SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
December 31, 1996 0-10825
Exact name of small business issuer as specified in its charter
NEW GENERATION FOODS, INC.
State or other jurisdiction of IRS Employer
incorporation or organization: Nevada Identification No.: 36-2972588
Address of principal executive offices:
45 Graham Road, Scarsdale, New York 10583
Telephone No.: (914) 722-2410
Securities registered pursuant to Section 12 (b) of the Act: None
Name of each exchange on which registered: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
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-B 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-KSB
or any amendment to this Form 10-KSB.
[ ]
The aggregate market value of the registrant's Common Stock
held by non-affiliates as of March 25, 1997 was $7,806 based on the average of
the high and low bid prices of such stock on March 25, 1997 as reported by the
NASD Electronic Bulletin Board Service.1
The number of shares outstanding of the registrant's Common
Stock as of March 25, 1997 was 399,830.
- --------
1Exclusion of shares held by any person should not be construed to indicate that
such person possesses the power, direct or indirect, to cause the direction of
the management or policies of the registrant or that such person is controlled
by or under common control with the registrant.
Registrant's revenues for its most recent fiscal year were $0.
<PAGE>
PART I
ITEM 1. BUSINESS
New Generation Foods, Inc. (the "Company" or "NGF") was
organized in February 1977 under the laws of the State of Nevada and adopted its
present name in August 1977. The Company was engaged in the development and sale
of nutritional food products until October 22, 1993, when substantially all of
its assets were sold (the "Asset Sale"), as described below. As a result of the
Asset Sale, the Company is no longer an operating company. During 1994, 1995 and
1996, the Company had no revenues and its income was derived from interest and
dividends and gains on the sale of its assets. The Company's assets consist
principally of cash, cash equivalents and marketable investment securities.
During the period 1982 - 1992, the Company developed a family
of all natural, nutritional and dietetic food products made from high protein
whole wheat utilizing its proprietary process. The Company's principal food
product was Spicer'sR Hunger CrunchersTM snacks, an expanded protein high fiber
food (hereinafter sometimes called "Spicer'sR"), produced with a crunchy
consistency, presently in the form of small wagon wheel shapes and available in
eight flavors. Spicer'sR is made from high protein whole wheat (protein content
of at least 14%) utilizing an extrusion process invented by Dr. Arnold Spicer,
assigned by him to the Company and patented by the Company.
THE ASSET SALE
As previously reported, on October 22, 1993, the Company sold
substantially all of the Company's assets to American Pacific Financial
Corporation ("American Pacific") for an aggregate purchase price of $2,600,000,
payable $150,000 in cash at the closing and the balance in secured notes of the
purchaser payable over a 30-month period. The remaining note receivable from the
Asset Sale, in the amount of $716,658, was paid in full in April 1996, with
accrued interest. At the closing, the Company also sold its inventory to
American Pacific at cost. The inventory sale was concluded for an aggregate
price of $130,500, of which $25,000 was paid to the Company at the Closing and
the balance has since been paid in full.
Interest of Certain Persons and
Conflicts of Interest
As described more fully in Items 11 and 12 below, Jerome S.
Flum, the Chairman of the Board, Chief Executive Officer and President of the
Company, individually and through Flum Partners, beneficially owns 2,333,333
shares of Series A Preferred Stock and 310,000 shares of Series B Preferred
Stock in addition to 150,054 shares of Common Stock. The Series A Preferred
Stock has a liquidation preference of $0.75 per share and the Class B Preferred
Stock has a liquidation preference of $1.00 per share. Therefore, upon
liquidation of the Company, Flum Partners, of which Mr. Flum is both general
partner and a limited partner, would receive, directly or indirectly,
approximately $2,060,000 plus cumulative dividends, aggregating $713,700 through
December 31, 1996, prior to
<PAGE>
any distributions to Common Stockholders. Flum Partners and Mr. Flum also own
approximately 37.5% of the outstanding shares of Common Stock and, therefore,
would be entitled to an aggregate of approximately 37.5% of such distributions
to Common Stockholders. Pursuant to the Certificates of Designation of the
Preferred Stock, the sale or transfer of substantially all of the assets of the
Company is deemed to be a liquidation, dissolution or winding-up of the Company
for purposes of determining when the liquidation preference of the holders of
Preferred Stock is to be paid. Accordingly, the holders of Preferred Stock are
entitled (after all debts of the Company have been paid) to receive
approximately $2,060,000 plus cumulative dividends before any distribution to
holders of the Common Stock. The Company does not have sufficient cash or other
assets to make such payment. However, the Preferred Stockholders, including Mr.
Flum, are not precluded at any time from seeking to enforce their rights to such
liquidation payment prior to the Company obtaining sufficient funds, which
enforcement could force the Company to seek protection under the bankruptcy
laws. Alternatively, the Preferred Stockholders could seek to obtain a partial
liquidation payment equal to the amount of available cash and other liquid
assets of the Company (approximately $1,968,000 at December 31, 1996), without
causing a bankruptcy filing, although in such event the Company's activities
would be effectively terminated. There are no specific circumstances of which
the Company is aware which would cause the Preferred Stockholders to seek such
liquidation preference payments. However, although it is the current intention
of management to apply the proceeds from the Asset Sale in a prudent manner,
which may increase the potential return to the minority Stockholders, the
Preferred Stockholders have not waived any legal rights to receive such
payments.
Use of Proceeds; Business of the Company
Following the Asset Sale
The Company has made no determination with regard to use of
the remaining proceeds of the Asset Sale. The Company will consider the options
it currently has available to it; namely, (i) to reinvest the proceeds, (ii)
make acquisitions of or merge with an operating business or (iii) liquidate the
Company and distribute such proceeds.
In the event that the Company proposes to engage primarily in
the business of investing, reinvesting or trading in securities, or otherwise
reinvests the proceeds of the Asset Sale in investment securities having a value
in excess of 40% of its total assets (exclusive of Government Securities,
certificates of deposit and other cash items), the Company may be deemed an
investment company and therefore may be required to register under and become
subject to the Investment Company Act of 1940. To date the value of the
Company's investment securities is well below such 40% limit.
In addition to considering the reinvestment of the proceeds of
the Asset Sale, the Company is considering seeking a merger, exchange of capital
stock, asset acquisition or other similar business combination with an operating
business. The Company's potential attraction to someone seeking an acquisition
or
<PAGE>
merger is that the Company will be a publicly held corporation. Thus, a merger
or acquisition could enable the other entity to become a publicly traded
corporation without experiencing the time requirements and financial
expenditures usually associated with going public. Moreover, under certain
circumstances it may be possible for an entity acquiring less than the
controlling shareholding in the Company to utilize some or all of the remaining
tax loss carry forwards of the Company in connection with the business
operations of such entity. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION- Federal Tax Consequences." If the
Company decides to pursue such a transaction it will encounter intense
competition from other entities having similar objectives. Further, there is a
large number of established and well financed entities, including venture
capital firms, that have increased their merger and acquisition activities.
Nearly all such entities will have significantly greater financial resources and
management capabilities than the Company, and consequently the Company will be
at a competitive disadvantage in identifying suitable merger or acquisition
candidates and successfully concluding a proposed merger, acquisition or similar
transaction.
To the extent the Preferred Stockholders demand payment of all
or a portion of the amounts due them, the Company's ability to invest the
proceeds of the Asset Sale, engage in a merger, exchange of capital stock, asset
acquisition or other similar business combination will be limited, if at all
possible. No such demand has as yet been received.
