring Person") acquires 15 percent or more of the Company's
Common Stock (with certain exceptions) or announces a tender offer for 15
percent or more of the Common Stock. With the exception of certain cash tender
offers, if a person becomes an Acquiring Person, or in the event of certain
mergers of the Company with an Acquiring Person, the rights will become
exercisable for shares of Common Stock with a market value of two times the
exercise price of the right. The Company's Board of Directors is entitled to
redeem the rights at $.01 per right at any time before a person has acquired 15
percent or more of the outstanding Common Stock.
STOCK OPTIONS
PLAN OPTIONS
- ------------
The Company has a 1992 First Amended and Restated Combination Stock Option Plan
(the "Plan"), which provides for the issuance of incentive stock options
("ISOs") to employees and officers of the Company and non-statutory stock
options ("NSOs") to employees, officers, directors and consultants of the
Company. Under the Plan, the exercise price of an ISO cannot be less than the
fair market value on the date of grant and the exercise price of an NSO cannot
be less than 85 percent of fair market value on the date of grant. Options
granted under the Plan generally vest three to five years from the date of grant
and generally expire ten years from the date of grant. Vesting may accelerate
upon a change in control of the Company. At September 30, 1999, the Company had
1,961 shares of Common Stock reserved for issuance under the Plan.
Activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE SHARES SUBJECT TO WEIGHTED AVERAGE
FOR GRANT OPTIONS EXERCISE PRICE
--------------------- --------------------- ----------------------
<S> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 761 1,373 $ 8.87
Options granted (172) 172 7.17
Options canceled 60 (60) 9.12
Options exercised -- (42) 4.37
--------------------- --------------------- ----------------------
BALANCES, DECEMBER 31, 1997 649 1,443 8.78
Options granted (172) 172 11.50
Options canceled 101 (101) 8.12
Options exercised -- (75) 7.27
--------------------- --------------------- ----------------------
BALANCES, DECEMBER 31, 1998 578 1,439 9.24
Options granted (516) 516 9.96
Options canceled 57 (57) 8.90
Options exercised -- (56) 7.18
===================== ===================== ======================
BALANCES, SEPTEMBER 30, 1999 119 1,842 $ 9.51
===================== ===================== ======================
</TABLE>
F-13
<PAGE>
NON-PLAN OPTIONS
- ----------------
On March 10, 1992, the Company granted a non-statutory stock option to its then
Chief Executive Officer exercisable for 1,650 shares of the Company's Common
Stock. Such option is exercisable for a period of ten years from the date of
grant at an exercise price of $1.00 per share, the fair market value of the
Company's Common Stock on the date of grant. During 1996, an option covering 625
of the shares was exercised. At September 30, 1999, an option to purchase 1,025
shares of Common Stock was outstanding and exercisable in full. At September 30,
1999, 1,025 shares of the Company's Common Stock were reserved for issuance
under this option grant.
On April 14, 1996, the Company granted an option to its Chief Executive Officer
exercisable for 300 shares of the Company's Common Stock. Such option is
exercisable for a period of ten years from the date of grant at an exercise
price of $8.69 per share, subject to vesting provisions over a four year period.
At September 30, 1999, the entire option remained outstanding and the Company
had 300 shares reserved for issuance under this option grant. 240 of the shares
covered by this option were exercisable at September 30, 1999.
During 1999, the Company granted options to certain employees and two
consultants covering a total of 80 shares of the Company's Common Stock at an
average exercise price of $11.16, all of which were outstanding at September 30,
1999. The Company had 80 shares of its Common Stock reserved for issuance under
these options. The fair value of options granted to non-employees was not
material.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the Financial Accounting Standards Board issued SFAS 123 which
defines a fair value based method of accounting for employee stock options and
similar equity instruments and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans using
the method of accounting prescribed by APB 25. Entities electing to continue to
use the accounting treatment in APB 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value based method
of accounting defined in SFAS 123 had been adopted.
The Company has elected to account for its stock-based compensation plans under
APB 25; however, the Company has computed, for pro forma disclosure purposes,
the value of all options granted during 1999, 1998 and 1997 using the
Black-Scholes option pricing model as prescribed by SFAS 123 using the following
weighted average assumptions for grants:
1999 1998 1997
--------------- -------------- --------------
Risk-free interest rate 6.00% 5.50% 6.25%
Expected dividend yield 0% 0% 0%
Expected lives 6.5 years 6.5 years 6.5 years
Expected volatility 61.49% 60.77% 58.11%
Using the Black-Scholes methodology, the total value of options granted during
1999, 1998 and 1997 was $3,816, $1,058 and $760, respectively, which would be
amortized on a pro forma basis over the vesting period of the options (typically
three to four years). The weighted average per share fair value of options
granted during 1999, 1998 and 1997 was $6.41, $4.92 and $4.45, respectively.
F-14
<PAGE>
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss available to common
shareholders and net loss per share would approximate the pro forma disclosures
below:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------- ------------------------ --------------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net loss available to common
shareholders $(22,146) $(24,404) $(10,042) $(11,870) $(1,393) $(3,518)
Basic and diluted net loss
per share $(2.51) $(2.77) $(1.16) $(1.37) $(0.16) $(0.41)
</TABLE>
The following table summarizes information about all stock options outstanding
at September 30, 1999:
<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
9/30/99 Life - Years Price 9/30/99 Price
- -------------------- ---------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 1,025 2.3 $1.00 1,025 $1.00
3.08 1 4.3 3.08 1 3.08
6.12 - 6.78 206 7.2 6.54 109 6.64
6.87 - 7.94 331 7.2 7.52 232 7.45
8.69 - 8.97 695 6.9 8.78 434 8.75
9.56-10.41 312 9.2 10.05 34 9.89
10.90 - 11.75 589 6.1 11.58 351 11.60
12.31 - 13.56 88 7.5 12.79 71 12.74
==================== ================ ================ ============== ================ ==============
$ 1.00 - 13.56 3,247 5.6 $ 6.79 2,257 $ 5.58
==================== ================ ================ ============== ================ ==============
</TABLE>
At December 31, 1998 and 1997, 2,010 and 1,783 options, respectively, were
exercisable at weighted average exercise prices of $5.08 per share and $4.54 per
share, respectively.
12. 401(K) PLAN
- ----------------
The Company has a 401(k) Salary Deferral Plan, which covers all employees who
have reached the age of 18. The covered employees may elect to have an amount
deducted from their wages for investment in a retirement plan. The Company
matches 100 percent of employee contributions up to two percent of compensation.
The Company's contribution to this plan was approximately $112 in 1999, $137 in
1998 and $106 in 1997.
F-15
<PAGE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
- ---------------------------------------
Supplemental disclosure of cash flow information is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ---------------
<S> <C> <C> <C>
Cash paid during the period for interest $ 637 $ 552 $ --
Cash paid during the period for income taxes 10 11 13
Issuance of Common Stock in exchange for interest expense
on Convertible Notes 525 525 --
Preferred dividends 1,980 -- --
</TABLE>
14. SUBSEQUENT EVENTS
- ----------------------
In November 1999, the Company sold approximately 18 acres of land it owned in
Portland, Oregon for net proceeds to the Company of approximately $1,500,
resulting in a gain of $174, which will be reflected in other income in the
first quarter of fiscal 2000.
In December 1999, the Company signed a letter of commitment for a new line of
credit. The new line of credit is expected to have a $25 million limit with
similar provisions to the existing line of credit. The Company expects the only
financial covenant to be a limitation on cumulative net cash losses (as defined)
of $5 million during the three-year term of the agreement.
F-16
<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 November 5, 1999. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule included
on page F-18 is the responsibility of the Company's management and is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states, in all material respects, the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Portland, Oregon,
November 5, 1999
F-17
<PAGE>
SCHEDULE II
GARDENBURGER, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(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, 1997:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 177 $ 128 $ - $ 30 $ 275
Year Ended December 31, 1998:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 275 $ 146 $ - $ 273 $ 148
Nine Months Ended September 30, 1999:
Reserves deducted from asset accounts:
Allowance for uncollectible accounts $ 148 $ 190 $ - $ 37 $ 301
</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-18
EXHIBIT 10.3
THE GREATER PORTLAND/VANCOUVER COMMERCIAL
ASSOCIATION OF REALTORS(R)
PURCHASE AND SALE AGREEMENT AND RECEIPT FOR EARNEST MONEY
(OREGON-COMMERCIAL FORM)
Dated: August 11, 1999
BETWEEN: Gardenburger, Inc. ("Seller")
AND: Ironwood Investments ("Buyer")
Buyer agrees to buy and Seller agrees to sell, on the following terms, the real
property and all improvements thereon ("the Property") commonly known as
approximately 15.47 acres of industrial land -- See attached Exhibit "A"--
and located at NE 166th and Airport Way in the City of Portland, County of
Multnomah, Oregon legally described as follows: 1 North, 3 East, 19B Tax Lots
1400, 1500 and 1700 (which description shall be replaced by a metes and bounds
legal description after the preliminary commitment has been issued).
1. PURCHASE PRICE. The total purchase price is One Million Five Hundred
Seventy Nine Thousand Nine Hundred Twenty and no/100 Dollars ($1,579,920.00)
payable as follows: All cash at closing
Any earnest money paid to Seller shall be credited against the purchase price.
2. EARNEST MONEY RECEIPT. Upon execution of this Agreement, Buyer shall pay
Twenty Five Thousand and no/100 Dollars ($25,000.00) as earnest money (the
"Earnest Money") in the form of / / cash or / / check or /x/ promissory note.
If the Earnest Money is in the form of a promissory note, it is due and payable:
/ / upon execution of this Agreement by Buyer and Seller or /x/ upon
satisfaction or waiver by Buyer of the conditions to Buyer's obligation to
purchase the Property set forth in this Agreement or / /other: N/A. The Earnest
Money shall be deposited with /x/ First American Title Company (the "Title
Company") at the following branch: 1700 S.W. Fourth Avenue, Portland, OR,
97201-5512 or / / other: N/A
3. CONDITIONS TO PURCHASE. Buyer's obligation to purchase the Property is
conditioned on the following: See Addendum "A"
and/or Buyer's approval of the results of its property inspection described in
Section 4 below. If Buyer has not approved the results of Buyer's property
inspection by notice given to Seller within _____ twenty (20) days after the
Execution Date (defined below), the Agreement shall be terminated, and the
Earnest Money shall be promptly returned to Buyer.
