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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to_________
Commission file number 0-20330
------------------------
GARDENBURGER, INC.
(Exact name of registrant as specified in its charter)
OREGON 93-0886359
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1411 SW MORRISON STREET, SUITE 400, PORTLAND, OREGON 97205
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 503-205-1500
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK WITHOUT PAR VALUE 8,927,101
(Class) (Outstanding at August 7, 2000)
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<PAGE>
GARDENBURGER, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION Page
------------------------------- ----
Item 1. Financial Statements
Balance Sheets - June 30, 2000 and September 30, 1999 2
Statements of Operations - Three Month and Nine Month
Periods Ended June 30, 2000 and 1999
3
Statements of Cash Flows - Nine Months Ended June 30,
2000 and 1999 4
Notes to Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
7
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 12
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------- --------------------
GARDENBURGER, INC.
BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------------- -------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,038 $ 7,033
Accounts receivable, net of allowances of
$264 and $301 6,245 6,133
Inventories, net 7,684 7,268
Prepaid expenses 2,273 2,207
Deferred income taxes 5,245 4,775
------------------- -------------------
Total Current Assets 23,485 27,416
Property, Plant and Equipment, net of accumulated
depreciation of $4,880 and $3,960 7,685 10,275
Deferred Income Taxes 12,691 12,691
Other Assets, net of accumulated amortization of
$1,106 and $804 2,057 2,320
------------------- -------------------
Total Assets $ 45,918 $ 52,702
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term note payable $ 3,500 $ 5,000
Accounts payable 2,058 6,669
Payroll and related liabilities payable 1,960 941
Other current liabilities 1,771 3,065
------------------- -------------------
Total Current Liabilities 9,289 15,675
Other Long-Term Liabilities 172 199
Convertible Notes Payable 15,000 15,000
Convertible Redeemable Preferred Stock 35,421 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:
8,927,101 and 8,841,451 11,114 10,619
Additional paid-in capital 12,404 4,277
Retained deficit (37,482) (25,215)
------------------- -------------------
Total Shareholders' Deficit (13,964) (10,319)
------------------- -------------------
Total Liabilities and Shareholders' Equity (Deficit) $ 45,918 $ 52,702
=================== ===================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
2
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
--------------------------------- ---------------------------------
2000 1999 2000 1999
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 21,333 $ 22,228 $ 54,444 $ 64,502
Cost of goods sold 10,956 13,052 27,446 34,211
-------------- --------------- --------------- --------------
Gross margin 10,377 9,176 26,998 30,291
Operating expenses:
Sales and marketing 7,888 22,032 21,775 45,395
General and administrative 1,420 1,669 5,095 5,165
Restructuring charge - 1,584 - 2,684
-------------- --------------- --------------- --------------
9,308 25,285 26,870 53,244
-------------- --------------- --------------- --------------
Operating income (loss) 1,069 (16,109) 128 (22,953)
Other income (expense):
Interest income 20 127 100 162
Interest expense (476) (495) (1,379) (1,688)
Other, net 8 2 (176) (1)
-------------- --------------- --------------- --------------
(448) (366) (1,455) (1,527)
-------------- --------------- --------------- --------------
Income (loss) before benefit from income taxes 621 (16,475) (1,327) (24,480)
(Provision for) benefit from income taxes (233) 5,936 461 8,805
-------------- --------------- --------------- --------------
Net income (loss) before preferred dividends 388 (10,539) (866) (15,675)
Preferred dividends 1,092 889 11,401 889
-------------- --------------- --------------- --------------
Net loss available for common shareholders (704) (11,428) (12,267) (16,564)
============== =============== =============== ==============
Net loss per share - basic and diluted $ (0.08) $ (1.29) $ (1.38) $ (1.89)
============== =============== =============== ==============
Shares used in per share calculations 8,926,279 8,834,143 8,875,195 8,772,749
============== =============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
GARDENBURGER, INC.
STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss before preferred dividends $ (866) $ (15,675)
Effect of exchange rate on operating accounts (1) (14)
Adjustments to reconcile net loss before preferred dividends
to net cash flows used in operating activities:
Deferred income taxes (470) (8,768)
Depreciation and amortization 1,670 1,531
Other non-cash expense 419 2,305
Loss on sale of property and equipment 199 1
(Increase) decrease in:
Accounts receivable, net (112) 1,347
Inventories, net (416) (4,784)
Prepaid expenses (66) 1,083
Income taxes receivable - 400
Increase (decrease) in:
Accounts payable (4,611) 2,836
Payroll and related liabilities payable 1,019 (352)
Other current liabilities (1,294) 864
------------------- -------------------
Net cash used in operating activities (4,529) (19,226)
Cash flows from investing activities:
Payments for purchase of property and equipment (545) (6,587)
Proceeds from sale of property and equipment 1,541 5,351
Other assets, net (39) (73)
------------------- -------------------
Net cash provided by (used in) investing activities 957 (1,309)
Cash flows from financing activities:
Payments on line of credit, net (1,500) (8,295)
Financing fees related to issuance of convertible notes payable - (55)
Issuance of preferred stock, net of issuance costs - 30,169
Proceeds from exercise of common stock options 76 520
Income tax benefit of non-qualified stock option exercises
and disqualifying dispositions 1 33
------------------- -------------------
Net cash provided by (used in) financing activities (1,423) 22,372
------------------- -------------------
Increase (decrease) in cash and cash equivalents (4,995) 1,837
Cash and cash equivalents:
Beginning of period 7,033 3,029
------------------- -------------------
End of period $ 2,038 $ 4,866
=================== ===================
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
GARDENBURGER, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE INDICATED)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
-----------------------------
The financial information included herein for the three and nine-month periods
ended June 30, 2000 and 1999 and the financial information as of June 30, 2000
is unaudited. However, such information reflects all adjustments, consisting
only of normal recurring adjustments, which are, in the opinion of management,
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods. The financial information as
of September 30, 1999 is derived from Gardenburger, Inc.'s (the Company's) 1999
Annual Report on Form 10-K. The interim financial statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's 1999 Annual Report on Form 10-K. The results of operations for the
interim periods presented are not necessarily indicative of the results to be
expected for the full year.
NOTE 2. 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.
JUNE 30, 2000 SEPTEMBER 30, 1999
------------------- --------------------
Raw materials $2,221 $2,672
Packaging and supplies 448 538
Finished goods 5,015 4,058
------------------- --------------------
$7,684 $7,268
=================== ====================
NOTE 3. SUPPLEMENTAL CASH FLOW INFORMATION
------------------------------------------
Supplemental disclosure of cash flow information is as follows:
NINE MONTHS ENDED JUNE 30,
-------------------------------
2000 1999
----------- ----------
Cash paid during the period for income taxes $ 6 $ 9
Cash paid during the period for interest 320 737
Stock issued in exchange for interest expense 419 1,050
Non-cash preferred dividends 11,401 889
5
<PAGE>
NOTE 4. EARNINGS PER SHARE
--------------------------
Basic earnings per share ("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:
JUNE 30,
-----------------------------------------
2000 1999
---------------- ---------------
Stock options 3,010 3,223
Convertible notes 1,313 1,237
Convertible preferred stock 4,062 3,250
---------------- ---------------
Total 8,385 7,710
================ ===============
NOTE 5. LINE OF CREDIT
-----------------------
In December 1999, the Company entered into a Loan and Security Agreement with
Banc of America Commercial Finance Corporation (the "Agreement"). The Agreement
provides for a line of credit of up to $25.0 million (assuming 30 percent
participation by another lender) and expires on December 23, 2002. The interest
rate on the line is prime plus 0.125%, 9.625% at June 30, 2000. The Company had
$3.5 million outstanding under this line at June 30, 2000. There is one
financial covenant under the Agreement as follows: the Company must not have a
cumulative cash loss in excess of $5.0 million from the origination date of the
Agreement through the expiration date of the Agreement. At June 30, 2000, the
Company was in compliance with this covenant.
NOTE 6. CONVERTIBLE REDEEMABLE PREFERRED STOCK
-----------------------------------------------
The Company did not meet its performance targets for the twelve months ended
December 31, 1999 as specified in the terms of the Series B Convertible
Preferred Stock and therefore was required to reset the conversion price of the
Series B shares to $3.75 per share from $10.00 per share, effectively increasing
the number of shares of common stock into which the Series B shares are
convertible from 487 to 1,300. As a result, the Company recorded a non-cash
preferred dividend charge of $8.1 million in the first quarter of fiscal 2000.
This charge was credited to additional paid-in capital.
NOTE 7. SUBSEQUENT EVENT
-------------------------
In August 2000, Lyle Hubbard, the Company's President, Chief Executive Officer
and Director, resigned effective August 4, 2000. In accordance with Mr.