Another alternative that may be considered by the Company may
be the liquidation of the Company with a distribution to its then holders of
Common Stock of all assets remaining available for distribution after payment of
liabilities and after having made appropriate provisions for the payment of
liquidating distributions upon each class of stock having preference over the
Common Stock. Since most if not all of the proceeds received from the Asset Sale
will be used to satisfy required payments to the Preferred Stockholders, it is
not likely that the Company will have significant assets, if any, available for
distribution to minority stockholders following such required payments.
The Company has made no decision to do any of the foregoing,
although it has had preliminary discussions with several entities relative to a
potential business combination. The Company will evaluate the course of action
it will take with regard to the best interests of the Company and the Company's
stockholders. In the event the Company chooses to merge with another company, or
liquidate the Company, it will have to obtain the approval of a majority of the
voting power of the Company prior to taking such action. Such approval may not
be necessary in the case of certain other business combinations, including an
acquisition of stock or assets of another company. Any merger, acquisition or
other business combination is likely to result in substantial dilution of the
ownership interest of the current Common Stockholders in the Company.
Proceeds received from the Asset Sale not immediately required
for the purposes set forth above are being invested as
<PAGE>
management of the Company deems prudent, which may include, but will not be
limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, options, bonds or United States Government or municipal securities,
provided, however, that the Company will attempt to invest the net proceeds in a
manner which will not result in the Company being deemed to be an investment
company under the Investment Company Act of 1940. In this regard, while the
foregoing investments are intended to be temporary (i.e. for the period during
which the Company is determining its future course of action with regard to the
business or liquidation of the Company), any such investments deemed by the
Securities and Exchange Commission not to be temporary, may result in the
Company being required to register as an investment company. The Company
believes that to the extent a significant portion of such proceeds is not used
in evaluating prospective business options, the interest income thereon should
be sufficient to defray continuing general and administrative expenses, as well
as costs relating to compliance with securities laws and regulations.
Employees
As of March 25, 1997, the Company and its subsidiaries had one
full-time employee who is its Chief Executive Officer and one part-time
consultant who acts as its controller. Following the closing of the Asset Sale,
substantially all of the Company's former employees became employed by American
Pacific. None of the Company's employees is covered by a collective bargaining
agreement. The Company believes its relations with its employees to be
satisfactory and had suffered no interruption in operations.
The Company has no retirement, pension, profit sharing or
similar program in effect for its employees, but has adopted stock option plans
covering its employees.
Directors and Executive Officers of the Company
The directors and executive officers of the Company are as
follows:
Principal Occupation/
Name Age Position Held with Company
Jerome S. Flum 56 Chairman of the Board and
Chief Executive Officer
Richard J. James 57 Director
Leslie Charm 53 Director
The Company's By-Laws provide that (a) directors shall be
elected to hold office until the next annual meeting of stockholders and that
each director, including a director elected to fill a vacancy, shall hold office
until the expiration of the term for which the director was elected and until a
successor has been elected, and (b) officers shall hold office until their
successors are chosen by the Board of Directors, except that the Board may
remove any officer at any time.
<PAGE>
Jerome S. Flum has been a director of the Company since 1983.
He was appointed President and Chief Executive Officer of the Company and
Chairman of the Board of Directors in June 1985. Effective December 1989, he
resumed his position as President. Mr. Flum, an attorney, has been, for more
than five years, the sole General Partner of Flum Partners, a New York limited
partnership which was organized in 1972. Since 1995, Mr. Flum has been Chairman
of China Capital Corp., a privately held consulting and management company
headquartered in Bethesda, Maryland.
Richard J. James has been a director of the Company since
April 1992. Mr. James has been a Manager of Quality Control in the
Camera Division of Polaroid Corporation since 1983.
Leslie Charm has been a director of the Company since
September 1994. Since 1972, Mr. Charm has been a partner in the firm of Youngman
& Charm, a firm specializing in assisting companies that are experiencing
operating and/or financial problems. From 1977 through 1990, he was the Chairman
and President of Doctor Pet Centers, Inc., a major distributor and specialty
retail chain. From 1989 to the present, he has been a director of Moto Photo,
Inc., a publicly-held international franchisor of imaging centers.
ITEM 2. PROPERTIES.
The Company's plant and equipment were sold to American
Pacific as part of the Asset Sale, and the mortgage which was granted to the
Company on such assets has been discharged upon payment of the purchase price of
the Tangible Property Promissory Note. The Company conducts its business
operations from an office in the residence of its Chairman and does not own,
lease or occupy any other property, plant or equipment.
ITEM 3. LEGAL PROCEEDINGS.
In August 1985, an action was commenced against the Company by
a former employee in the Circuit Court of Cook County, Illinois County
Department, Law Division, alleging wrongful demotion and wrongful discharge by
the Company. The plaintiff is seeking back pay for the period since her release
as well as reinstatement to her position. The claim seeks damages in excess of
$15,000, plus punitive damages in excess of $15,000. While this matter is still
in the preliminary stages and there has been no discovery, the Company believes
that it has meritorious defenses and that the ultimate outcome should not have a
material adverse impact on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Prior to May 11, 1993, the Common Stock of the Company was
traded principally on the NASDAQ Automated Quotation System under the symbol
NGEN and also on the Boston Stock Exchange under the symbol NGF.B or NGF. During
the second quarter of 1993, the Company's Common Stock was delisted from both
the Boston Stock Exchange and the NASDAQ Automated Quotation System. The
Company's Common Stock now trades sporadically in the over-the-counter market
"Bulletin Board Service." The following table sets forth the high and low
closing bid quotations for the Common Stock as reported on the over-the-counter
market Bulletin Board Service for each calendar quarter of 1995 and 1996. Such
market quotations reflect inter-dealer prices without retail markup, markdown or
commission and do not necessarily represent actual transactions.
High Bid Low Bid
-------- -------
1995
First Quarter 9/64 3/64
Second Quarter 9/64 1/64
Third Quarter 3/64 1/64
Fourth Quarter 1/32 1/32
1996
First Quarter 1/32 1/32
Second Quarter 1/32 1/32
Third Quarter 1/32 1/32
Fourth Quarter 1/32 1/32
On March 25, 1997, there were approximately 500 registered
holders of the Company's Common Stock.
The Company has not paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future except that such dividends may be paid if the Company determines to
liquidate following consummation of the Asset Sale. See "Business - The Asset
Sale - Use of Proceeds; Business of the Company Following the Asset Sale." No
dividends on the Series A Preferred Stock have been paid. At December 31, 1996,
preferred dividends in arrears amounted to $630,000, or $.0675 per share of
Series A Preferred Stock, and $83,700, or $.09 per share of Series B Preferred
Stock.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
Financial Condition
As a result of the Asset Sale in October 1993, previously
reported, the Company has ceased its business operations. The remaining note
receivable from the Asset Sale, in the amount of $716,658 was paid in full in
April 1996, with accrued interest.
The Company intends to use a portion of its present cash and
investment holdings (approximately $1,968,000 as of December 31, 1996) to repay
certain accounts payable and to satisfy other liabilities of the Company
(aggregating $56,311 at December 31, 1996). The Company has made no
determination with regard to use of the remaining proceeds of the Asset Sale.
The Company will consider the options it currently has available to it; namely,
(i) to reinvest the proceeds, (ii) to make acquisitions of or merge with an
operating business, or (iii) to liquidate the Company and distribute such
proceeds.
In the event that the Company proposes to engage primarily in
the business of investing, reinvesting or trading in securities, or otherwise
reinvests the proceeds of the Asset Sale in investment securities having a value
in excess of 40% of its total assets (exclusive of Government Securities,
certificates of deposit and other cash items), the Company may be deemed an
investment company and therefore may be required to register under and become
subject to the Investment Company Act of 1940.