4. PROPERTY INSPECTION. Seller shall permit Buyer and its agents, at Buyer's
sole expense and risk, to enter the Property, at reasonable times after
reasonable prior notice to Seller and after prior notice to the tenants of the
Property as required by the tenants' leases, to conduct inspections, tests, and
surveys concerning the structural condition of the improvements, all mechanical,
electrical and plumbing systems, hazardous materials, pest infestation, soils
conditions, wetlands, American with Disabilities Act compliance, and other
matters affecting the suitability of the Property for Buyer's intended use
and/or otherwise reasonably related to the purchase of the Property. Buyer shall
indemnify, hold harmless, and defend Seller from all liens, costs, and expenses,
including reasonable attorneys' fees and experts fees, arising from or relating
to Buyer's entry on and inspection of the Property. This agreement to indemnify,
hold harmless, and defend Seller shall survive closing or any termination of
this Agreement.
5. SELLER'S DOCUMENTS. Within ten (10) days after the Execution Date, Seller
shall deliver to Buyer, at Buyer's address shown below, legible and complete
copies of the following documents and other items relating to the ownership,
operation, and maintenance of the Property, to the extent now in existence and
to the extent such items are within Seller's possession or control:
Surveys, easements, environmental reports, agreements with city or state
government, building plans, engineering studies, wetland reports and soil
reports. All applicable information that is available that will aid in
developing the subject property.
6. TITLE INSURANCE. Within ten (10) days after the Execution Date, Seller shall
deliver to Buyer a preliminary title report from the Title Company (the
"Preliminary Commitment"), together with complete and legible copies of all
documents shown therein as exceptions to title, showing the status of Seller's
title to the Property. Buyer shall have not less than five (5) days after
receipt of a copy of the Preliminary Commitment within which to give notice in
writing to Seller of any objection to such title or to any liens or encumbrances
affecting the Property. Within five (5) days after the date of such notice from
Buyer, Seller shall give Buyer written notice of whether it is willing and able
to remove the objected-to exceptions. Within five (5) days after the date of
such notice from Seller, Buyer shall elect whether to purchase the Property
subject to the objected-to exceptions which Seller is not willing or able to
remove or terminate this Agreement. On or before the Closing Date (defined
below), Seller shall remove all exceptions to which Buyer objects and which
Seller agrees Seller is willing and able to remove. All remaining exceptions set
forth in the Preliminary Commitment and agreed to by Buyer shall be "Permitted
Exceptions." The title insurance policy to be delivered by Seller to Buyer at
closing shall contain no exceptions other than the Permitted Exceptions and the
usual preprinted exceptions in an owner's standard form title insurance policy.
<PAGE>
7. DEFAULT: REMEDIES. If the conditions, if any, to Buyer's obligation to close
this transaction are satisfied or waived by Buyer and Buyer nevertheless fails,
through no fault of Seller, to close the purchase of the Property, Seller's sole
remedy shall be to retain the Earnest Money paid by Buyer. In the event Seller
fails, through no fault of Buyer, to close the sale of the Property, Buyer shall
be entitled to pursue any remedies available at law or in equity, including
without limitation, the remedy of specific performance.
8. CLOSING OF SALE. The sale shall be closed /x/ on or before See Addendum "A"
or / / N/A days after the Execution Date (the "Closing Date") in escrow at the
Title Company. The sale shall be "closed" when the document conveying title is
recorded and funds are disbursed to Seller. At closing, Buyer and Seller shall
deposit with the Title Company all documents and funds required to close the
transaction in accordance with the terms of this Agreement. At closing, Seller
shall deliver a certification in a form approved by Buyer that Seller is not a
"foreign person" as such term is defined in the Internal Revenue Code and the
Treasury Regulations promulgated under the Internal Revenue Code. If Seller is a
foreign person and this transaction is not otherwise exempt from FIRPTA
regulations, the Title Company shall be instructed by the parties to withhold
and pay the amount required by law to the Internal Revenue Service. At closing,
Seller shall convey lee simple title to the Property to Buyer by /x/ statutory
warranty deed or / / N/A (the "Deed"). If this Agreement provides for the
conveyance by Seller of a vendee's interest in the Property by a contract of
sale, Seller shall deposit with the Title Company (or other mutually acceptable
escrow) the executed and acknowledged Deed, together with written instructions
to deliver such deed to Buyer upon payment in full of the purchase price. At
closing, Seller shall pay for and deliver to Buyer a standard form owner's
policy of title insurance in the amount of the purchase price insuring fee
simple title to the Property in Buyer subject only to the Permitted Exceptions
and the standard preprinted exceptions in a standard form policy.
9. CLOSING COSTS: PRORATES. Unless otherwise provided in a separate written
agreement, the real estate commission is due on the Closing Date. Seller shall
pay the premium for the title insurance policy which Seller is required to
deliver pursuant to the above paragraph. Seller and Buyer shall each pay
one-half of the escrow fees charged by the Title Company, any excise tax, and
any transfer tax. Real property taxes for the tax year in which the transaction
is closed, assessments (if a Permitted Exception), personal property taxes,
rents on existing tenancies paid for the month of closing, interest on assumed
obligations, and utilities shall be prorated as of the Closing Date. Prepaid
rents, security deposits, and other unearned refundable deposits regarding the
tenancies shall be assigned and delivered to Buyer at closing. The Property / /
does /x/ does not qualify for a special tax assessment or deferral program as
follows: N/A. /x/ Seller / / Buyer / / N/A shall be responsible for payment
of all taxes, interest, and penalties, if any, upon removal of the Property from
such special assessment or program.
10. POSSESSION. Buyer shall be entitled to exclusive possession of the Property,
subject to tenancies existing as of the Closing Date, /x/ on the Closing Date
/ / or N/A.
11. CONDITION OF PROPERTY. Seller represents that, to the best of Seller's
knowledge and except as described in Addendum "A" attached hereto, there are no
pending or threatened notices of violation of any laws, codes, rules, or
regulations applicable to the Property ("Laws"), and Seller is not aware of any
such violations. Risk of loss or damage to the Property shall be Seller's until
closing and Buyer's at and after closing. No agent of Seller nor any agent of
Buyer has made any representations regarding the Property. The real estate
licensees named in this Agreement have made no representations to any party
regarding the condition of the Property, the operations on or income from the
Property, or whether the Property or the use thereof complies with Laws. Except
for Seller's representations set forth in this Section 11 Buyer shall acquire
the Property "AS IS" with all faults and Buyer shall rely on the results of its
own inspection and investigation in Buyer's acquisition of the Property.
12. PERSONAL PROPERTY. This sale includes the following personal property:
/x/ None or / / the personal property located on and used in connection with the
Property and owned by Seller which Seller shall itemize in a schedule. Seller
shall deliver to Buyer such schedule within N/A days after the Execution Date.
13. AGENCY DISCLOSURE. The following agency relationship(s) in this transaction
is (are) hereby consented to and acknowledged:
(a) / / John E. Fettig, Trammell Crow Company (selling real estate
licensee) is the agent of (check one): / / Buyer exclusively as an agent of
Buyer; /x/ Seller exclusively as an agent of Seller; / / both Seller and Buyer
as set out in the in-company agreement.
(b) / / Steven T. Klein, Trammell Crow Company (listing agent if not the
same as selling agent) is the agent of (check one): /x/ Seller exclusively as
Seller's agent; / / both Seller and Buyer as set out in the in-company
agreement.
(c) / / ___________________________________________ (real estate licensee)
is the agent of both Seller and Buyer in a limited dual agency relationship
pursuant to separate agreement.
ACKNOWLEDGED
Buyer /s/ Steve Morrison Date 8/13/99 Seller______________ Date__________
-------------------- -------
Buyer /s/ Richard Dietz Date 8/16/99 Seller______________ Date__________
-------------------- -------
Designated Designated
Broker(s) Initials _____ Date________ Broker(s) Initials_____ Date__________
<PAGE>
14. NOTICES. Unless otherwise specified, any notice required or permitted in, or
related to, this Agreement must be in writing and signed by the party to be
bound. Any time limit in or applicable to a notice shall commence on the day
following mailing of the notice in the U.S. mails, postage prepaid. by the
applicable party to the address of the other party shown in this Agreement,
unless that day is a Saturday. Sunday, or legal holiday, in which event it will
commence on the next following business day.
15. ASSIGNMENT. Buyer may assign / / may not assign /x/ may assign, if the
assignee is an entity owned and controlled by Buyer (MAY NOT, IF NO BOX IS
CHECKED) this Agreement or Buyer's rights under this Agreement without Seller's
prior written consent.
16. ATTORNEYS' FEES. In the event a suit, action, arbitration, or other
proceeding of any nature whatsoever, including without limitation any proceeding
under the U.S. Bankruptcy Code, is instituted, or the services of an attorney
are retained, to interpret or enforce any provision of this Agreement or with
respect to any dispute relating to this Agreement, the prevailing party shall be
entitled to recover from the losing party its attorneys', paralegals',
accountants', and other experts' fees and alt other fees, costs, and expenses
actually incurred and reasonably necessary in connection therewith. In the event
of suit, action, arbitration, or other proceeding, the amount thereof shall be
determined by the judge or arbitrator, shall include fees and expenses incurred
on any appeal or review, and shall be in addition to all other amounts provided
by law.
17. STATUTORY LAND USE DISCLAIMER. THE PROPERTY DESCRIBED IN THIS INSTRUMENT MAY
NOT BE WITHIN A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS
SUBJECT TO LAND USE LAWS AND REGULATIONS, WHICH, IN FARM AND FOREST ZONES, MAY
NOT AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS
AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN ORS 30.930 IN ALL ZONES.
BEFORE SIGNING OR ACCEPTING THIS INSTRUMENT, THE PERSON ACQUIRING FEE TITLE TO
THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING
DEPARTMENT TO VERIFY APPROVED USES AND THE EXISTENCE OF FIRE PROTECTION FOR
STRUCTURES.