Hubbard's employment and retention agreements, he was paid approximately $1.2
million upon his resignation.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
Results of Operations
---------------------
Net sales decreased to $21.3 million in the three months ended June 30, 2000
(the "third quarter of fiscal 2000") from $22.2 million in the three months
ended June 30, 1999 (the "third quarter of fiscal 1999") and decreased to $54.4
million for the nine months ended June 30, 2000 compared to $64.5 million for
the nine months ended June 30, 1999. The decreases for the quarter and year to
date periods ended June 30, 2000 compared to the quarter and year to date
periods ended June 30, 1999 are due to decreased advertising and couponing and a
decrease in sales within the veggie burger category. The decrease for the nine
months ended June 30, 2000 compared to the same period last year is also related
to strong December 1998 sales as customers, especially in the grocery channel,
stocked up on product in anticipation of extensive January 1999 consumer
promotions. The Company continues to hold the number one share position in all
distribution channels within which it does business. According to AC Nielsen
data, for the week ending July 8, 2000, the Company's market share was 39.1
percent in the grocery channel, despite aggressive spending by Kellogg's for
Worthington's Morningstar brand and Philip Morris' Kraft spending for Boca
Burger.
Gross margin was $10.4 million and $27.0 million, respectively (48.6 percent and
49.6 percent of net sales, respectively), for the three and nine month periods
ended June 30, 2000, compared to $9.2 million and $30.3 million, respectively
(41.3 percent and 47.0 percent of net sales, respectively), for the comparable
periods of fiscal 1999. The increases in the gross margin percentages are
primarily a result of the second production line at the Company's Clearfield
plant being fully on-line as well as favorable purchase prices for dairy
products during fiscal 2000. Gross margins in the second and third quarters of
fiscal 2000 were lower than the first quarter of fiscal 2000 due to one-time
start up costs related to the Company's new Flame Grilled products, which began
shipping to grocery customers in April 2000.
Sales and marketing expense decreased to $7.9 million and $21.8 million,
respectively (37.0 percent and 40.0 percent of net sales, respectively), for the
three and nine month periods ended June 30, 2000, compared to $22.0 million and
$45.4 million, respectively (99.1 percent and 70.4 percent of net sales,
respectively), for the three and nine month periods ended June 30, 1999. The
Company has reduced its sales and marketing expenditures as it moves to a profit
driven business model in fiscal 2000 from its more aggressive media advertising
model in fiscal 1999. The Company has significantly reduced its discretionary
marketing expenses and is focusing its marketing spending on areas that it
believes will more efficiently maintain its strong market position, especially
within the grocery channel. As discussed above, the Company has maintained its
number one position within its distribution channels despite the decrease in
marketing spending.
General and administrative expense ("g&a") totaled $1.4 million and $5.1
million, respectively (6.7 percent and 9.4 percent of net sales, respectively),
for the three and nine month periods ended June 30, 2000, compared to $1.7
million and $5.2 million, respectively (7.5 percent and 8.0 percent of net
sales, respectively), for the three and nine month periods ended June 30, 1999.
The decrease in g&a for the quarter and year to date periods ended June 30, 2000
compared to the quarter and year to date periods ended June 30, 1999 is
primarily the result of lower salaries and related costs as a result of an
7
<PAGE>
organizational downsizing which began in September of 1999, offset in part by
increased depreciation expense related to the Company's new information system,
certain one-time severance payments, and certain one-time costs related to new
strategic initiatives.
The Company incurred a restructuring charge of $2.7 million in the first six
months of calendar 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.
Income from operations was $1.1 million and $128,000, respectively, for the
three and nine month periods ended June 30, 2000 compared to loss from
operations of $16.1 million and $23.0 million, respectively, for the comparable
periods of fiscal 1999. The improvement in operating results was primarily due
to increased gross margin percentages and decreased operating expenses as a
percentage of net sales as discussed above, offset in part by lower sales in
fiscal 2000.
Income taxes are based on an estimated rate of 34.7 percent for the nine months
ended June 30, 2000 compared to the 35.8 percent rate used for all of fiscal
1999.