In addition to considering the reinvestment of the proceeds of
the Asset Sale, the Company is considering seeking a merger, exchange of capital
stock, asset acquisition or other similar business combination with an operating
business. The Company's potential attraction to someone seeking an acquisition
or merger is that the Company will be a publicly held corporation. Thus, a
merger or acquisition could enable the other entity to become a publicly traded
corporation without experiencing the time requirements and financial
expenditures usually associated with going public. Moreover, under certain
circumstances it may be possible for an entity acquiring less than the
controlling shareholding in the Company to utilize some or all of the remaining
tax loss carry forwards of the Company in connection with the business
operations of such other entity. See "Federal Tax Considerations." If the
Company decides to pursue such a transaction it will encounter intense
competition from other entities having similar objectives. Further, there is a
large number of established and well financed entities, including venture
capital firms, that have increased their merger and acquisition activities.
Nearly all such entities will have significantly greater financial resources and
management capabilities than the Company, and consequently the Company will be
at a competitive disadvantage in identifying suitable merger or acquisition
candidates and successfully concluding a proposed merger, acquisition or similar
transaction.
To the extent the Preferred Stockholders, with respect to
their liquidation preference, including accrued dividends, on the
<PAGE>
Series A and Series B Preferred Stock owned by them, as previously reported,
demand payment of all or a portion of the amounts due them, the Company's
ability to invest the proceeds of the Asset Sale, engage in a merger, exchange
of capital stock, asset acquisition or other similar business combination will
be limited, if at all possible. No such demand has as yet been received.
Another alternative that may be considered by the Company may
be the liquidation of the Company with a distribution to its then holders of
Common Stock of all assets remaining available for distribution after payment of
liabilities and after having made appropriate provisions for the payment of
liquidating distributions upon each class of stock having preference over the
Common Stock. Since most of the proceeds received from the Asset Sale will be
used to satisfy required payments to the Preferred Stockholders, it is not
likely that the Company will have significant assets, if any, available for
distribution to minority stockholders following such required payments.
The Company has made no decision to do any of the foregoing,
although it has had preliminary discussions with several entities relative to a
potential business combination. The Company will evaluate the course of action
it will take with regard to the best interests of the Company and the Company's
stockholders. In the event the Company chooses to merge with another company, or
liquidate the Company, it will have to obtain the approval of a majority of the
voting power of the Company prior to taking such action. Such approval may not
be necessary in the case of certain other business combinations, including an
acquisition of stock or assets of another company.
Proceeds received from the Asset Sale not immediately required
for the purposes set forth above are being invested as management of the Company
deems prudent, which may include, but will not be limited to, certificates of
deposit, mutual funds, money-market accounts, stock, options, bonds or United
States Government or municipal securities, provided, however, that the Company
will attempt to invest the net proceeds in a manner which will not result in the
Company being deemed to be an investment company under the Investment Company
Act of 1940. In this regard, while the foregoing investments are intended to be
temporary (i.e. for the period during which the Company is determining its
future course of action with regard to the business or liquidation of the
Company), any such investments deemed by the Securities and Exchange Commission
not to be temporary, may result in the Company being required to register as an
investment company. The Company believes that to the extent a significant
portion of such proceeds is not used in evaluating prospective business options,
the interest income thereon should be sufficient to defray continuing general
and administrative expenses, as well as costs relating to compliance with
securities laws and regulations.
At December 31, 1996, the Company had cash, cash equivalents
and other liquid assets of $1,968,823, compared to $1,293,545 of liquid assets
at December 31, 1995, and had working capital of $1,929,786, compared to working
capital of 1,462,915 at December 31, 1995. The Company has no bank lines of
credit or other currently available credit sources. The increase in liquid
<PAGE>
assets and working capital is due principally to the receipt in April 1996 of
the $716,658 final installment from the Asset Sale.
<PAGE>
Operations
1996 vs. 1995 and 1995 vs. 1994
As a result of the Asset Sale and the operation by American
Pacific of the Company's business from October 22, 1993, the Company's business
operations as a food manufacturer were terminated on that date. Accordingly, no
operations were conducted in the fiscal years ended December 31, 1994, December
31, 1995 and December 31, 1996.
In the years ending December 31, 1995 and December 31, 1996,
the Company recognized $141,722 and $543,158, respectively, representing the
balance of the total gain of $1,849,736 on the Asset Sale.
Net loss for the year ended December 31, 1995 was ($3,573) or
($.01) per share, reflecting increased selling, general and administrative
expenses, an increased loss on investments for the year and income taxes
attributable to Federal alternative minimum and New York State tax, in excess of
interest and dividend income on the Company's liquid assets and the portion of
the gain on the Asset Sale which was recognized in the year. The increase in
selling, general and administrative expenses in 1995 (which are now the only
expenses being incurred by the Company), reflected the payment to the Chairman
of $34,622 of salary which had been deferred from 1994. The reduction in net
income from 1994 principally reflected the recording of the major portion of the
gain on the Asset Sale in 1994.
Net income for the 1996 year was $471,385, or $1.18 per share,
reflecting interest and dividend income on the Company's liquid assets and the
portion of the gain on the Asset Sale which was recognized in the year, in
excess of selling, general and administrative expenses, including the Chairman's
compensation expense.
Statement of Financial Accounting Standards No. 115
The marketable investment securities at December 31, 1994 must
be accounted for in accordance with the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" (SFAS 115), effective January 1, 1994. SFAS 115 requires the
classification of debt and equity securities into one of three following
categories:
Held-to-Maturity-includes investments which the Company has
the positive intent and ability to hold until maturity. Such
investments are measured at amortized cost.
Trading Securities - includes investments in securities
purchased and held principally for the purpose of selling them
in the near term. Unrealized holding gains and losses are
included in income.
<PAGE>
Available-for-Sale - includes investments in securities not
classified as held-to-maturity or trading. Unrealized holding
gains and losses are reported as a net amount as a separate
component of stockholders' equity until realized.
Marketable investment securities, which consist of options and
warrants, are all classified as trading securities.
Federal Tax Considerations
The Company has available net operating loss carry-forwards
("NOLs") which may be used to reduce its Federal income tax liability. However,
provisions contained in the Internal Revenue Code of 1986, as amended (the
"Code"), may impose substantial limitations upon the Company's ability to
utilize its NOLs. For example, the Company may be subject to the so-called
"alternative minimum tax" which does not always permit full utilization of NOLs
otherwise available. In connection with the sale of assets to American Pacific,
the Company's NOLs may only be used to offset a maximum of 90% of alternative
minimum taxable income, which resulted in a Federal tax liability of
approximately $6,600 in 1994, which was recorded in 1995.
In addition, limitations imposed by Section 382 of the Code
upon the availability of NOLs would apply if certain changes were to occur in
ownership of the Company. Thus, the Company's utilization of its carry-forwards
in the future may be deferred and/or reduced if the Company undertakes further
equity financings or if certain other changes occur in the ownership of the
Common Stock. Finally, if the Company becomes an investment company subject to
the Investment Company Act of 1940, it will no longer be entitled to a deduction
for NOLs. For information regarding the amounts and expiration dates of the
Company's NOLs, see Note 4 to the Company's Consolidated Financial Statements.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements and financial statement schedules of
the Company as of and for the years ended December 31, 1996 and 1995, together
with the report of Clifton Gunderson L.L.C. independent auditors, are set forth
at pages F-1 to F-17 of this Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT.
Pursuant to General Instruction E(3) for Form 10-KSB, the
information required by this Item 9 is contained in Part I above and
incorporated herein by reference, except that the information required by Item
405 of Regulation S-B is set forth below.