18. MISCELLANEOUS. Time is of the essence of this Agreement. The facsimile
transmission of any signed document including this Agreement shall be the same
as delivery of an original. At the request of either party, the party delivering
a document by facsimile will confirm facsimile transmission by signing and
delivering a duplicate original document. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original and all of
which together shall constitute one and the same Agreement. This Agreement
contains the entire agreement and understanding of the parties with respect to
the subject matter of this Agreement and supersedes all prior and
contemporaneous agreements between them with respect thereto. Without limiting
the provisions of Section 15 of this Agreement. this Agreement shall be binding
upon and shall inure to the benefit of the parties and their respective
successors and assigns. The person signing this Agreement on behalf of Buyer and
the person signing this Agreement on behalf of Seller each represents. covenants
and warrants that such person has full right and authority to enter into this
Agreement and to bind the party for whom such person signs this Agreement to the
terms and provisions of this Agreement. This Agreement shall not be recorded
unless the parties otherwise agree.
19. ADDENDUMS: EXHIBITS. The following named addendums and exhibits are
attached to this Agreement and incorporated within this Agreement; / / none or
/x/ Addendum "A" and Exhibit "A".
20. TIME FOR ACCEPTANCE. Seller has until 5:00 p.m. Pacific Time on August 18,
1999 to accept this offer. Acceptance is not
effective until a copy of this Agreement which has been signed and dated by
Seller is actually received by Buyer. If this offer is not so accepted, it shall
expire and the Earnest Money shall be promptly refunded to Buyer.
21. SELLER'S ACCEPTANCE AND BROKERAGE AGREEMENT. Seller agrees to sell the
Property on the terms and conditions in this Agreement and further agrees to pay
a commission in the total amount computed in accordance with the listing
agreement or other commission agreement.
22. EXECUTION DATE. The Execution Date is the later of the two dates shown
beneath the parties' signatures below.
CONSULT YOUR ATTORNEY. THIS DOCUMENT HAS BEEN PREPARED FOR SUBMISSION TO YOUR
ATTORNEY FOR REVIEW AND APPROVAL PRIOR TO SIGNING. NO REPRESENTATION IS MADE BY
THE REAL ESTATE LICENSEES NAMED IN THIS AGREEMENT AS TO THE LEGAL SUFFICIENCY OR
TAX CONSEQUENCES OF THIS AGREEMENT.
Buyer: Ironwood Investments Seller: Gardenburger, Inc.
By /s/ Steve Morrison By /s/ Richard C. Dietz
----------------------------- --------------------------
Title Partner Title Chief Financial Officer
----------------------------- --------------------------
Execution Date 8/13/99 Execution Date 8/16/99
------------------ -------------------
Home Phone _____________________ Home Phone ___________________
Office Phone 503-653-2514 Office Phone 503-205-1515
Fax Phone 503-653-9199 Fax Phone 503-205-1650
Address P.O. Box 1250 Address 1411 SW Morrison St.
9160 SE Lawnfield Road Suite 400
Clackamas, Oregon 97015 Portland, Oregon 97205
<PAGE>
ADDENDUM "A"
TO PURCHASE AND SALE AGREEMENT
AND RECEIPT FOR EARNEST MONEY
DATED AUGUST 11, 1999
BETWEEN GARDENBURGER, INC., SELLER
AND IRONWOOD INVESTMENTS, BUYER
1) EARNEST MONEY: Buyer's earnest money note shall be converted into cash upon
the satisfaction of waiver of Buyer's contingencies as outlined herein. The
earnest money at that time will be non-refundable to Buyer and applicable to the
purchase price.
2) CONTINGENCIES: This Purchase and Sale Agreement is contingent upon the
following terms and conditions:
A. Buyer's satisfaction with the result of a pre-construction meeting
with the City of Portland.
B. Review of Seller's documents as outlined in Section 5.
3) SATISFACTION OR WAIVER
OF CONTINGENCIES:
If either of the contingencies (the "Contingencies") described in
paragraph 2 of this Addendum is not satisfied or waived by Buyer within
twenty (20) days after the Execution Date of this Agreement, Buyer may terminate
this Agreement by written notice to Seller given on or before the twentieth
(20th) day following the Execution Date. If Buyer gives Seller such written
notice of termination, Seller shall refund the Promissory Note Earnest Money to
Buyer. If Buyer fails to provide such written notice of termination on or before
the twentieth (20th) day following the Execution Date, (1) the Contingencies
shall be deemed to have been satisfied or waived by Buyer, (2) the Promissory
Note Earnest Money shall be converted to cash, and (3) Seller shall have no
obligation to refund the Earnest Money or any portion thereof to Buyer. This
transaction shall be closed within five (5) business days after the date on
which the Contingencies have been or are deemed to have been waived or
satisfied.
4) STREET VACATION: Buyer understands and acknowledges the following:
On March 13, 1996, the City of Portland City Council passed Ordinance
No. 169858 approving the vacation of N.E. Airport Way east of N.E. 166th Avenue,
subject to certain conditions. Among the conditions of approval were conditions
requiring the owner of the Property to grant to the City of Portland a 40-foot
wide access easement to Well Site No. 9 of the City of Portland's Bureau of
Water Works, and grant to the City of Portland a 40-foot wide public water
facility easement. Ordinance No. 169858 provides that the conditions of
approval, including the granting of the above-referenced easements, must be
complied with within two years after the effective date of the ordinance, which
was March 13, 1996. The easements have not yet been granted to the City of
Portland.
EXHIBIT 10.36
THIRD AMENDMENT TO
EMPLOYMENT AGREEMENT
This Third Amendment to Employment Agreement is entered into as of this 9th
day of December, 1999, by and between Gardenburger, Inc. (the "Company"), and
Lyle G. Hubbard ("Hubbard").
RECITALS
A. On or about May 23, 1996, the Company and Hubbard executed an Employment
Agreement dated as of April 14, 1996, pursuant to which the Company agreed to
employ Hubbard as its Chief Executive Officer. The employment agreement was
extended and amended pursuant to an Agreement to Extend and Amend Employment
Agreement dated November 16, 1998 (the "First Amendment"), and a second
Agreement to Extend and Amend Employment Agreement dated as of March 5, 1999
(the "Second Amendment"). The employment agreement, as amended by the First
Amendment and Second Amendment, shall hereinafter be referred to as the
"Employment Agreement."
B. The Company and Hubbard desire to further amend the Employment Agreement
in the manner set forth below.
AGREEMENTS
NOW, THEREFORE, the Company and Hubbard agree as follows:
1. Section 5.5.2 of the Employment Agreement is amended to provide in its
entirety as follows:
5.5.2(A) In the event of the termination of
Employee's employment pursuant to Section 5.2 (Death or Disability) or
Section 5.4 (termination of Employee's employment without Cause
occurring in the absence of a Change in Control as that term is defined
in Section 5.7), the Company shall pay to Employee:
(1) The then current base compensation payable to
Employee under Section 2.1 prorated through the effective date
of the termination;
(2) The annual target incentive bonus in effect as of
the date of termination of Employee's employment prorated
through the effective date of termination as if such annual
target incentives had been achieved; and
(3) Severance pay equal to:
(i) the greater of (x) one and one-half
times Employee's annual base compensation in effect
-1-
<PAGE>
as of the date of termination or (y) the base
compensation remaining to be paid to Employee under
Section 2.1 between the effective date of such
termination and the end of the employment term under
this Agreement; and
(ii) one and one-half times the average of
the annual incentive bonuses reported as W-2
compensation to Employee for the two calendar years
ending prior to the calendar year in which the
termination occurs.
5.5.2(B) No other compensation, benefits or payments
of any nature whatsoever shall be due and payable under this Agreement
in the event of termination of Employee's employment by the Company
pursuant to Section 5.2 or 5.4.
5.5.2(C) Employee agrees, as a condition to payment
and receipt of such severance pay, to execute a full and complete
release, in form and substance satisfactory to the Company, of any and
all claims of every kind and nature whatsoever against the Company.
2. Section 5.6.1 of the Employment Agreement is amended to provide in its
entirety as follows:
5.6.1 DECISION OF COMPANY NOT TO EXTEND TERM. The
Company is required under Section 1.1 above to notify Employee at the
end of the second year of the employment term and, in the event this
Agreement is extended, at the end of each subsequent one-year period
thereafter, whether the Company elects to extend this Agreement for an
additional one-year term. If the Company, in its sole and absolute
discretion, decides not to extend this Agreement for an additional
one-year term, then the Company shall, in the event it has not already
paid severance pay to Employee under Section 5.5.2(a)(3) above, pay to
Employee at the end of the final year of Employee's employment, as
severance pay, an amount equal to one and one-half times Employee's
annual base compensation in effect as of the expiration date of
Employee's employment with the Company and one and one-half times the
average of the annual incentive bonuses reported as W-2 compensation to
Employee for the two calendar years ending prior to the calendar year
in which the termination occurs; provided, however, the Company shall
have no obligation to pay such severance pay if the reason for not
extending this Agreement is Employee's retirement. Employee agrees, as
a condition to payment and receipt of such severance pay, to execute a
full and complete release, in form and substance satisfactory to the
Company, of any and all claims of every kind and nature whatsoever
against the Company. The Board of Directors shall be under no
obligation, in the event it elects not to extend the term of this
-2-
<PAGE>
Agreement, to review Employee's performance, or offer Employee another
extension, at the end of the final year of Employee's employment.
3. Section 5.7.2 of the Employment Agreement is amended to provide in its
entirety as follows:
5.7.2(A) In the event that Employee's employment with
the Company is terminated, either by Employee with Good Reason or by
the Company without Cause, within two years after the date of
occurrence of any event constituting a Change in Control (it being
recognized that more than one such event may occur in which case the
two-year period shall run from the date of occurrence of each such
event), and provided that the condition set forth in Section 5.7.6 of
this Agreement is satisfied, Employee shall be entitled to the payments
described in Sections 5.5.2(a)(1) and (2) of this Agreement and, in
lieu of the severance pay described in Section 5.5.2(a)(3) of this
Agreement, an amount of severance pay equal to 2.99 times the sum of
(i) the average of the annual base compensation paid to Employee by the
Company during the "Base Period" as defined by Internal Revenue Code
Section 280G(d)(2) and the regulations thereunder (hereinafter "Base
Period"), and (ii) the average of the annual incentive bonuses (if any)
reported as W-2 compensation to Employee during the Base Period;
provided, however, for purposes of calculating the average of the
annual incentive bonuses, Base Period shall not include any period
ending prior to January 1, 1997. If the Base Period includes a short or
incomplete taxable year, the base compensation and incentive bonuses
paid in the short or incomplete year will be annualized before
determining the average.
