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, 1997 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, 1998 was $25.00 based on the average of the high
and low bid prices of such stock on March 25, 1998 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, 1998 was 399,830.
Registrant's revenues for its most recent fiscal year were $0.
- - --------
1 Exclusion 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.
<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,
1996 and 1997, 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.
PAYMENT OF LIQUIDATION PREFERENCES - ISSUANCE OF SENIOR PREFERRED STOCK
Under the terms of the Company's previously outstanding Series A Preferred
Stock and Series B Preferred Stock, a sale or transfer of substantially all of
the assets of the Company was deemed to be a liquidation, dissolution or winding
up of the Company for purposes of determining the payment of the liquidation
preferences on the Series A Preferred Stock and Series B Preferred Stock.
Accordingly, the Asset Sale entitled Flum Partners, the holder of all of the
outstanding Series A Preferred Stock and Series B Preferred Stock, to payment of
the applicable liquidation preferences and accrued and unpaid dividends.
In November 1997, Flum Partners delivered a letter to the Company demanding
payment of the applicable liquidation preferences on the Series A Preferred
Stock and Series B Preferred Stock ($1,175,000 in the case of the Series A
Preferred Stock and $310,000 in the case of the Series B Preferred Stock) and
accrued and unpaid dividends on such shares. On the date of the delivery of the
demand, accrued dividends on the Series A Preferred Stock amounted to $787,500
and accrued dividends on the Series B Preferred Stock amounted to $111,600.
Accordingly, the aggregate amount payable pursuant to the demand of Flum
Partners was approximately $2,960,000.
Since Flum Partners is an affiliate of Mr. Jerome Flum, a member of the
Board, and because of Mr. Flum's interest in Flum Partners and in the
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transaction, the Board formed an Independent Committee consisting of independent
Board members to consider the letter from Flum Partners.
The Independent Committee met and reviewed the Company's financial
situation at such time. The Company had approximately $1.89 million of cash and
cash equivalents, and it was deemed prudent for the Company to maintain a cash
balance of approximately $90,000 for potential claims and other expenses and for
working capital to enable the Company to attempt to identify and consummate a
transaction which would increase the value of the Company. Thus, $1.8 million of
cash was available for payment of the liquidation preferences and accrued
dividends on the Series A and Series B Preferred Stock, leaving an unpaid amount
of approximately $1.16 million of cash.
The Independent Committee then engaged in discussions with Mr. Flum,
representing Flum Partners. Pursuant to such discussions, Flum Partners agreed
to accept, in payment of the unpaid $1.16 million of cash, shares of a new
series of convertible senior preferred stock ("Senior Preferred Stock"), with an
aggregate liquidation preference equal to $1.1 million, which was $60,000 less
than the unpaid liquidation preferences and accrued dividends on the Series A
Preferred Stock and Series B Preferred Stock. The new series of Senior Preferred
Stock does not accrue dividends, but converts into 90% of the Company's Common
Stock on a fully-diluted basis. The new Senior Preferred Stock is
"participating", in that, upon a liquidation or sale of the Company, and after
the Senior Preferred Stock receives its liquidation preference, the Senior
Preferred Stock will share ratably with the Common Stock on an "as converted"
basis.
After further negotiations with the Independent Committee, Mr. Flum agreed
to a termination of his existing Employment Agreement effective December 1,
1997, saving the Company approximately $190,000 in salary expense through the
end of the term of such Agreement, in consideration of which the Company
transferred to Mr. Flum an automobile and computer equipment with an aggregate
value not exceeding $10,000. Mr. Flum also agreed to continue as Chairman of the
Board and Chief Executive Officer of the Company, without pay, on an "at will"
basis. Mr. Flum also agreed for a twelve month period, to attempt to identify
and consummate a transaction which would increase the value of the Company.