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Section 16(a) of the Securities Exchange Act of 1934 requires
the Company's directors and executive officers, and persons who own more than
10% of a registered class of the Company's equity securities, to file with the
Securities and Exchange Commission, initial reports of ownership and reports of
changes in ownership of Common Stock and other equity securities of the Company.
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
To the Company's knowledge, based solely on representations
received from the officers and directors and greater than 10% shareholders, all
Section 16(a) filing requirement reports were made on a timely basis.
ITEM 10. EXECUTIVE COMPENSATION.
Cash Compensation of Executive Officers
The table set forth below shows the cash compensation paid for
services in all capacities to the Company's Chief Executive Officer during the
three years indicated.
Annual Compensation
-------------------
Name and Principal Position Year Salary
- --------------------------- ---- ------
Jerome S. Flum 1996 $121,506
President and Chief 1995 $119,856(2)
Executive Officer 1994 $425,490(1)
- ------------------
(1) Includes $334,603 paid upon Asset Sale pursuant to Employment
Agreement and $34,622 of salary for 1994 which had been deferred by
the Company. See "Certain Relationships and Related Transactions-
Related Party Transactions".
(2) Excludes $34,622 of salary for 1994 which had been deferred by the Company
and paid in 1995. See note (1) above.
Directors' Fees
Directors and committee members generally serve as such
<PAGE>
without compensation, except that commencing September 1994, non-employee
directors receive $450 for each Board of Directors meeting attended, up to a
maximum payment of $1,800 per Director per calendar year. In addition,
non-qualified stock options or stock appreciation rights have been granted from
time to time to current and former directors pursuant to the 1985 SAR and
Non-Qualified Option Plan, as amended (the "1985 Plan"), of the Company. See
"Compensation Pursuant to Stock Option Plans".
Compensation Pursuant to Stock Option Plans
During the period January 1, 1995 through December 31, 1996,
no options were granted to executive officers or employees of the Company and no
options held by executive officers or employees were exercised.
No options were granted to all current directors other than
executive officers as a group (two persons) or to Dr. Spicer, who died in 1995.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information concerning the only
persons known to the Company to own beneficially more than 5% of the Common
Stock or more than 5% of the Series A Preferred Stock or Series B Preferred
Stock as of March 25, 1997. Except as indicated in the following notes, the
owners have sole voting and investment power with respect to the shares.
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership of Percent of
----------------------- ----------
Preferred Preferred
Stock Stock
Series A Series A
Common - Common -
Beneficial Owners Stock Series B Stock(1) Series B
- ----------------- ----- -------- -------- --------
<S> <C> <C> <C> <C>
Flum Partners (2) 138,845(3) 2,333,333(3) 27.7% 100%
c/o Jerome S. Flum 310,000(3) 100%
45 Graham Road
Scarsdale, New York 10583
Jerome S. Flum 252,070(2) 2,333,333(3)(4) 50.2% 100%
45 Graham Road (3)(4) 310,000(3) 100%
Scarsdale, New York 10583
All officers and
directors as a group
(3 persons) 255,320(2) 2,333,333(3) 50.5% 100%
(3)(4)(5) 310,000(3) 100%
</TABLE>
(1) Percent of class is based on 399,830 shares of Common Stock
<PAGE>
outstanding as of March 25, 1997, plus the number of shares described
in note (4) below in the case of Flum Partners, Jerome S. Flum and Flum
Partners/Jerome S. Flum, as a group, and such total plus the number of
shares described in note (5) below in the case of all officers and
directors as a group.
(2) The sole general partner of Flum Partners is Jerome S.Flum, Chairman of
the Board, President and Chief Executive Officer of the Company.
(3) Because the shares of Series A Preferred Stock and Series B
Preferred Stock are immediately convertible by the record
owner at its option into 89,914 and 12,102 shares of Common
Stock, respectively, and pending such conversion are entitled
to 89,914 and 12,102 votes, respectively, the shares of Series
A Preferred Stock and Series B Preferred Stock are also
counted as 89,914 and 12,102 shares of Common Stock.
(4) Includes 138,845 shares of Common Stock (36,829 shares of
Common Stock and 2,333,333 shares of Series A Preferred Stock
and 310,000 shares of Series B Preferred Stock, convertible
into a total of 102,016 shares of Common Stock) owned
beneficially by Flum Partners which are also deemed to be
owned beneficially by Mr. Flum because of his power, as sole
general partner of Flum Partners, to direct the voting of such
shares held by the partnership. Mr. Flum disclaims beneficial
ownership of the shares owned by Flum Partners. The 252,070
shares of Common Stock, or 50.2% of the outstanding shares of
Common Stock, and all of the 2,333,333 shares of Series A
Preferred Stock and 310,000 shares of Series B Preferred
Stock, may also be deemed to be owned, beneficially and
collectively, by Flum Partners and Mr. Flum, as a "group",
within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (the "Act").
(5) Includes non-qualified stock options to purchase 3,250 shares
held by two directors. Excludes shares and options owned by
Dr. Spicer, who died during 1995.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Certain Transactions
On December 27, 1988, Flum Partners purchased 2,333,333 shares
of Series A Preferred Stock of the Company and on August 21, 1989, Flum Partners
purchased 310,000 shares of Series B Preferred Stock from the Company.
Under the terms of the Series A Preferred Stock, each share
thereof is convertible into .0297625 shares of Common Stock at the option of the
holder at any time (based on a formula using a conversion price of $25.20 per
share, as adjusted) plus an amount of Special Conversion Shares, calculated on
June 1, 1989 and on each June 1 thereafter through June 1, 1992, and thereafter,
at the option of a majority of the holders as set forth below, through December
1, 1995, based on an amount per share of Series A Preferred Stock of $0.0675 per
annum, divided by the conversion
<PAGE>
price then in effect; has a liquidation preference, on a ratable basis with the
Series B Preferred Stock, of $.75 per share; is entitled to cash dividends, on a
ratable basis with the Series B Preferred Stock, commencing June 1, 1992, at the
annual rate of $0.0675 per share, which shall be cumulative, provided that each
year until December 1, 1995, at the option of the holders of a majority of the
Series A Preferred Stock, such holders may elect, in lieu of the dividends, to
cause the Company to increase the Special Conversion Shares in the annual
amounts described above, plus, in the event a dividend is paid on the Common
Stock, a special dividend on any Special Conversion Shares, in the amount of the
Common Stock dividend which would be payable if such Special Conversion Shares
had been converted on the record date; and has an immediate and continuing right
of registration under the Securities Act of 1933, as amended (the "Act").
Under the terms of the Series B Preferred Stock, each share
thereof is convertible into .0294125 share of Common Stock at the option of the
holder at any time (based on a formula using an initial conversion price of
$34.00 per share, as adjusted) plus an amount of Special Conversion Shares,
calculated on June 1, 1990 and on each June 1 thereafter through June 1, 1993,
and thereafter, at the option of a majority of the holders as set forth below,
through December 1, 1996, based on an amount per share of Series B Preferred
Stock of $.09 per annum, divided by the conversion price per share then in
effect; has a liquidation preference, on a ratable basis with the Series A
Preferred Stock, of $1.00 per share; is entitled to cash dividends, on a ratable
basis with the Series A Preferred Stock, commencing June 1, 1993, at the annual
rate of $.09 per share, which shall be cumulative, provided that each year until
December 1, 1996, at the option of the holders of a majority of the Series B
Preferred Stock, such holders may elect, in lieu of dividends, to cause the
Company to increase the Special Conversion Shares in the annual amounts
described above, plus, in the event a dividend is paid on the Common Stock, a
special dividend on any Special Conversion Shares, in the amount of the Common
Stock dividend which would be payable if such Special Conversion Shares had been
converted on the record date; and has an immediate and continuing right of
registration under the Act.