5.7.2(B) In the event that Employee's employment with
the Company is terminated, either by Employee with Good Reason or by
the Company without Cause, within two years after the date of
occurrence of any event constituting a Change in Control (it being
recognized that more than one such event may occur in which case the
two-year period shall run from the date of occurrence of each such
event), and if the condition set forth in Section 5.7.6 of this
Agreement is not satisfied, Employee shall be entitled to the payments
described in Section 5.5.2(a)(1) and (2) of this Agreement and, in lieu
of the severance pay described in Section 5.5.2(a)(3) of this
Agreement, the following additional amounts:
(i) one and one-half times the higher of
Employee's annual base compensation in effect as of
the date of termination of Employee's employment or
the date immediately prior to the Change in Control
Date; and
-3-
<PAGE>
(ii) one and one-half times the higher of
Employee's annual target incentive bonus in effect as
of the date of termination of Employee's employment
or the date immediately prior to the Change in
Control Date as if such annual target incentives had
been achieved.
5.7.2(C) The severance payments described in Sections
5.7.2(a) and 5.7.2.(b) of this Agreement, which are in the alternative,
shall hereinafter be referred to as the "Change in Control Severance
Payment."
5.7.2(D) Except for the benefits described in Section
5.9 of this Agreement, no other compensation, benefits or payments of
any nature whatsoever shall be due and payable under this Agreement in
the event of termination of Employee's employment by the Company
pursuant to Sections 5.7.2(a) or (b).
5.7.2(E) Employee agrees, as a condition to payment
and receipt of the Change in Control Severance Payment, to execute a
full and complete release, in form and substance satisfactory to the
Company, of any and all claims of every kind and nature whatsoever
against the Company.
4. Sections 5.7.5(a) and (b) of the Employment Agreement are amended to
provide in their entirety as follows:
(a) In the event that any portion of the total
payments to be received by Employee in connection with a Change in
Control (including the payments described in Sections 5.5.2(a)(1) and
(2) of this Agreement, the Change in Control Severance Payment and any
other payment or benefit payable to Employee in connection with the
Change in Control pursuant to any plan, arrangement, or agreement with
the Company, a person whose actions result in the Change in Control, or
person affiliated with the Company or such person) (hereinafter
referred to as "Total Payments") would constitute an "excess parachute
payment" within the meaning of Section 280G(b) of the Code that is
subject to an Excise Tax, the Total Payments otherwise payable to
Employee shall be reduced to the minimum extent necessary to avoid the
Excise Tax. Employee shall have the right to choose the items
comprising the Total Payments to be reduced.
(b) For purposes of the reduction described in
Section 5.7.5(a):
(1) No portion of the Total Payments, the receipt or
enjoyment of which Employee has effectively waived in writing
prior to the date of payment of the severance payments, shall
be taken into account;
(2) No portion of the Total Payments shall be taken
into account which, in the opinion of Arthur Andersen LLP (or,
-4-
<PAGE>
if Arthur Andersen LLP is unavailable, such tax counsel
selected by Employee and reasonably acceptable to Company)
("Tax Counsel"), does not constitute a "parachute payment"
within the meaning of Section 280G of the Code;
(3) If Employee and the Company disagree whether any
of the Total Payments will result in an Excise Tax, the matter
will be conclusively resolved by an opinion of Tax Counsel;
and
(4) The value of any noncash benefit or any deferred
payment or benefit included in the Total Payments, whether or
not all or a portion of any payment or benefit is a "parachute
payment" for purposes of paragraph (b)(2) above, and the
amount of the reduction, if any, in the Total Payments shall
be determined by Tax Counsel in accordance with the principles
of Section 280G of the Code.
(5) In no event shall Company be liable or
responsible for the payment of or reimbursement to Employee
for Employee's payment of any Excise Tax for which Employee is
or may be liable in connection with any portion of the Total
Payments received by Employee.
5. Section 5.7.6 of the Employment Agreement is amended to provide as
follows:
5.7.6 The Change in Control Severance Payment
described in Section 5.7.2(a) of this Agreement shall be paid to
Employee only if the Change in Control results from an Acquiring Person
acquiring control in the Company for a price per share of the Company's
common stock that exceeds the applicable minimum per share price set
forth below, which applicable minimum per share sale price shall be
determined as of the earlier of the Change in Control Date or the date
of full execution of a definitive agreement which, if consummated, will
result in a Change in Control (which date shall hereinafter be referred
to as the "Determination Date"):
-5-
<PAGE>
Determination Date Minimum per
occurring on or before share sale price
---------------------- ----------------
December 1, 1998 $10.00
March 1, 1999 $10.375
June 1, 1999 $10.75
September 1, 1999 $11.125
December 1, 1999 $11.50
March 1, 2000 $11.93
June 1, 2000 $12.36
September 1, 2000 $12.79
December 1, 2000 $13.23
March 1, 2001 $13.72
April 15, 2001 $13.96
6. Section 5.9 shall be added to the Employment Agreement and shall provide
as follows:
5.9 HEALTH AND LIFE INSURANCE COVERAGE. If Employee
becomes entitled to a Change in Control Severance Payment, then for a
period of eighteen (18) months following the date of termination (the
"Severance Period"), the Company shall pay for Employee's life,
accident and health insurance benefits ("Welfare Benefits")
substantially similar in all material respects to those which the
Employee was receiving immediately prior to the date of termination
(without giving effect to any adverse amendment to, or elimination of,
such benefits made after the Change in Control). Any eligible dependent
coverage Employee had as of the date of termination will continue for
such period on the same terms, to the extent permitted by the
applicable policies or contracts. If the terms of any benefit plan
referred to in this Section 5.9 do not permit continued participation
by Employee or the benefits are not substantially similar in all
material respects, the Company, if possible, will arrange for other
coverage at its expense providing substantially similar benefits. The
coverage provided for in this Section 5.9 shall be applied against and
shall reduce the period for which COBRA benefits will be provided. If
Employee receives Welfare Benefits from another source during the
Severance Period, then the Company's obligation to continue Welfare
Benefits at the Company's expense will cease. Employee agrees to
promptly report to the Company if he receives any Welfare Benefits
during the Severance Period.
-6-
<PAGE>
7. No other modification or amendment to the Employment Agreement is made
or intended to be made hereby. All terms, conditions, and covenants of the
Employment Agreement, to the extent not inconsistent with the amendments
described above, shall remain in full force and effect.
GARDENBURGER, INC.
By: /s/ E. Kay Stepp By: /s/ Lyle G. Hubbard
------------------------------- ------------------------------
E. Kay Stepp Lyle G. Hubbard
Chair of the Board of Directors
GARDENBURGER, INC.
FY2000 SENIOR MANAGEMENT TEAM INCENTIVE PROGRAM
PURPOSE:
Gardenburger's senior management team is compensated by three primary methods:
- - market-based salary, as gauged against other targeted competitors for our
talent;
- - an equity opportunity that is reflected in a meaningful stock option grant
program that encourages ownership and commitment to long-term goals; and
- - a bonus opportunity that reflects reward for accomplishing intermediate-
term goals.
The incentive program is specifically designed to reward the full team when
pre-determined targets are met. The business drivers are primarily GROWTH OF
REVENUE and PROFITABILITY. The focus of the company today is to continue the
successful evolution of the branding strategy first implemented by its CEO and
to capture as large a portion of the market share as possible to reduce
competition and to thwart entry by other possible competitors. At the same time,
accomplishment of specific operating income levels is critical to reward both
stockholders and other investors for their commitment to the strategy.
The agreed approach to awards has been to acknowledge the value in team-driven,
as opposed to individual, accomplishment. This fosters sharing of goals between
various business components (e.g., retail grocery, club, natural, foodservice)
and attainment of overall company success. This approach will continue in
FY2000, with use of an individual component that allows the CEO to assess team
member contribution to this broader effort. It will also reward for reaching
specific, agreed goals and team participation.
APPROACH AND PROCESS
The key drivers that impact the business are developed in advance of the
beginning of the fiscal year, and agreement is reached with all members of the
team surrounding their portion of the overall goal(s). Specific targets are
discussed and negotiated until the best possible business results are agreed
upon, with consideration given to the needs of stockholders, investors,
customers, business partners and employees.
The principal drivers are growth of revenue and operating income, with the
latter weighted at a higher value. Targets for FY2000 are:
- - Revenue goal of $92.4 million
- - Operating income target of $4.6 million
1
<PAGE>
The bonus targets for the senior team includes 55% of base salary for CEO and
45% of base salary for all other team members. Additionally, the award is
divided into two parts for the second group:
- - 75% of total: Business drivers (revenue/profitability).
- - 25% of total: CEO discretionary award based on individual contribution.
This means that the first component may grow or shrink as a function of the
calculation, while the second is fixed as a maximum amount relative to base
salary.
The first component would be paid for business driver accomplishment. A matrix
calculation will be used to track the percent accomplishment of each driver
against the other. There is no distinction between business product areas;
overall sales accomplishment is used. This relationship is expressed as a
geometric grid, which has been established utilizing the business plan and
laying out rates of payout against the two axes. The two factors work in tandem
with each other so that success in one may partially offset lack of full
attainment in the other.
Benchmark points for this relationship include:
- - An uncapped maximum on sales growth to reward "exceptional" performance.
- - A minimum threshold, with no payout, at $80.0 million in sales and no
operating income.
- - A "circuit-breaker" factor which provides for no payout in the event of an
OI loss at any revenue level.
The second component would be paid based upon the CEO's evaluation of the
individual team member's contribution to the overall business success. Factors
which may be used by the CEO could include (but are not limited to) completion
of agreed departmental goals, leadership on company-wide tasks, or participation
and leadership in senior team business processes. The award could be at any
percentage between 0-25%. Benchmark points for this component include:
- - An absolute maximum of 25% against base salary for the discretionary award,
independent of the revenue and profitability calculation.
All rewards would be paid at conclusion of the FY, and after completion and
verification of the year-end results by the company's Finance team.
2
EXHIBIT 10.41
RETENTION INCENTIVE AGREEMENT
THIS RETENTION INCENTIVE AGREEMENT, dated November 10, 1999, is made by and
between Gardenburger, Inc., an Oregon corporation (the "Company"), and Lyle G.
Hubbard ("Executive").