Preferred dividends were $1.1 million and $11.4 million for the three and nine
month periods ended June 30, 2000 compared to $889,000 in the comparable periods
of fiscal 1999. In April 1999, the Company issued $32.5 million of Series A and
Series B convertible preferred stock that is entitled to a 12% cumulative annual
dividend, resulting in a non-cash quarterly dividend charge of $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. Also, in the first quarter of fiscal 2000, due to an adjustment in
the Series B conversion price to $3.75 per share from $10.00 per share, the
Company recorded a non-cash charge of $8.1 million related to the implied value
of the beneficial conversion feature.
Net loss available for common shareholders was $0.7 million and $12.3 million,
respectively, for the three and nine month periods ended June 30, 2000 compared
to $11.4 million and $16.6 million, respectively, for the comparable periods of
fiscal 1999. The $12.3 million loss available for common shareholders for the
nine months ended June 30, 2000 includes the additional $8.1 million non-cash
preferred dividends charge in the first quarter of fiscal 2000 discussed above.
Liquidity and Capital Resources
-------------------------------
At June 30, 2000, working capital was $14.2 million. In the first nine months of
fiscal 2000, working capital increased by $2.5 million compared to September 30,
1999, and the current ratio increased to 2.5:1 from 1.7:1.
Cash and cash equivalents decreased $5.0 million from September 30, 1999,
primarily due to $4.5 million used in operations, $0.5 million used for the
purchase of property and equipment and $1.5 million used for payment on the
Company's line of credit, offset by $1.5 million in proceeds from the sale of
property.
8
<PAGE>
Accounts receivable remained relatively flat at $6.2 million at June 30, 2000
compared to $6.1 million at September 30, 1999. Days sales outstanding decreased
to 27 days at June 30, 2000 from 32 days at September 30, 1999.
Inventories increased $0.4 million to $7.7 million at June 30, 2000 from $7.3
million at September 30, 1999 in order to build finished goods for the summer
selling season. Inventory turned 5.0 times on an annualized basis in the third
quarter of fiscal 2000 compared to 3.4 times on an annualized basis in the third
quarter of fiscal 1999.
The Company recorded a benefit from income taxes of $15.0 million related to
$41.2 million of net operating loss carryforwards ("NOLs") through September 30,
1999 and has recorded an additional tax benefit of $461,000 as a result of a
$1.3 million loss before income taxes for the nine months ended June 30, 2000.
No valuation allowance has been recorded against the deferred tax asset for the
Company's net operating losses. Management has determined, based primarily on a
strategic shift in the fourth quarter of fiscal 1999 to a more profit driven
business model, that taxable income of the Company will more likely than not be
sufficient to utilize fully the NOLs prior to their ultimate expiration date.
The Company's basis for such assertion is 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.
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 dates in the years 2018 through 2019.
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.
Accounts payable decreased $4.6 million to $2.1 million at June 30, 2000 from
$6.7 million at September 30, 1999, primarily as a result of decreased spending
on advertising and related costs in fiscal 2000.
Payroll and related liabilities increased $1.1 million to $2.0 million at June
30, 2000 from $0.9 million at September 30, 1999, primarily as a result of
accrued retention compensation agreements in the first and second quarters of
fiscal 2000 that did not occur in the first two quarters of fiscal 1999.
9
<PAGE>
Other current liabilities decreased $1.3 million to $1.8 million at June 30,
2000 from $3.1 million at September 30, 1999, primarily as a result of the
timing of payment and amount of accruals related to new product introductions.
Capital expenditures of $545,000 during the first nine months of fiscal 2000
primarily resulted from expenditures for the Company's information systems.
Capital expenditures are estimated to total approximately $1.0 million for
fiscal 2000, primarily for information systems infrastructure and production
equipment.
Additional paid-in capital increased $8.1 million to $12.4 million at June 30,
2000 from $4.3 million at September 30, 1999 as a result of the $8.1 million
related to the implied value of the beneficial conversion feature of the Series
B convertible preferred stock.
The Company has outstanding $15.0 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 June 30, 2000 was $11.42
per share.
Under the terms of the Note Purchase Agreement, as amended, relating to the
Notes, the Company must comply with one financial covenant as follows: the
Company must not have a cumulative cash loss in excess of $5.0 million from
December 23, 1999 through December 23, 2002. At June 30, 2000, the Company was
in compliance with this covenant.