The number of shares issuable upon conversion of the Series A
Preferred Stock and the Series B Preferred Stock and the conversion prices
thereof are subject to adjustment upon the occurrence of certain events,
including the issuance or sale of additional shares of Common Stock, or options,
warrants or rights therefor, at an effective price lower than the respective
conversion prices or 80% of the market price of the Common Stock, whichever is
lower. Pursuant to the foregoing adjustment provisions, the conversion prices of
the Series A Preferred Stock and the Series B Preferred Stock were adjusted to
reflect the sale to Mr. Flum of Common Stock at prices lower than the respective
conversion prices then in effect. Based on the adjusted conversion price of
$25.20 and after giving effect to the calculation of Special Conversion Shares,
the Series A Preferred Stock is currently convertible into 89,914 shares of
Common Stock. Based on the adjusted conversion price of $34.00 and after giving
effect to the calculation of the Special Conversion Shares, the Series B
Preferred Stock is currently convertible into 12,102 shares of
<PAGE>
Common Stock.
Pursuant to the terms of the Series A Preferred Stock and the
Series B Preferred Stock, the Asset Sale is deemed to be a liquidation,
dissolution or winding up of the Company. Accordingly, Flum Partners is entitled
to receive approximately $2,060,000 plus cumulative dividends in the amount of
$713,700 (after all debts of the Company have been paid) before any distribution
to holders of Common Stock. The Company does not have sufficient cash or other
assets to make such payment. See "Business-Sale of Assets-Interest of Certain
Persons and Conflicts of Interest".
Related Party Transactions
The Company entered into an employment agreement with Mr.
Flum, effective as of July 1, 1992. The employment agreement provides for Mr.
Flum to serve as the Chairman and Chief Executive Officer of the Company until
June 30, 1999, unless sooner terminated by the Company for cause, or upon death
or permanent disability. Mr. Flum will be entitled to a base salary of $112,000
per year, increasing to $135,000 immediately following the achievement by the
Company of a pre-tax operating profit for any fiscal year, with the foregoing
salary levels to be increased each year based on increases in the Consumer Price
Index. Mr. Flum will be entitled to a bonus based on a percentage of annual net
pre-tax profits for each year. Mr. Flum is entitled to participate in all
employee benefit plans made available by the Company to its other executive
officers, as well as the use of an automobile and coverage under a policy of
disability income insurance, as and when the Company's cash flow is sufficient
to defray the premium cost thereof. Pursuant to such employment agreement, upon
the occurrence of a change in control of the Company, Mr. Flum will be entitled
to receive a lump sum payment equal to three times his current annual base
salary, but not to exceed any amount which the Company shall be entitled to
deduct as a compensation expense under the Code. A change of control of the
Company shall be deemed to have occurred if (1) a third person acquires shares
of the Company having twenty-five percent or more of the total number of votes
that may be cast for the election of directors of the Company, (2) a merger or
consolidation of the Company with another corporation shall occur, unless the
Company shall be the surviving entity, (3) a sale of all or substantially all of
the Company's assets shall be made, or (4) the composition of a majority of the
Board of Directors of the Company shall change under certain circumstances.
Following the Asset Sale, the amount of $334,603, which
was accrued in 1993, was paid to Mr. Flum in 1994 as the lump-sum
payment due him under the Employment Agreement. See "Business-Sale
of Assets-Interest of Certain Persons and Conflict of Interest."
Effective July 1, 1992, through September 1994, Mr. Flum
had voluntarily agreed to a temporary reduction in his base salary
to $110,000 per year and, since April, 1992, to a further temporary
reduction at the rate of $1,500 per month ($300 per month effective
November 1992) to offset the fees and salary paid to Barbara
Schwartz. Effective October 1, 1994, Ms. Schwartz is no longer
employed by the Company. Effective January 1, 1996, Mr. Flum's
<PAGE>
current annual base salary is $121,506 per year.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3-A - Copy of the Company's Restated Articles of
Incorporation. (1)
3-B - Copy of the Company's Certificate of Amendment to
the Articles of Incorporation, dated August 31,
1987. (2)
3-C - Copy of the Company's By-Laws as amended April 27,
1987. (2)
3-D - Certificate of Designations for Series A Preferred
Stock, together with Certificate of Amendment
thereto and Second Certificate of Amendment
thereto. (3)
3-E - Certificate of Designations for Series B Preferred
Stock. (4)
10-A - Copy of Company's 1992 Stock Option Plan.(7)
10-B - Copy of Company's 1985 SAR and Non-Qualified Stock
Option Plan. (3)
10-C - Copy of Employment Agreement dated as of July 1,
1992 between the Company and Jerome Flum.(7)
10-D - Copy of 1988 Amendments to Company's 1985 SAR and
Non-qualified Stock Option Plan. (5)
10-E - Letter Agreement dated November 12, 1990 by and
between New Generation Foods, Inc. and Jerome S.
Flum. (6)
10-F - Letter Agreement dated November 27, 1990 by and
between New Generation Foods, Inc. and Jerome S.
Flum. (6)
10-G - Registration Rights Agreement dated November 12,
1990 by and between New Generation Foods, Inc. and
Jerome S. Flum. (6)
11 - Statements regarding computation of per share
earnings.
22 - Subsidiaries of the Company.
Exhibits as indicated above are not included with the Form
10-KSB. They are available upon request and payment of a reasonable fee
approximating the Registrant's cost of providing and mailing the exhibits.
Inquiries should be directed to:
New Generation Foods, Inc.
Office of the President (10-KSB Exhibits)
45 Graham Road
Scarsdale, New York 10583
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during 1996.
<PAGE>
(1) Filed as an Exhibit to Registrant's Registration Statement on
Form S-18 (File No. 1-67055C) and incorporated herein by
reference thereto.
(2) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ending December 31, 1988 (File No. 0- 10825) and
incorporated herein by reference thereto.
(3) Filed as an Exhibit to Registrant's Registration Statement on
Form S-2 (File No. 33-17446) and incorporated herein by
reference.
(4) Filed as an Exhibit to Registrant's Registration Statement on
Form S-8 (File No. 33-17446) filed October 25, 1989 and
incorporated herein by reference.
(5) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the
fiscal year ending December 31, 1989 (File No. 0-10825) and
incorporated herein by reference thereto.
(6) Filed as an Exhibit to Registrant's Post-Effective Amendment
No. 3 to Registration Statement on Form S-3 filed November 15,
1991 (File No. 33-17446) and incorporated herein by reference
thereto.
(7) Filed as an Exhibit to Registrant's Annual Report on Form
10-KSB for the fiscal year ending December 31, 1992 (File No.
0-10825) and incorporated herein by reference thereto.
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITOR'S REPORT............................................F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets - December 31, 1996 and 1995.......F-3
Consolidated Statements of Operations - Years Ended
December 31, 1996 and 1995................................F-5
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1996 and 1995................................F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996 and 1995................................F-8
Notes to Consolidated Financial Statements -
December 31, 1996 and 1995................................F-9
F-1
<PAGE>
Independent Auditor's Report
The Board of Directors and Stockholders
New Generation Foods, Inc.
We have audited the accompanying consolidated balance sheets of New Generation
Foods, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Generation
Foods, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
CLIFTON GUNDERSON L.L.C.