WHEREAS, the Board of Directors of the Company recognizes the importance to
the Company of the continuity of management; and
WHEREAS, the Board has determined that voluntary terminations by key
management employees could occur as the result of limited retention incentives;
and
WHEREAS, the Board has determined that action should be taken to reinforce
and encourage the continued attention and dedication of members of the Company's
management, including Executive, to their assigned duties;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein, the Company and Executive hereby agree as follows:
1. TERM OF AGREEMENT. This agreement shall commence on the date hereof and
shall continue in effect through December 31, 2000, unless sooner terminated due
to a Change in Control.
2. NATURE OF THE AGREEMENT. In order to induce the Executive to remain in the
employ of the Company, the Company agrees, under the conditions described
herein, to pay Executive a retention incentive payment in the amount of
$500,000. No amount or benefit shall be payable under this Agreement unless
Executive remains employed at the end of the Term of Agreement and the other
conditions set forth herein are satisfied, or unless a Change in Control event,
as defined in Section 3, occurs.
3. CHANGE IN CONTROL; DEFINITION. A Change in Control shall mean:
(a) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
in Control: (i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and (iii)
of subsection (c) of this Section 3 are satisfied; or
-1-
<PAGE>
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization, merger
or consolidation, in each case, unless, following such reorganization, merger or
consolidation, (i) more than 75% of, respectively, the then outstanding shares
of common stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such reorganization, merger or
consolidation in substantially the same proportions as their ownership,
immediately prior to such reorganization, merger or consolidation, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities, as
the case may be, (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
reorganization, merger or consolidation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors, and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation with respect to which following such sale or other disposition, (A)
more than 75% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportions as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
-2-
<PAGE>
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 25% or more of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and (C) at
least a majority of the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
in the event of a Management Change in Control. A Management Change in Control
shall mean a Change in Control pursuant to which Executive (alone or with
others) acquires or retains, directly or indirectly, the power to direct or
cause the direction of the management and policies of the Company (whether
through the ownership of voting securities, by contract, or otherwise).
4. CONDITIONS OF AWARD.
(a) Employment. Executive is currently employed by the Company and, subject
to (i), (ii), and (iii) below, generally must continue to be employed during the
Term of Agreement in order to be eligible for this award.
(i) If Executive voluntarily terminates employment before December
31, 2000, no award or prorated award will be made.
(ii) If Executive's employment is terminated for Cause before December
31, 2000, no award or prorated award will be made. For the
purpose of this Agreement, "Cause" shall be interpreted broadly
to mean (a) failure to adequately perform job duties (other than
by reason of a disability that renders him unable to perform the
essential functions of his job with or without reasonable
accommodation) after imposition of progressive disciplinary
process; (b) any act of personal dishonesty, insubordination,
breach of fiduciary duty, or willful misconduct by Executive; (c)
Executive's use of illegal drugs, or use of lawful drugs or
alcohol in a manner violative of the Company's written policies;
(d) objective evidence of Executive's wrongful discrimination
against or harassment of another person1; (e) any conduct by
Executive that may significantly disparage the integrity or
reputation of the Company; (f) Executive's diversion of any
corporate opportunity or other similarly serious conflict of
interest inuring to the Company's detriment; (g) conduct by
Executive significantly endangering the life, safety, or health
of self or others; (h) Executive's violation of any law, rule, or
regulation (other than minor traffic violations or similar minor
offenses); or (i) any act or failure to act by Executive of
similar seriousness to those listed above.
(iii) If Executive's employment is terminated without Cause (including
by reason of death or disability) before December 31, 2000, then
-3-
- -------------------------
1 Sworn statements shall satisfy this requirement of objective evidence.
<PAGE>
a prorated award will be made. The award will be prorated to
reflect the number of actual days Executive was actively employed
after the complete execution of this Agreement as compared to the
number of days between the execution of this Agreement and
December 31, 2000.
(b) Change in Control. Should a Change in Control, as defined in Section 3,
be finalized and completed before December 31, 2000, then provided all other
eligibility criteria are satisfied, Executive will be entitled to payment in
full of the award on the date the Change in Control is finalized and completed
and this Agreement shall terminate.
5. PAYMENT. The payment of the $500,000 retention incentive award (or portion
thereof, if applicable) will be made within five (5) business days after
December 31, 2000, or the date that a Change in Control is finalized and
completed, whichever occurs first. Payment will be made after statutorily
required taxes and other legally authorized deductions are withheld.
6. MISCELLANEOUS.
(a) Notices. All notices, consents, and other communications if required
will be forwarded by U.S. Postal Service or express courier service:
To the Company: Gardenburger, Inc.
Suite 400
1411 S.W. Morrison Street
Portland, Oregon 97205
Fax Number: (503) 205-1576
Attn: Vice President, Human Resources
To Executive: Lyle G. Hubbard
At the last address shown on the records of the Company
(b) Assignment. This Agreement shall inure to the benefit of and shall be
binding upon the parties hereto and their respective executors, administrators,
heirs, personal representatives and successors, but, except as hereinafter
provided, neither this Agreement nor any right hereunder may be assigned or
transferred by either party hereto, or by any beneficiary or any other person,
nor be subject to alienation, anticipation, sale, pledge, encumbrance,
execution, levy or other legal process of any kind against Executive,
Executive's beneficiary or any other person. Notwithstanding the foregoing, any
person or business succeeding to all or substantially all of the business of the
Company by stock purchase, merger, consolidation, purchase of assets or
otherwise, shall be bound by and shall adopt and assume this Agreement, and the
Company shall obtain the express assumption of this Agreement by such successor.
(c) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Oregon, except to the
extent otherwise expressly provided in this Agreement.
(d) Amendment. This Agreement may be amended only by a written instrument
signed by the parties hereto, which makes specific reference to this Agreement.
-4-
<PAGE>
(e) Severability. If any provision of this Agreement shall be held invalid
or unenforceable by any court of competent jurisdiction, such holding shall not
invalidate or render unenforceable any other provisions hereof.
(f) Other Benefits. Nothing in this Agreement shall limit or replace the
compensation or benefits payable to Executive, or otherwise adversely affect
Executive's rights, under any other benefit plan, program or agreement to which
Executive is a party.
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by the chair of its board of directors, and Executive has set his
hand, as of the date first written above.
GARDENBURGER, INC.
/s/ Lyle G. Hubbard By: /s/ E. Kay Stepp
- ------------------------------- --------------------------------
Lyle G. Hubbard E. Kay Stepp
Chair of the Board of Directors
-5-
EXHIBIT 10.42
FORM OF RETENTION INCENTIVE AGREEMENT
THIS RETENTION INCENTIVE AGREEMENT, dated _______________, 1999, is
made by and between Gardenburger, Inc., an Oregon corporation (the "Company"),
and XXXX XXXXX ("Executive").
WHEREAS, the Board of Directors of the Company recognizes the
importance to the Company of the continuity of management; and
WHEREAS, the Board, after reviewing financial data for the first half
of the current fiscal year, and recognized the probability that there will be no
incentive payments to Senior Management Team members for FY1999; and
WHEREAS, the Board, after discussions with the Chief Executive Officer
and the Vice President of Human Resources, determined that voluntary
terminations by key management employees could occur as the result of limited
retention incentives; and
WHEREAS, the Board determined at its meeting of July 13, 1999, that
action should be taken to reinforce and encourage the continued attention and
dedication of members of the Company's management, including Executive, to their
assigned duties;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and Executive hereby agree as follows:
1. Term of Agreement. This agreement shall commence on the date hereof and shall
continue in effect through December 31, 2000, unless sooner terminated due to a
Change in Control.
2. Nature of the Agreement. In order to induce the Executive to remain in the
employ of the Company, the Company agrees, under the conditions described
herein, to pay Executive the retention incentive payment described herein. No
amount or benefit shall be payable under this Agreement unless Executive remains
employed at the end of Term of Agreement, or unless a Change in Control event,
as defined in Section 3, occurs.
3. Change in Control; Definition. A Change in Control shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
in Control: (i) any acquisition directly from the Company, (ii) any acquisition
1
<PAGE>
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and (iii)
of subsection (c) of this Section 3 are satisfied; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation, (i) more than 75% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
reorganization, merger or consolidation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors, and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
2
<PAGE>
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation with respect to which following such sale or other disposition, (A)
more than 75% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportions as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 25% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and (C) at
least a majority of the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Company.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
in the event of a Management Change in Control. A Management Change in Control
shall mean a Change in Control pursuant to which Executive (alone or with
others) acquires or retains, directly or indirectly, the power to direct or
cause the direction of the management and policies of the Company (whether
through the ownership of voting securities, by contract, or otherwise).
4. Conditions of Award.
(a) Employment. Executive is currently employed by the Company, and
subject to (i), (ii) and (iii) below generally must continue to be employed
during the Term of Agreement in order to be eligible for this award.
(i) If Executive voluntarily terminates employment before
December 31, 2000, no award or prorated award will be made.
(ii) If Executive's employment is terminated for Cause before
December 31, 2000, no award or prorated award will be made. For the
purpose of this Agreement, "Cause" shall be interpreted broadly to mean
(a) failure to adequately perform job duties (other than by reason of a
disability that renders him or her unable to perform the essential
functions of his or her job with or without reasonable accommodation)
after imposition of progressive disciplinary process; (b) any act of
3
<PAGE>
personal dishonesty, insubordination, breach of fiduciary duty, or
willful misconduct by the Executive; (c) Executive's use of illegal
drugs, or use of lawful drugs or alcohol in a manner violative of the
Company's written policies; (d) objective evidence of Executive's
wrongful discrimination against or harassment of another person1 (e)
any conduct by Executive that may significantly disparage the integrity
or reputation of the Company; (f) Executive's diversion of any
corporate opportunity or other similarly serious conflict of interest
inuring to the Company's detriment; (g) conduct by the Executive
significantly endangering the life, safety or health of self or others;
(h) Executive's violation of any law, rule or regulation (other than
minor traffic violations or similar minor offenses) or (i) any act or
failure to act by Executive of similar seriousness to those listed
above.
(iii) If Executive's employment is terminated without Cause
(including by reason of death or disability) before December 31, 2000,
then a pro-rated award will be made. The award will be prorated to
reflect the number of actual days Executive was actively employed after
the complete execution of this Agreement as compared to the number of
days between the execution of this Agreement and December 31, 2000.
Nothing in this Section alters or modifies the "at-will" character of
Executive's employment in any manner.