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 2,762,500 shares of Series A
convertible preferred stock and 487,500 shares of Series B convertible preferred
stock to members of the investor group, 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 March 31, 2000, the Series A preferred shares were
convertible at a price of $10 per share and the Series B preferred shares were
convertible at $3.75 per share (subject to antidilution adjustments) at any time
following issuance at the discretion of the holder. The Company did not meet
certain performance targets for the twelve months ended December 31, 1999
specified in the terms of the Series B convertible preferred stock, triggering
an adjustment in the Series B conversion price to $3.75 per share from $10.00
per share. As a result of the adjustment, the Company recorded an approximately
$8.1 million non-cash charge for additional preferred dividends to account for
the implied value of the beneficial conversion feature. 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,
exclusive of accrued but unpaid dividends, 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
In December 1999, the Company entered into a Loan and Security Agreement with
Banc of America Commercial Finance Corporation (the "Agreement"). The Agreement
provides for a line of credit of up to $25.0 million (assuming 30 percent
participation by another lender) and expires on December 23, 2002. The interest
rate on the line is prime plus 0.125%, 9.625% at June 30, 2000. The Company had
$3.5 million outstanding under this line at June 30, 2000. There is one
financial covenant under the Agreement as follows: the Company must not have a
cumulative cash loss in excess of $5.0 million from the origination date of the
Agreement through the expiration date of the Agreement. At June 30, 2000, the
Company was in compliance with this covenant.
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
terms, which range from five to seven years, depending upon the equipment.
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.
In May 2000, the Emerging Issues Task Force ("EITF") reached consensus on Issue
No. 00-14, "Accounting for Certain Sales Incentives" ("EITF 00-14"). EITF 00-14
is intended to provide consensus guidance for the accounting for sales subject
to rebates and revenue sharing arrangements as well as coupons and discounts.
The issue addresses the income statement classification of rebates and other
discounts as well as the accounting for those rebates and discounts. As a result
of additional discussion by the EITF in July 2000, the implementation date of
ETIF 00-14 has been delayed until the fourth quarter of the first fiscal year
beginning after December 15, 1999. Upon application of the consensus,
comparative financial statements for prior periods should be reclassified to
comply with the classification guidelines of EITF 00-14. While it is expected
that EITF 00-14 will have an impact on the Company's financial statements, the
extent of the impact is not known at this time.
11
<PAGE>
ITEM 3. 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 June 30, 2000, the Company had $3.5 million
outstanding under this credit line at an annual interest rate of 9.625 percent.
A hypothetical 10 percent change in interest rates would not have a material
impact on the Company's cash flows.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
------- -----------------
On August 7, 2000, the Company announced the resignation of Lyle G. Hubbard as
President and Chief Executive Officer and a member of the Company's Board of
Directors, effective August 4, 2000. Pursuant to a separation agreement entered
into between the Company and Mr. Hubbard, the Company has agreed to pay to Mr.
Hubbard approximately $1.2 million, representing amounts that would have been
payable to Mr. Hubbard under his employment agreement dated April 14, 1996, as
amended, and his retention incentive agreement dated November 10, 1999, upon
termination of employment without cause, and a severance payment and health
insurance coverage in exchange for a release of claims against the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a) THE EXHIBITS FILED AS A PART OF THIS REPORT ARE LISTED BELOW AND THIS LIST
IS INTENDED TO COMPRISE THE EXHIBIT INDEX:
Exhibit No.
----------
10.1 Loan and Security Agreement dated December 23, 1999 between
Banc of America Commercial Finance Corporation through its
Commercial Funding Division and the Company. (1)
10.2 First Amendment dated December 30, 1999 to Note Purchase
Agreement dated March 27, 1998 between Dresdner Kleinwort
Benson Private Equity Partners LP and the Company. (1)
27 Financial Data Schedule.
(1) Previously filed with the Company's Form 10-Q for the quarter
ended December 31, 1999, as filed with the Securities and
Exchange Commission on February 9, 2000 and is incorporated
herein by reference.
(b) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the quarter ended June 30,
2000.
On August 8, 2000, the Company filed a report on Form 8-K to report the
resignation of Lyle G. Hubbard as President, Chief Executive Officer and
Director effective August 4, 2000. James W. Linford, previously Senior Vice
President of Supply Chain and Operations of the Company, has assumed the
role of interim President and CEO.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 10, 2000 GARDENBURGER, INC.
By: /s/ JAMES W. LINFORD
---------------------------------------------
James W. Linford
Interim President and Chief Executive Officer
(Principal Executive Officer)
By: /s/LORRAINE CRAWFORD
---------------------------------------------
Lorraine Crawford
Corporate Controller and Acting Chief
Financial Officer
(Principal Accounting Officer)
13