Peoria, Illinois
March 17, 1997
F-2
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,963,394 $ 1,265,756
Marketable investment securities, at market value 5,429 27,789
Notes receivable, less deferred gain of $543,158
in 1995 (Note 1) - 223,501
Interest receivable 16,090 6,808
Other receivables 1,184 -
---------- ----------
Total current assets 1,986,097 1,523,854
--------- ----------
EQUIPMENT, at cost (Note 3) 36,649 30,816
Less accumulated depreciation 19,988 18,669
---------- ----------
Net equipment 16,661 12,147
---------- ----------
TOTAL ASSETS $ 2,002,758 $ 1,536,001
============== ==============
</TABLE>
F-3
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accrued franchise taxes $ 45,200 $ 45,200
Accrued compensation 10,125 11,500
Accrued expenses 986 4,239
------- --------
Total current liabilities 56,311 60,939
------- --------
STOCKHOLDERS' EQUITY (Notes 5 and 6)
Cumulative Convertible Voting Preferred Stock, $.01
par value:
Series A (stated at liquidation value of $.75 per
share). Authorized 2,333,333 shares; issued
and outstanding 2,333,333 1,750,000 1,750,000
Series B (stated at liquidation value of $1.00 per
share). Authorized 350,000 shares; issued and
outstanding 310,000 310,000 310,000
Common stock, $.01 par value. Authorized 25,000,000
shares; issued and outstanding 399,830 3,998 3,998
Additional paid-in capital 22,818,930 22,818,930
Retained deficit (22,936,481) (23,407,866)
------------ ------------
Total stockholders' equity 1,946,447 1,475,062
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 2,002,7580 $1,536,001
============ ===========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
OPERATING EXPENSES
Selling, general, and administrative $ 36,583 $ 25,892
Chairman's compensation expense 121,506 154,478
-------- --------
Total operating expenses 158,089 180,370
-------- --------
Operating loss (158,089) (180,370)
-------- --------
OTHER INCOME (DEDUCTIONS)
Interest and dividend income 105,972 116,158
Interest expense - (160)
Gain on sale of assets (Note 1) 543,158 141,722
Loss on investments (22,373) (71,105)
Miscellaneous 2,982 (110)
------- --------
629,739 186,505
------- --------
Income before income taxes 471,650 6,135
INCOME TAXES (Note 4) 265 9,708
------- --------
NET INCOME (LOSS) $ 471,385 $ (3,573)
======== ==========
NET INCOME (LOSS) PER SHARE $ 1.18 $ (.01)
======= ==========
AVERAGE NUMBER OF SHARES
OUTSTANDING 399,830 399,830
========= =========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
Preferred Stock
---------------
Series A
--------
Shares Amount
------ ------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 2,333,333 $ 1,750,000
Net loss for year ended December 31, 1995 - -
----------- ---------
BALANCE AT DECEMBER 31, 1995 2,333,333 1,750,000
Net income for year ended December 31, 1996 - -
----------- ---------
BALANCE AT DECEMBER 31, 1996 2,333,333 $ 1,750,000
=========== ==========
</TABLE>
(continued on next page F-7)
F-6
<PAGE>
<TABLE>
<CAPTION>
Preferred Stock Additional Retained Total
--------------- ---------- -------- -----
Series B Common Stock Paid-in Earnings Stockholders'
-------- ------------ ------- -------- -------------
Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(cont'd)
310,000 $ 310,000 399,830 $ 3,998 $22,818,930 $ (23,404,293) $ 1,478,635
- - - - - (3,573) (3,573)
-------- ------- -------- ------- ----------- ---------- ---------
310,000 310,000 399,830 3,998 22,818,930 (23,407,866) 1,475,062
- - - - - 471,385 471,385
-------- ------- -------- ------- ----------- ---------- ---------
310,000 $ 310,000 399,830 $ 3,998 $22,818,930 $ (22,936,481) $ 1,946,447
======== ========= ======== ======= =========== =========== ==========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying notes to consolidated financial statements.
F-7
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 471,385 $ (3,573)
Adjustments to reconcile net income (loss) to net cash -------- ---------
provided by (used in) operating activities:
Depreciation 4,274 5,908
Loss on sale of marketable investment securities 61,077 5,358
Unrealized holding (gains) losses on marketable investment
securities (38,704) 65,747
Proceeds from sale of marketable investment securities (13) 1,002,120
Purchase of marketable investment securities - (37,213)
Gain on sale of assets (543,158) (141,722)
Gain on sale of fixed assets (34) -
Change in assets and liabilities:
Increase in receivables 10,466) (1,205)
Decrease in accounts payable, accrued compensation,
accrued expenses, and other current accruals (4,628) (30,867)
------- --------
Total adjustments 531,652) 868,126
-------- --------
Net cash provided by (used in) operating activities (60,267) 864,553
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (13,954) -
Proceeds from notes receivable 766,659 200,004
Proceeds from sale of fixed assets 5,200 -
-------- --------
Net cash provided by investing activities 757,905 200,004
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable - (23,928)
------- --------
Net cash used in financing activities - (23,928)
------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 697,638 1,040,629
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,265,756 225,127
--------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $1,963,394 $ 1,265,756
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for interest $ - $ 160
========== ===========
Cash paid during the year for taxes $ 265 $ 9,708
========== ===========
</TABLE>
These consolidated financial statements should be read only in connection
with the accompanying notes to consolidated financial statements.
F-8
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 1 - BASIS OF PRESENTATION AND SALE OF OPERATING ASSETS
The consolidated financial statements include the accounts of New Generation
Foods, Inc. and its wholly owned subsidiaries, Spicers International, Inc. and
NGF Services, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation. The Company manufactured a food product from
expanded whole wheat, which was its only line of business, until October 22,
1993 when substantially all of the operating assets of the Company were sold as
described below. As a result, the Company is no longer an operating company.
On October 22, 1993, the Company sold substantially all of the Company's assets
(Asset Sale) to American Pacific Financial Corporation (American Pacific) for an
aggregate purchase price of $2,600,000 payable $150,000 at the closing and the
balance in secured notes of the purchaser as described below. The Company also
sold its inventory to American Pacific at its cost of $130,509.
The total gain on the Asset Sale was $1,849,736 of which $1,306,578 had been
recognized at December 31, 1995. The deferred gain of $543,158 at December 31,
1995 was offset against the notes receivable and was recognized during 1996 as
the remaining balance of the notes receivable was collected.
Components of the notes receivable entered into October 22, 1993, which required
monthly payments of interest at 6 percent per annum, were as follows:
Note receivable of $55,509 at December 31, 1993 for the sale of inventory,
plus accrued interest, was paid April 22, 1994.
Note receivable of $1,300,000 at December 31, 1993 for the sale of property,
plus accrued interest, was paid May 9, 1994.
Note receivable of $766,659 and $966,663 at December 31, 1995 and 1994,
respectively, for the sale of intangible assets required monthly payments
of principal in the amount of $16,667, plus interest, through February
1996. The scheduled unpaid balance of $716,658, plus accrued interest, was
received on April 9, 1996. The note receivable was secured by the sold
intangible assets and by certain real estate parcels of the purchaser.
A summary of notes receivable at December 31, 1995 follows:
1995:
Notes receivable $ 766,659
Deferred gain (543,158)
---------
Net notes receivable $ 223,501
=========
F-9
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates in Preparing Financial Statements
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 assets and 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.
(b) Equipment
Equipment is stated at cost. Depreciation on equipment is calculated on the
straight-line method over the estimated useful lives of the assets.
(c) Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during each year.
The computation excludes the common stock equivalents consisting of stock
options because their inclusion would have had an antidilutive effect. The
cumulative convertible voting preferred stocks are not considered common stock
equivalents.