(b) Team Participation. Executive currently participates as a member of
the Company's Senior Management Team, and must continue as an active and
productive member of that group at the direction and invitation of the Chief
Executive Officer in order to be eligible for this award.
(c) Change in Control. Should a Change in Control, as defined in
Section 3, be finalized before December 31, 2000, then provided all other
eligibility criteria are satisfied, Executive will be eligible for the award on
the date the Change in Control is finalized and this Agreement shall terminate.
5. Award Compensation and Process.
(a) Amount of Award. The award is calculated as one (1) times the
current annual base salary of $XXX,XXX.XX. This amount excludes any bonuses,
other incentives or other compensation the person may be entitled to receive.
(b) Payment. The payment of the award will be made within five (5)
business days after December 31, 2000, or the date that a Change in Control is
finalized, whichever occurs first. Payment will be made after statutorily
required taxes and other legally authorized deductions are withheld.
- -------------------------------
1 Sworn statements shall satisfy this requirement of objective evidence.
4
<PAGE>
6. Miscellaneous.
(a) Notices. All notices, consents and other communications if required
will be forwarded by U.S. Postal Service or express courier service:
To the Company: Gardenburger, Inc.
1411 SW Morrison St., Suite 400
Portland, OR 97205
Fax Number: 503-205-1576
Attn: Vice President, Human Resources
To Executive: XXXX XXXXX
At the last address
Shown on the records of the Company
(b) Assignment. This Agreement shall inure to the benefit of and shall
be binding upon the parties hereto and their respective executors,
administrators, heirs, personal representatives and successors, but, except as
hereinafter provided, neither this Agreement nor any right hereunder may be
assigned or transferred by either party hereto, or by any beneficiary or any
other person, nor be subject to alienation, anticipation, sale, pledge,
encumbrance, execution, levy or other legal process of any kind against
Executive, Executive's beneficiary or any other person. Notwithstanding the
foregoing, any person or business succeeding to all or substantially all of the
business of the Company by stock purchase, merger, consolidation, purchase of
assets or otherwise, shall be bound by and shall adopt and assume this
Agreement, and the Company shall obtain the express assumption of this Agreement
by such successor.
(c) Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Oregon, except to the
extent otherwise expressly provided in this Agreement.
(d) Amendment. This Agreement may only be amended by a written
instrument signed by the parties hereto, which makes specific reference to this
Agreement.
(e) Severability. If any provision of this Agreement shall be held
invalid or unenforceable by any court of competent jurisdiction, such holding
shall not invalidate or render unenforceable any other provisions hereof.
(f) Other Benefits. Nothing in this Agreement shall limit or replace
the compensation or benefits payable to Executive, or otherwise adversely affect
Executive's rights, under any other benefit plan, program or agreement to which
Executive is a party.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officers, and Executive has set
his or her hand, as of the date first written above.
XXXX XXXXXX GARDENBURGER, INC.
_________________________ By: _____________________
Date: ____________________ Title: ____________________
Date: ____________________
EXHIBIT 10.43
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT, dated ________________, 1999, is made
by and between Gardenburger, Inc., an Oregon corporation (the "Company"), and
XXXX XXXXX (the "Executive").
WHEREAS, the Board of Directors of the Company considers it essential
to the best interests of the Company to foster the continued employment of key
management personnel; and
WHEREAS, the Board recognizes that, as is the case with many
publicly-held corporations, the possibility of a Change in Control (as defined
below) exists and that such possibility, and the uncertainty and questions which
it may raise among management, may result in the departure or distraction of
management personnel to the detriment of the Company; and
WHEREAS, the Board has determined at its meeting of July 13, 1999, that
appropriate steps should be taken to reinforce and encourage the continued
attention and dedication of members of the Company's management, including the
Executive, to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from the possibility of a Change in
Control;
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein, the Company and the Executive hereby agree as
follows:
1. Term of Agreement. This agreement shall commence on the date hereof and shall
continue in effect through December 31, 2001; provided however, that commencing
on January 1, 2002, and each January 1 thereafter, the term of this agreement
shall automatically be extended for one additional year unless, not later than
September 30 of the preceding year, the Company or the Executive shall have
given notice not to extend this Agreement or a Change in Control shall have
occurred prior to such January 1; and further provided, however, that if a
Change in Control shall have occurred during the term of this Agreement, this
Agreement shall continue in effect for a period of twenty-four (24) months
beyond the date on which such Change in Control occurred. This Agreement shall
automatically terminate twenty-four months after a Change in Control unless
expressly extended by the Board of Directors of the Company.
2. Nature of the Agreement. In order to induce the Executive to remain in the
employ of the Company, the Company agrees, under the conditions described
herein, to pay the Executive the severance payments and benefits described
herein. EXCEPT AS PROVIDED IN SECTION 6 HEREOF, NO AMOUNT OR BENEFIT SHALL BE
PAYABLE UNDER THIS AGREEMENT UNLESS EXECUTIVE IS EMPLOYED BY THE COMPANY
IMMEDIATELY PRIOR TO THE CHANGE IN CONTROL AND THERE SHALL HAVE BEEN A
TERMINATION OF THE EXECUTIVE'S EMPLOYMENT WITH THE COMPANY FOLLOWING THE CHANGE
<PAGE>
IN CONTROL AND DURING THE TERM OF THIS AGREEMENT. The sole exception to this
rule is that benefits will be payable prior to a Change in Control if Executive
has been terminated by the Company at the request of a third party who has taken
substantial steps reasonably calculated to effect a Change in Control. Hence,
except in the limited circumstance set forth above, if a termination of
Executive's employment occurs prior to a Change in Control, then no severance
and/or other benefits shall be payable to Executive by the Company under this
Agreement.
3. Change in Control. For purposes of this Agreement, a "Change in Control"
shall mean:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not constitute a Change
in Control: (i) any acquisition directly from the Company, (ii) any acquisition
by the Company, (iii) any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any corporation controlled by
the Company or (iv) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation, if, following such reorganization,
merger or consolidation, the conditions described in clauses (i), (ii) and (iii)
of subsection (c) of this Section 3 are satisfied; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or
other actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board; or
(c) Approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, unless, following such reorganization,
merger or consolidation, (i) more than 75% of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
reorganization, merger or consolidation and the combined voting power of the
then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned, directly or
<PAGE>
indirectly, by all or substantially all of the individuals and entities who were
the beneficial owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such reorganization,
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or consolidation, of
the Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (excluding the Company, any employee benefit
plan (or related trust) of the Company or such corporation resulting from such
reorganization, merger or consolidation and any Person beneficially owning,
immediately prior to such reorganization, merger or consolidation, directly or
indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding
Company Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 25% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such reorganization, merger or
consolidation or the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors, and (iii) at least a majority of the members of the board of
directors of the corporation resulting from such reorganization, merger or
consolidation were members of the Incumbent Board at the time of the execution
of the initial agreement providing for such reorganization, merger or
consolidation; or
(d) Approval by the shareholders of the Company of (i) a complete
liquidation or dissolution of the Company or (ii) the sale or other disposition
of all or substantially all of the assets of the Company, other than to a
corporation with respect to which following such sale or other disposition, (A)
more than 75% of, respectively, the then outstanding shares of common stock of
such corporation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such sale or other disposition in
substantially the same proportions as their ownership, immediately prior to such
sale or other disposition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be, (B) no Person
(excluding the Company and any employee benefit plan (or related trust) of the
Company or such corporation and any Person beneficially owning, immediately
prior to such sale or other disposition, directly or indirectly, 25% or more of
the Outstanding Company Common Stock or Outstanding Company Voting Securities,
as the case may be) beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding shares of common stock of such corporation
and the combined voting power of the then outstanding voting securities of such
corporation entitled to vote generally in the election of directors, and (C) at
least a majority of the members of the board of directors of such corporation
were members of the Incumbent Board at the time of the execution of the initial
agreement or action of the Board providing for such sale or other disposition of
assets of the Company.
<PAGE>
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur in the event of a Management Change in Control. A Management Change in
Control shall mean a Change in Control pursuant to which Executive (alone or
with others) acquires or retains, directly or indirectly, the power to direct or
cause the direction of the management and policies of the Company (whether
through the ownership of voting securities, by contract, or otherwise).
4. Termination. The Executive's employment with the Company may be terminated
under the following circumstances:
(a) Death or Disability. The Executive's employment with the Company
shall terminate upon Executive's death or the occurrence of a disability that
renders him/her unable to perform the essential functions of his/her job with or
without reasonable accommodation.
(b) Cause. The Company may terminate the Executive's employment
hereunder for Cause. For purposes of this Agreement, the Company shall have
"Cause" to terminate the Executive's employment with the Company upon the
Executive's:
(i) conviction for the commission of a felony; 1
(ii) failure to substantially perform his duties hereunder
after written warning (Executive shall have at least thirty (30) days after
receipt of first written warning to correct such deficiency or deficiencies) ;
(iii) intentional or grossly negligent conduct that is
demonstrably and significantly injurious to the Company or its affiliates;
(iv) self-dealing or diversion of a corporate opportunity
to the detriment of the Company; or
(v) violation of a key Company policy (including, but not
limited to, acts of harassment or discrimination, or use of unlawful drugs or
drunkenness on Company property during normal work hours); provided that,
termination will not be deemed to have been for "Cause" unless and until a copy
of a resolution duly adopted by the affirmative vote of not less than two-thirds
of the entire membership of the Board of Directors at a meeting called and held
for that purpose (after reasonable notice to Executive and opportunity for
Executive, together with counsel, to be heard by the Board), finding that in the
good faith opinion of the Board, Executive was guilty of conduct constituting
Cause as defined above and specifying the particulars for such finding in
detail, has been delivered to Executive. The parties agree that the provisions
for a Board resolution and the process called for by this paragraph do not
- --------------------------
1 In the event of Executive's arrest or indictment on felony charges, payments
of severance and other benefits under this Agreement shall be withheld until
guilt or innocence is determined. For the purposes of this Agreement,
Executive's pleading of no lo contendre to a felony charge shall be considered a
conviction.
<PAGE>
require a delay of Executive's termination; instead, the general purpose of such
process is to determine whether any involuntary termination is with or without
Cause and/or if reinstatement is warranted.
(c) Without Cause. Either the Executive or the Company may terminate
Executive's employment with the Company immediately without cause and without
prior notice.