In its deliberations as to the fairness of the transaction, the Board
considered the following factors: (i) Mr. Flum agreed to terminate his existing
Employment Agreement with the Company, saving the Company an aggregate of
approximately $190,000 in salary expense; (ii) the Senior Preferred Stock does
not accrue dividends, saving the Company approximately $157,000 in annual
dividends; (iii) the Senior Preferred Stock has a liquidation preference of
approximately $60,000 less than the aggregate amount payable in respect of the
liquidation preferences and accrued dividends on the Series A Preferred Stock
and Series B Preferred Stock (in this regard the Board recognized that the
Series A and Series B Preferred Stock had aggregate liquidation preferences
(plus accrued dividends) of approximately $2.96 million); and (iv) that Mr. Flum
would attempt for a period of twelve months to identify and consummate a
transaction which would increase the value of the Company. With regard to the
factor described in clause (iii) above, the Independent Committee recognized
that in any such transaction, the Senior Preferred Stock would be entitled to
its liquidation preference before any distributions to common stockholders. The
Independent Committee also noted that, if it did not accept the proposal of Flum
Partners, the Board would be obligated to pay all of the Company's cash to Flum
Partners in partial satisfaction of the liquidation preferences, and then to
proceed with the final liquidation of the Company, which would result in the
holders of Common Stock not receiving anything.
In accordance with the foregoing, the Company issued to Flum Partners at
the end of 1997 and in the first quarter of 1998 a total of 1,100,000 shares of
Senior Preferred Stock and $1.8 million of cash in payment of the liquidation
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preferences and accrued dividends on the Series A Preferred Stock and Series B
Preferred Stock.
Interest of Certain Persons and
Conflicts of Interest
As a consequence of the payment of the liquidation preferences of the
Series A Preferred Stock and Series B Preferred Stock, and 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 1,100,000 shares of Senior Preferred Stock in
addition to 150,054 shares of Common Stock. The Senior Preferred Stock has a
liquidation preference of $1.00 per share and converts into approximately 90% of
the outstanding Common Stock of the Company. 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 $1,100,000 prior
to any distributions to Common Stockholders. Since the Senior Preferred Stock is
"participating", upon a sale or liquidation of the Company, Flum Partners would
be entitled to receive in excess of 90% of the amounts distributed to Common
Stockholders.
Employees
As of March 25, 1998, 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 57 Chairman of the Board and Chief Executive
Officer
Richard J. James 58 Director
Leslie Charm 54 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.
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
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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.
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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 1996 and 1997. Such market
quotations reflect inter-dealer prices without retail markup, markdown or
commission and do not necessarily represent actual transactions.
High Bid Low Bid
--------- -------
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
1997
First Quarter $0.0001 $0.0001
Second Quarter $0.0001 $0.0001
Third Quarter $0.0001 $0.0001
Fourth Quarter $0.0001 $0.0001
On March 25, 1998, 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. During 1997
the Series A Preferred Stock and Series B Preferred Stock of the Company was
retired. At the retirement date accrued and unpaid dividends were $787,500 and
$111,600, respectively, substantially all of which were subsequently paid. See
"Payment of Liquidation Preferences - Issuance of Senior Preferred Stock."
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.
Under the terms of the Company's previously outstanding Series A Preferred
Stock and Series B Preferred Stock, a sale or transfer of substantially all of
the assets of the Company was deemed to be a liquidation, dissolution or winding
up of the Company for purposes of determining the payment of the liquidation
preferences on the Series A Preferred Stock and Series B Preferred Stock.
Accordingly, the Asset Sale entitled Flum Partners, the holder of all of
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the outstanding Series A Preferred Stock and Series B Preferred Stock, to
payment of the applicable liquidation preferences and accrued and unpaid
dividends.
In November 1997, Flum Partners delivered a letter to the Company demanding
payment of the applicable liquidation preferences on the Series A Preferred
Stock and Series B Preferred Stock ($1,175,000 in the case of the Series A
Preferred Stock and $310,000 in the case of the Series B Preferred Stock) and
accrued and unpaid dividends on such shares. On the date of the delivery of the
demand, accrued dividends on the Series A Preferred Stock amounted to $787,500
and accrued dividends on the Series B Preferred Stock amounted to $111,600.
Accordingly, the aggregate amount payable pursuant to the demand of Flum
Partners was approximately $2,960,000.
Since Flum Partners is an affiliate of Mr. Jerome Flum, a member of the
Board, and because of Mr. Flum's interest in Flum Partners and in the
transaction, the Board formed an Independent Committee consisting of independent
Board members to consider the letter from Flum Partners.