(d) Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
(e) Marketable Investment Securities
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, (SFAS 115) effective January 1, 1994. SFAS 115 requires the
classification of debt and equity securities into one of the three following
categories:
Held-to-maturity - includes investments which the Company has the
positive intent and ability to hold until maturity. Such investments are
measured at amortized cost.
Trading securities - includes investments in securities purchased and
held principally for the purpose of selling them in the near term.
Unrealized holding gains and losses are included in income.
Available-for-sale - includes investments in securities not classified as
held-to-maturity or trading. Unrealized holding gains and losses are
reported as a net amount as a separate component of stockholders' equity
until realized.
Marketable investment securities, which consist of options and warrants, are all
classified as trading securities.
F-10
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(f) Income Taxes
Deferred income taxes are provided on temporary differences between financial
statement and income tax reporting. Temporary differences are differences
between the amounts of assets and liabilities reported for financial statement
purposes and their tax bases. Deferred tax liabilities are recognized for
temporary differences that will be taxable in future years' tax returns.
Deferred tax assets are recognized for temporary differences that will be
deductible in future years' tax returns and for operating loss and tax credit
carryforwards. Deferred tax assets are reduced by a valuation allowance if it is
deemed more likely than not that some or all of the deferred tax assets will not
be realized.
NOTE 3 - EQUIPMENT
A summary of equipment at December 31 follows:
1996 1995
---- ----
Office furniture and equipment $ 22,695 $ 22,695
Automobile 13,954 8,121
------ ------
$ 36,649 $ 30,816
======= =======
Useful lives of assets for financial statement purposes are 3 years for
automobile and 5 years for office furniture and equipment.
NOTE 4 - INCOME TAXES
Components of income tax expense are as follows:
Federal State Total
------- ----- -----
1996:
Current $ - $ 265 $ 265
Deferred - - -
------- ------ -------
Total $ - $ 265 $ 265
======= ====== =======
1995:
Current $ 6,600 $ 3,108 $ 9,708
Deferred - - -
------- ------ -------
Total $ 6,600 $ 3,108 $ 9,708
======= ======= =======
F-11
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - INCOME TAXES (CONTINUED)
The actual tax expense for 1996 and 1995 differs from the "expected" tax expense
for those years (computed by applying the applicable United States federal
corporate tax rate to income (loss) before income taxes) as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" tax expense $ 160,361 $ 2,086
Surtax benefit - (1,166)
Expiration of net operating loss carryforward 457,161 407,281
Expiration of investment tax carryforward 12,147 8,090
Underaccrual of prior year taxes 265 9,708
Decrease in valuation allowance (629,669) (417,129)
Other - 838
-------- --------
Income tax expense $ 265 $ 9,708
======== =========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 6,092,344 $ 6,696,707
Investment tax credit carryforwards 64,648 76,795
Unrealized loss on marketable investment securities 11,049 24,208
Alternative minimum tax carryforward 6,002 6,002
--------- ---------
Total gross deferred tax assets 6,174,043 6,803,712
Less valuation allowance (6,174,043) (6,803,712)
--------- ----------
Net deferred tax assets $ - $ -
=========== ============
</TABLE>
A valuation allowance is provided to reduce the deferred tax assets to a level
which, more likely than not, will be realized. The net deferred assets reflects
management's estimate of the amount which will be realized from future
profitability which can be predicted with reasonable certainty.
The net change in the total valuation allowance for the years ended
December 31, 1996 and 1995 was a decrease of $629,669 and $417,129,
respectively.
F-12
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 4 - INCOME TAXES (CONTINUED)
At December 31, 1996, the Company has net operating loss carryforwards as
follows which are available to offset future federal taxable income, if any,
through 2008. The Company also has investment tax credit carryforwards as
follows which are available to reduce future federal income taxes, if any,
through 2000.
Net Investment Year of
Operating Loss Tax Credit Expiration
-------------- ---------- ----------
$ 1,920,000 $ 14,000 1997
2,238,000 32,000 1998
2,332,000 25,000 1999
3,436,000 28,000 2000
1,750,000 - 2001
1,434,000 - 2002
1,512,000 - 2003
1,131,000 - 2004
805,000 - 2005
547,000 - 2006
574,000 - 2007
238,000 - 2008
---------- --------
$ 17,917,000 $ 99,000
========== =========
NOTE 5 - PREFERRED STOCK
During 1987, 5,000,000 shares of preferred stock $.01 par value, were authorized
by the stockholders.
The sale or transfer of substantially all of the assets of the Company is deemed
to be a liquidation, dissolution or winding-up of the Company for the purposes
of determining when the liquidation preference of the holders of the Series A
and Series B Preferred Stock is to be paid. Accordingly, upon consummation of
the Asset Sale, the holders of the Preferred Stock are entitled to receive
preference in liquidation before any distribution to the holders of the common
stock.
F-13
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 5 - PREFERRED STOCK (CONTINUED)
(a) Series A Preferred Stock
During 1988, 2,333,333 shares of Series A Cumulative Convertible Voting
Preferred Stock (Series A Preferred Stock) were authorized and issued. Each
share of the Series A Preferred Stock is convertible into .0297625 common shares
based upon a ratio utilizing a conversion price of $25.20 per share, as
adjusted, plus an amount of Special Conversion Shares, calculated each June 1
through June 1, 1992, based on an amount per share of Series A Preferred Stock
of $0.0675 per annum, divided by the then conversion price. The conversion price
was $25.20 at June 1, 1996 and 1995. The conversion price is subject to
adjustment in certain events, including the issue or sale of common stock for a
consideration per share less than the lesser of the conversion price or 80
percent of the market price immediately prior to such issue or sale (except for
Series A Preferred Stock conversion, exercise of warrants, options, or similar
rights outstanding on the date the Series A Preferred Stock was issued). At
December 31, 1996, the Series A Preferred Stock is convertible in the aggregate
into 89,914 shares of common stock. The Series A Preferred Stock has a
liquidating preference of $.75 per share and shall be entitled to no further
payments or distributions after the payment of all declared but unpaid or
cumulative dividends with respect to such shares of Series A Preferred Stock.
Each share of Series A Preferred Stock has voting rights equal in all respects
to those of the common stock into which the Series A Preferred Stock is
convertible on the record date for the vote in question.
Dividends on the Series A Preferred Stock are payable annually each June 1,
commencing June 1, 1993, to holders of record on the May 1st preceding the
dividend payment date. Dividends are to be paid upon the discretion of the
Board; however, if not paid, the dividends are cumulative from June 1, 1992.
Dividends are paid at the rate of $0.0675 per share per year and are payable in
cash. No dividends have been declared on the Series A Preferred Stock. Dividends
in arrears at December 31, 1996 totaled $630,000 or $0.0675 per share for four
years.
F-14
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 5 - PREFERRED STOCK (CONTINUED)
(b) Series B Preferred Stock
During 1989, 350,000 shares of Series B Preferred Stock, $.01 par value, were
authorized by the Board of Directors. During 1989, 310,000 shares of Series B
Cumulative Convertible Voting Preferred Stock (Series B Preferred Stock) were
issued. Each share of the Series B Preferred Stock is convertible into .0294125
common shares based upon a ratio utilizing a conversion price of $34.00 per
share, as adjusted, plus an amount of Special Conversion Shares, calculated on
June 1, 1990 and on each June 1 thereafter through June 1, 1993, based on an
amount per share of Series B Preferred Stock of $.09 per annum, divided by the
then conversion price. The conversion price was $34.00 at June 1, 1996 and 1995.