(d) Good Reason. The Executive may terminate his employment with the
Company for Good Reason. Good Reason shall mean the occurrence, after a Change
in Control and during the term of this Agreement, (without the Executive's
written consent) of any one of the following acts by the Company, or failures by
the Company to act:
(i) the assignment to the Executive of any duties inconsistent
with Executive's status as Vice President, _____________________, or a
substantial adverse alteration in the nature or status of Executive's
responsibilities; or
(ii) any reduction by the Company in the Executive's annual
base salary as in effect immediately prior to the Change in Control or as the
same may be increased from time to time; or
(iii) the failure by the Company to pay to Executive any
portion of Executive's current salary or incentive compensation, or to pay to
Executive any portion of an installment of deferred compensation under any
deferred compensation program of the Company, within seven (7) days of the date
such compensation is due; or
(iv) (a) the failure by the Company to continue in effect any
on-going compensation plan in which the Executive participates immediately prior
to the Change in Control which is material to the Executive's total
compensation, including but not limited to, as applicable, stock options,
restricted stock, stock appreciation rights, incentive compensation, bonus,
retention bonus and other plans, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan;
or (b) the failure by the Company to continue the Executive's participation
therein (or in such substitute or alternative plan) on a basis not materially
less favorable, both in terms of the amount or timing of payment of benefits
provided and the level of the Executive's participation relative to other
participants, as existed immediately prior to the Change in Control; or
(v) (a) the failure by the Company to continue to provide the
Executive with benefits substantially similar to those enjoyed by the Executive
under any of the Company's retirement savings, life insurance, medical, health
and accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control, (b) the taking of any action by the
Company which would directly or indirectly materially reduce any of such
benefits or deprive the Executive of any material perquisite or material fringe
benefit enjoyed by the Executive immediately prior to the Change in Control,
provided that no substantially similar fringe benefit or perquisite has been
<PAGE>
provided, or (c) the failure by the Company to provide the Executive with at
least the number of paid vacation days to which the Executive is entitled on the
basis of years of service with the Company in accordance with the provisions of
the original employment offer, or the Company's normal vacation policy in effect
immediately prior to the Change in Control, whichever is more favorable to the
Executive; or
(vi) the relocation of the Executive's principal place of
employment to a location more than 35 miles from the Executive's principal place
of employment as of the date hereof or the Company's requiring the Executive to
be based anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Company's business to an
extent substantially consistent with the Executive's business travel obligations
immediately prior to the Change in Control.
Notwithstanding the foregoing, no event shall constitute "Good
Reason" unless the Executive shall have notified the Company in writing of the
conduct allegedly constituting Good Reason and the Company shall have failed to
correct such conduct within thirty (30) days of the date of its receipt of such
written notice from the Executive. Moreover, unless Executive shall have
notified the Company of the conduct allegedly constituting Good Reason within
six months of the first occurrence of such conduct, then Executive shall have
waived his/her right to claim that such conduct constitutes "Good Reason" under
this Agreement.
5. Termination Procedure.
(a) Notice of Termination. Any termination of the Executive's
employment by the Company or by the Executive (other than termination due to the
death of the Executive) shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 8. For purposes of this
Agreement, a "Notice of Termination" shall mean a notice that shall indicate the
specific provision in this Agreement relied upon and, if applicable, shall
identify in reasonable detail the reason for termination of the Executive's
employment under the provision so indicated.
(b) Date of Termination. "Date of Termination" shall mean: (i) if the
Executive's employment is terminated by his or her death, the date of his or her
death, or (ii) if the Executive's employment is terminated pursuant to any other
reason or Section of this Agreement, the date of termination shall be the date
that Notice of Termination is issued.
6. Compensation Upon Termination.
(a) Termination Due to Death or Disability. If Executive's employment
is terminated under Section 4(a), except as provided in Section 6(d) below, the
Company shall have no further obligations to Executive under this Agreement.
(b) Termination by Company without Cause or by Executive for Good
Reason. Upon termination of Executive's employment after a Change in Control and
<PAGE>
during the term of this Agreement by the Company without Cause or by Executive
for Good Reason hereunder,2 then, in lieu of any further salary, bonus, or other
incentive payments for periods subsequent to the Date of Termination (with the
sole exception of any retention bonus due in the future) and in lieu of any
severance benefit otherwise payable to the Executive:
(i) Salary. The Company shall pay to the Executive a lump sum
cash severance payment, within thirty (30) days of the Date of Termination,
equal to one and one-half (1 1/2) times the higher of the Executive's annual
base salary as of the Date of Termination or the Executive's annual base salary
in effect immediately prior to the Change in Control.
(ii) Bonuses and Incentives. The Company shall pay to the
Executive a lump sum in cash, within thirty (30) days of the Date of
Termination, equal to one and one-half (1 1/2) times the higher of the
Executive's annual target incentive bonus in effect as of the Date of
Termination or the date immediately prior to the Change in Control as if such
annual target incentives had been achieved.
(iii) Health and Life Insurance Coverage. During a period of
eighteen (18) months (the "Severance Period") the Company shall pay for
Executive's life, accident and health insurance benefits ("Welfare Benefits")
substantially similar in all material respects to those which the Executive is
receiving immediately prior to the Date of Termination (without giving effect to
any adverse amendment to, or elimination of, such benefits made after a Change
in Control). Any eligible dependent coverage Executive had as of the Date of
Termination will continue for such period on the same terms, to the extent
permitted by the applicable policies or contracts. If the terms of any benefit
plan referred to in this Section 6(b)(iii) do not permit continued participation
by Executive or the benefits are not substantially similar in all material
respects the Company, if possible, will arrange for other coverage at its
expense providing substantially similar benefits. The coverage provided for in
this Section shall be applied against and reduces the period for which COBRA
benefits will be provided. If the Executive receives Welfare Benefits from
another source during the Severance Period, then the Company's obligation to
continue Welfare Benefits at the Company's expense will cease. The Executive
agrees to promptly report to the Company if he receives any Welfare Benefits
during the Severance Period.
(c) Termination by the Company for Cause or by Executive Other than
for Good Reason. If the Executive's employment shall be terminated after a
Change in Control and during the term of this Agreement by the Company for Cause
or by the Executive other than for Good Reason, then, subject to Section 6(d)
below, the Company shall have no obligations to Executive under this Agreement.
- -------------------------
2 As provided in Section 2, this section 6(b) shall also apply in the event
Executive is terminated prior to a Change in Control at the request of a third
party who has taken substantial steps reasonably calculated to effect a Change
in Control.
<PAGE>
(d) Additional Payments. Following any termination of the Executive's
employment following the Change in Control and during the term of this
Agreement, (i) the Company shall pay the Executive all unpaid amounts, if any,
to which the Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, if such payments are due on or
before the Date of Termination, (ii) within ten (10) days of the Date of
Termination, the Company shall pay the Executive, or his legal representatives
or estate, as applicable, the Executive's full salary through the Date of
Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits normally payable to the
Executive at Termination under the ordinary terms of the Company's compensation
and benefit plans, programs or arrangements and (iii) the Company shall pay to
the Executive the Executive's legally required post-termination compensation and
benefits as such payments become due (such post-termination compensation and
benefits shall be determined under, and paid in accordance with, the Company's
retirement savings, insurance and other compensation and benefit plans, programs
and arrangements).
7. Adjustment of Benefits.
(a) Maximization of Amount. Notwithstanding anything in this Agreement
to the contrary, if, in the opinion of independent tax accountants or counsel
selected and retained by the Company and reasonably acceptable to Executive
(referred to hereinafter as "Tax Counsel"), any portion of the compensation and
benefits payable, or to be provided, to Executive by the Company under this
Agreement, any other agreement between Executive and the Company, or any plan or
policy of the Company, are to be treated as an Excess Parachute Payment subject
in whole or in part to the excise tax imposed under Internal Revenue Code
Section 4999 (the "Excise Tax"), then the Company shall direct Tax Counsel to
determine and compare Executive's net after-tax income under each of the
following assumptions: (i) all of the compensation and benefits payable by the
Company under all such arrangements are paid to Executive ("Full Severance") and
Executive pays all applicable federal, state and local taxes, including, without
limitation, the Excise Tax; or (ii) the total amount of the compensation and
benefits payable by the Company under all such arrangements is reduced ("Reduced
Severance") such that no Excess Parachute Payment results and the Excise Tax is
not triggered but otherwise Executive pays all applicable federal, state and
local taxes. If Tax Counsel's determination shows that payment to Executive of
Full Severance provides Executive with higher net after-tax income, then the
Full Severance shall be payable to Executive. If Tax Counsel's determination
shows that Reduced Severance provides Executive with higher net after-tax
income, the Reduced Severance shall be payable to Executive. In all cases, the
parties agree that Executive shall bear the cost of the Excise Tax, if any, and
all applicable federal, state, and local taxes (including penalties and
interest). If a Full Severance is paid, Tax Counsel shall provide Executive with
a written summary showing the amount of the Excess Parachute Payment and the
estimated Excise Tax to be paid. If a Reduced Severance is paid, Tax Counsel
shall provide to Executive a written opinion that the total amount of payments
made to Executive do not comprise an Excess Parachute Payment and that no Excise
Tax is due.
<PAGE>
(b) Reduction of Amount. In the event that the amount of any Severance
Payments which would be payable to or for the benefit of Executive under this
Agreement are reduced to comply with this Section, the Company and Executive
jointly shall decide which Severance Payments are to be reduced; provided,
however, the Company shall not unreasonably deny the requests and preferences of
Executive in making this determination.
(c) Cooperation of Parties. This Section 7 shall be interpreted so as
to maximize the net after-tax dollar value to Executive. In determining whether
any Excess Parachute Payment exists and the most advantageous outcome for
Executive, the parties shall take into account all provisions of Internal
Revenue Code Section 280G and the regulations thereunder, including making
appropriate adjustments to such calculation for amounts established to be
Reasonable Compensation pursuant to Internal Revenue Code Section 280G(b)(4) and
amounts paid under qualified plans pursuant to Internal Revenue Code Section
280G(b)(6). Both the Company and Executive shall cooperate fully with Tax
Counsel and provide Tax Counsel with all compensation and benefit amounts,
personal tax information and other information necessary or helpful in
calculating such net after-tax amounts. The parties agree that all fees and
expenses of Tax Counsel shall be borne solely by the Company. If Executive
disputes Tax Counsel's calculations, the dispute shall be resolved in accordance
with Section 7(f) below. In connection with any Internal Revenue Service
examination, audit or other inquiry related to the payment of Severance
Payments, the calculation of an Excess Parachute Payment, or the amount or
existence of any related tax liability (including income tax and Excise Tax),
the Company and Executive agree to cooperate in providing evidence to the
Internal Revenue Service (and, if applicable, to state revenue departments).
Furthermore, if in the context of a tax exam, audit, or proceeding the Company
plans to contest the amount or existence of an Excess Parachute Payment or the
applicable Excise Tax, the Company shall promptly notify Executive in writing
and Executive shall: (i) give the Company any information reasonably requested
by the Company relating to such claim, (ii) take such action in connection with
contesting such claim as the Company shall reasonably request in writing from
time to time, including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the Company, (iii)
cooperate with the Company in good faith in order effectively to contest such
claim, and (iv) permit the Company to participate in any proceedings relating to
such claim. The Company shall bear and pay directly all legal and administrative
costs incurred in connection with such contest.
(d) Correction of Determination. If it is established pursuant to a
final determination of a court or an Internal Revenue Service proceeding, or
pursuant to an opinion of Tax Counsel, that, notwithstanding the good faith of
the Company and Executive in applying the terms of this Section 7, either (i)
all or a portion of the amounts paid to Executive unintentionally constituted an
Excess Parachute Payment and triggered the Excise Tax, although the payments to
Executive were reduced in an effort to avoid such result; or (ii) the amount
paid to Executive was reduced by more than was necessary to avoid triggering the
<PAGE>
Excise Tax, then the parties shall make the applicable correction that will
achieve the goal described in Section 7(c) hereof. In the event the error
referred to in clause (i) hereof occurs, Executive shall repay to the Company,
within ten (10) days after the error is discovered, the amount necessary to
avoid the Excise Tax; provided, however, that if Executive, based on advice from
Tax Counsel and Executive's own tax advisor, determines that the return of such
amounts will not serve to eliminate the Excess Parachute Payment and the Excise
Tax, the Company shall then be obligated to pay to Executive, within ten (10)
days after Executive notifies the Company of Executive's determination, the
total amount by which the original amount of Executive's compensation and
benefits were reduced pursuant to the terms of Section 7(a) and (b) hereof. In
the event the error referred to in clause (ii) occurs, the Company shall pay to
Executive, within ten (10) days after the error is discovered, the maximum
amount of the compensation and benefits that were reduced pursuant to the terms
of Section 7(a) and (b) hereof that Executive may receive without triggering the
Excise Tax.
8. Miscellaneous.
(a) Notices. All notices, consents and other communications required or
authorized to be given by either party to the other under this Agreement shall
be in writing and shall be deemed to have been given or submitted (i) upon
actual receipt if delivered in person or by facsimile transmission with
confirmation of transmission, (ii) upon the earlier of actual receipt or the
expiration of two (2) business days after sending by express courier (such as
U.P.S. or Federal Express), and (iii) upon the earlier of actual receipt or the
expiration of seven (7) business days after mailing if sent by registered or
certified mail, postage prepaid, to the parties at the following addresses:
To the Company: Gardenburger, Inc.
1411 SW Morrison St., Suite 400
Portland, OR 97205
Fax Number: 503-205-1595
Attn: Chief Executive Officer
With a Copy to: Gardenburger, Inc.
1411 SW Morrison St., Suite 400
Portland, OR 97205
Fax Number: 503-205-1576
Attn: Vice President, Human Resources
To Executive: XXXX XXXXX
At the last address and fax number
Shown on the records of the Company
Executive shall be responsible for providing the Company with a current address.
Either party may change its address (and facsimile number) for purposes of
notices under this Agreement by providing notice to the other party in the
manner set forth above.
<PAGE>
(b) Assignment. This Agreement shall inure to the benefit of and shall
be binding upon the parties hereto and their respective executors,
administrators, heirs, personal representatives and successors, but, except as
hereinafter provided, neither this Agreement nor any right hereunder may be
assigned or transferred by either party hereto, or by any beneficiary or any
other person, or be subject to alienation, anticipation, sale, pledge,
encumbrance, execution, levy or other legal process of any kind against
Executive, Executive's beneficiary or any other person. Notwithstanding the
foregoing, any person or business succeeding to all or substantially all of the
business of the Company by stock purchase, merger, consolidation, purchase of
assets or otherwise, shall be bound by and shall adopt and assume this
Agreement, and the Company shall obtain the express assumption of this Agreement
by such successor.
(c) No Obligation to Fund. The agreement of the Company (or its
successor) to make payments to Executive hereunder shall represent the unsecured
obligation of the Company (and its successor), except to the extent (i) the
terms of any other agreement, plan or arrangement pertaining to the parties
provide for funding; or (ii) the Company (or its successor) in its sole
discretion elects in whole or in part to fund the Company's obligations under
this Agreement pursuant to a trust arrangement or otherwise.
(d) Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Oregon, except to the
extent otherwise expressly provided in this Agreement.
(e) Arbitration of Disputes; Expenses. All claims by Executive for
compensation and benefits under this Agreement shall be directed to and
determined by the Board of Directors and shall be in writing. Any denial by the
Board of a claim for benefits under this Agreement shall be delivered to
Executive in writing and shall set forth the specific reasons for the denial and
the specific provisions of this Agreement relied upon. The Board shall afford a
reasonable opportunity to Executive for a review of a decision denying a claim
and shall further allow Executive to appeal to the Board a decision of the Board
within sixty (60) days after notification by the Board that Executive's claim
has been denied. Any further dispute or controversy arising under or in
connection with this agreement shall be settled exclusively by arbitration in
Portland, Oregon, in accordance with the commercial arbitration rules of the
American Arbitration Association then in effect. The arbitration award shall be
final and binding upon the parties and judgment upon the award may be entered in
any court having jurisdiction. In the event either party incurs legal fees and
other expenses with relation to an action seeking to obtain or to enforce any
rights or benefits provided by this Agreement and is successful, in whole or in
part, in obtaining or enforcing any such rights or benefits through settlement,
arbitration or otherwise, the non-prevailing party shall promptly pay the
prevailing party's reasonable legal fees and expenses incurred in enforcing this
Agreement and the fees of the arbitrator(s). Except to the extent provided in
the preceding sentence, each party shall pay its own legal fees and other
expenses associated with any dispute, provided, however, that the fee for the
arbitrator(s) shall be shared equally.
<PAGE>
(f) Consulting and Subsequent Employment. Nothing in this Agreement
shall preclude the Company or its successors from employing Executive in a
consulting or regular employment capacity following termination of employment
under the conditions of this Agreement.
(g) Amendment. This Agreement may only be amended by a written
instrument signed by the parties hereto, which makes specific reference to this
Agreement.
(h) Severability. If any court of competent jurisdiction shall hold any
provision of this Agreement invalid or unenforceable, such holding shall not
invalidate or render unenforceable any other provisions hereof.
(i) Other Benefits. Except as set forth in Section 6(b), nothing in
this Agreement shall limit or replace the compensation or benefits payable to
Executive, or otherwise adversely affect Executive's rights, under any other
benefit plan, program or agreement to which Executive is a party.
(j) Entire Agreement. This document is the entire, final, and complete
agreement and understanding of the parties with respect to the topics discussed
herein and, if this Agreement directly conflicts with any other written and oral
agreements made or executed by and between the parties or their representatives,
this Agreement shall supersede all such agreements.
9. Release of Claims. As a precondition to receipt of the severance and other
benefits provided in Section 6(b) of this Agreement, Executive acknowledges and
understands that he or she must sign a Waiver and Release of Claims Agreement.
Such Agreement shall be substantially similar to the Agreement attached as
Exhibit A. Executive understands that he/she will not be entitled to receive any
payments until he/she executes and delivers the Waiver and Release of Claims
Agreement, and the revocation period set forth in the Waiver and Release of
Claims Agreement has run.
10. Non-Competition. Executive understands that a desire for an amicable
long-term relationship between Company and Executive, even after the termination
of Executive's employment, is an important aspect of the Company's entering into
this Agreement. Therefore, as a precondition of receipt of any benefits under
Section 6(b) of this Agreement, Executive agrees that within fifteen (15) days
after the termination of his/her employment with the Company, he/she will
execute the Non-Competition Agreement attached to this Agreement as Attachment
B. He/She acknowledges that the Non-Competition Agreement will be entered into
by both parties after his/her employment with the Company is concluded.
Executive shall not be entitled to receive any benefits under this Agreement
until he/she has executed and returned such Non-Competition Agreement to the
Company without alteration.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on its behalf by its duly authorized officers, and Executive has set
his or her hand, as of the date first written above.
XXXX XXXXX GARDENBURGER, INC.
________________________________ By:______________________________________
Date:___________________________ Title:___________________________________
Date:____________________________________
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As Independent public accountants, we hereby consent to the incorporation of our
reports dated November 5, 1999, included in this Form 10-K into the Company's
previously filed Registration Statements Nos. 33-64622, 33-64624, 33-76764,
333-79451, 333-79455 and 333-92665 on Form S-8 and Nos. 333-56775 and 333-79653
on Form S-3.
ARTHUR ANDERSEN LLP
Portland, Oregon,
December 23, 1999
<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
nine month period ended September 30, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 7,033
<SECURITIES> 0
<RECEIVABLES> 6,434
<ALLOWANCES> 301
<INVENTORY> 7,268
<CURRENT-ASSETS> 27,416
<PP&E> 14,235
<DEPRECIATION> 3,960
<TOTAL-ASSETS> 52,702
<CURRENT-LIABILITIES> 15,675
<BONDS> 20,000
0
32,147
<COMMON> 10,619
<OTHER-SE> (20,938)
<TOTAL-LIABILITY-AND-EQUITY> 52,702
<SALES> 60,106
<TOTAL-REVENUES> 60,106
<CGS> 34,334
<TOTAL-COSTS> 34,334
<OTHER-EXPENSES> 55,769
<LOSS-PROVISION> 190
<INTEREST-EXPENSE> 1,596
<INCOME-PRETAX> (31,389)
<INCOME-TAX> 11,223
<INCOME-CONTINUING> (22,146)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,146)
<EPS-BASIC> (2.51)
<EPS-DILUTED> (2.51)
</TABLE>