The conversion price is subject to adjustment in certain events, including the
issue or sale of common stock for a consideration per share less than the
conversion price or less than an amount equal to 80 percent of the market price
immediately prior to such issue or sale (except for conversion of Series B
Preferred Stock, any other series of preferred stock of the Corporation issued
prior to the issuance of the Series B Preferred Stock; exercise of warrants,
options or similar rights outstanding on the date the Series B Preferred Stock
was issued). At December 31, 1996, the Series B Preferred Stock is convertible
in the aggregate into 12,102 shares of common stock. The Series B Preferred
Stock has a liquidating preference of $1.00 per share and shall be entitled to
no further payments or distributions after the payment of all declared but
unpaid or cumulative dividends with respect to such shares of Series B Preferred
Stock.
Each share of Series B Preferred Stock has voting rights equal in all respects
to those of the common stock into which the Series B Preferred Stock is
convertible on the record date for the vote in question.
Dividends on the Series B Preferred Stock are payable annually each June 1,
commencing June 1, 1994, to holders of record on the May 1st preceding the
dividend payment date. Dividends are to be paid upon the discretion of the
Board; however, if not paid, the dividends are cumulative from June 1, 1993.
Dividends are paid at the rate of $.09 per share per year and are payable in
cash, provided that during the period ended December 1, 1996 the holders of a
majority of the Series B Preferred Stock may elect, in lieu of entitlement to a
cash dividend, to cause the Company to increase the number of Special Conversion
Shares in the annual amounts described above. This election was not exercised.
No dividends have been declared on the Series B Preferred Stock. Dividends in
arrears at December 31, 1996 totaled $83,700 or $0.09 per share for three years.
NOTE 6 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS
(a) Common Stock
At December 31, 1996, 105,269 shares of the Company's authorized common stock
were reserved for issuance under stock option plans, common stock warrants,
Series A Preferred Stock (convertible) outstanding, and Series B Preferred Stock
(convertible) outstanding.
F-15
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 6 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (CONTINUED)
(b) Stock Options and Stock Appreciation Rights
The Company has two stock option plans, the 1992 Incentive Stock Option Plan and
the 1985 SAR and Nonqualified Stock Option Plan. The Company's 1992 Incentive
Stock Option Plan authorizes the grant of incentive stock options to employees
of the Company. The total number of the Company's shares that may be issued or
transferred pursuant to options granted under the Incentive Stock Option Plan,
as amended, is 150,000 shares of common stock. At December 31, 1996, there were
no options outstanding for shares of common stock under this plan. The exercise
price of each option shall not be less than the fair market value of the common
stock at the date of grant. Options expire on the date determined, but not more
than ten years from the date of grant. No option may be exercised unless the
holder is then an employee of the Company, provided that such exercise may be
made for no more than three months following termination of employment or one
year after death while being employed. No options may be granted under this plan
after June 12, 2002.
The Company's 1985 SAR and Nonqualified Stock Option Plan authorizes the grant
of stock incentives in the form of stock options and stock appreciation rights
to key service personnel of the Company. The total number of the Company's
shares that may be issued or transferred pursuant to stock incentives granted
under the plan, as amended, is 62,500 shares of common stock. At December 31,
1996, there were options outstanding for 3,250 shares of common stock under this
plan. The plan authorizes the grant of two categories of stock incentives:
(1) Stock Options. The exercise price of each option is determined by
the Board of Directors. Options expire on the date determined, but
not more than ten years from the date of grant.
(2) Stock Appreciation Rights. Stock appreciation rights (SARs) may be
granted in one of three forms:
i) In combination with any option granted under the plan, in which
event the exercise of the SAR has the effect of canceling the
related option, and exercise of the related option has the effect
of canceling the related SAR;
ii) Independently of a stock option; or
iii) In addition to a stock option, entitling the optionee to exercise
the SAR and, in addition, either to exercise the related stock
option or surrender it and receive in return a number of shares
equal to the excess of the fair market value of the option shares
on the date of exercise over the option price.
No stock incentives may be granted under this Plan after September 20,
1995.
There have been no transactions with respect to the Company's stock
appreciation rights during the years ended December 31, 1996 and 1995,
nor are there any stock appreciation rights outstanding at December 31,
1996 and 1995.
F-16
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
NOTE 6 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (CONTINUED)
Transactions with respect to the Company's stock option plans for the years
ended December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Range of Number of
Price Per Shares Under
Share Options
----- -------
<S> <C> <C>
Outstanding at December 31, 1994 6,750
Expired $ .102 (1,000)
-------
Outstanding at December 31, 1995 5,750
Expired $10.64 (2,500)
-------
Exercisable at December 31, 1996 $ .102-2.1875 3,250
======
</TABLE>
NOTE 7 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods were used to estimate the fair value of financial
instruments at December 31, 1996 and 1995:
Cash and Cash Equivalents, Note Receivable, and Interest Receivable
Because of their short maturity, the carrying amounts reported in the
consolidated balance sheet approximates fair value.
Marketable Investment Securities
Estimates of the fair values of marketable investment securities are based on
quoted market prices. As the Company classifies its investments as trading
securities, the carrying amount reported in the consolidated balance sheets
approximates fair value.
This information is an integral part of the accompanying
consolidated financial statements.
F-17
<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, thereto duly authorized.
NEW GENERATION FOODS, INC.
By: /s/ Jerome S. Flum
------------------
Jerome Flum
Chairman of the Board, Chief
Executive Officer and Principal
Financial Officer
March 25, 1997
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Jerome S. Flum and David I.
Schaffer his true and lawful attorney-in-fact, with full power of substitution
and resubstitution, to act for him and in his name, place and stead, in any and
all capacities to sign any and all amendments to this Annual Report on Form
10-KSB, and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
each of said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite or necessary to be done in and
about the premises, and fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that each of such
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Position Date
/s/ Jerome S. Flum Chairman of the Board, March 25, 1997
- ---------------------
Jerome S. Flum Chief Executive Officer,
Principal Financial Officer
/s/ Leslie Charm Director March 25, 1997
- ---------------------
Leslie Charm
/s/ Richard J. James Director March 25, 1997
- ---------------------
Richard J. James
/s/ Janice Page Controller March 25, 1997
- ---------------------
Janice Page
<PAGE>
EXHIBITS
- --------
11- Statements regarding computation of per share earnings.
22- Subsidiaries of the Company.
<PAGE>
Exhibit 11
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
Net Loss Per Share
Net loss per share is computed by dividing net loss by the weighted average
number of shares of common stock and common stock equivalents outstanding during
each year. The computation excludes the common stock equivalents consisting of
stock options because their inclusion would have had an antidilutive effect. The
cumulative convertible voting preferred stock is not considered common stock
equivalents.
Primary Loss Per Share Computation
For the Year Ended December 31, 1996
Net Loss $ 471,385
Weighted average shares outstanding (divided by) 399,830
---------
Loss per share $ 1.18
=========
<PAGE>
Exhibit 22
SUBSIDIARIES OF
NEW GENERATION FOODS, INC.
% of Ownership
State of By New Generation
Name Incorporation Foods, Inc.
- ---- ------------- -----------
Spicer's Nevada 100%
International, Inc.
NGF Services, Inc. New York 100%
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000315958
<NAME> NEW GENERATION FOODS, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 1,963,394
<SECURITIES> 5,429
<RECEIVABLES> 17,274
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,986,097
<PP&E> 36,649
<DEPRECIATION> 19,988
<TOTAL-ASSETS> 2,002,758
<CURRENT-LIABILITIES> 56,311
<BONDS> 0
0
2,643,333
<COMMON> 399,830
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,002,758
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 158,089
<LOSS-PROVISION> (158,089)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 471,650
<INCOME-TAX> 265
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 471,385
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.18
</TABLE>