The Independent Committee met and reviewed the Company's financial
situation at such time. The Company had approximately $1.89 million of cash and
cash equivalents, and it was deemed prudent for the Company to maintain a cash
balance of approximately $90,000 for potential claims and other expenses and for
working capital to enable the Company to attempt to identify and consummate a
transaction which would increase the value of the Company. Thus, $1.8 million of
cash was available for payment of the liquidation preferences and accrued
dividends on the Series A and Series B Preferred Stock, leaving an unpaid amount
of approximately $1.16 million of cash.
The Independent Committee then engaged in discussions with Mr. Flum,
representing Flum Partners. Pursuant to such discussions, Flum Partners agreed
to accept, in payment of the unpaid $1.16 million of cash, shares of a new
series of convertible senior preferred stock ("Senior Preferred Stock"), with an
aggregate liquidation preference equal to $1.1 million, which was $60,000 less
than the unpaid liquidation preferences and accrued dividends on the Series A
Preferred Stock and Series B Preferred Stock. The new series of Senior Preferred
Stock does not accrue dividends, but converts into 90% of the Company's Common
Stock on a fully-diluted basis. The new Senior Preferred Stock is
"participating", in that, upon a liquidation or sale of the Company, and after
the Senior Preferred Stock receives its liquidation preference, the Senior
Preferred Stock will share ratably with the Common Stock on an "as converted"
basis.
After further negotiations with the Independent Committee, Mr. Flum agreed
to a termination of his existing Employment Agreement effective December 1,
1997, saving the Company approximately $190,000 in salary expense through the
end of the term of such Agreement, in consideration of which the Company
transferred to Mr. Flum an automobile and computer equipment with an aggregate
value not exceeding $10,000. Mr. Flum also agreed to continue as Chairman of the
Board and Chief Executive Officer of the Company, without pay, on an "at will"
basis. Mr. Flum also agreed for a twelve month period, to attempt to identify
and consummate a transaction which would increase the value of the Company.
In its deliberations as to the fairness of the transaction, the Board
considered the following factors: (i) Mr. Flum agreed to terminate his existing
Employment Agreement with the Company, saving the Company an aggregate of
approximately $190,000 in salary expense; (ii) the Senior Preferred Stock does
not accrue dividends, saving the Company approximately $157,000 in annual
dividends; (iii) the Senior Preferred Stock has a liquidation preference of
approximately $60,000 less than the aggregate amount payable in respect of the
liquidation preferences and accrued dividends on the Series A Preferred Stock
and Series B Preferred Stock (in this regard the Board recognized that the
Series A and Series B Preferred Stock had aggregate liquidation preferences
(plus accrued
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dividends) of approximately $2.96 million); and (iv) that Mr. Flum would attempt
for a period of twelve months to identify and consummate a transaction which
would increase the value of the Company. With regard to the factor described in
clause (iii) above, the Independent Committee recognized that in any such
transaction, the Senior Preferred Stock would be entitled to its liquidation
preference before any distributions to common stockholders. The Independent
Committee also noted that, if it did not accept the proposal of Flum Partners,
the Board would be obligated to pay all of the Company's cash to Flum Partners
in partial satisfaction of the liquidation preferences, and then to proceed with
the final liquidation of the Company, which would result in the holders of
Common Stock not receiving anything.
In accordance with the foregoing, the Company issued to Flum Partners at
the end of 1997 and in the first quarter of 1998 a total of 1,100,000 shares of
the Senior Preferred Stock and $1.8 million of cash in payment of the
liquidation preferences and accrued dividends on the Series A Preferred Stock
and Series B Preferred Stock.
At December 31, 1997, the Company had cash, cash equivalents and other
liquid assets of $1,400,051, compared to $1,968,823 of liquid assets at December
31, 1996, and had working capital of $54,067, compared to working capital of
$1,929,786 at December 31, 1996. The decline in working capital reflects the
recording of $1,300,000 as a current liability to Flum Partners for the
liquidation preferences and accrued dividends on the Series A Preferred Stock
and Series B Preferred Stock. The Company has no bank lines of credit or other
currently available credit sources.
Operations
1997 vs. 1996 and 1995
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, 1995, December 31, 1996 and
December 31, 1997.
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 income for the 1996 year was $471,385, or $0.72 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.
Net loss for the year ended December 31, 1997 was ($81,049) or ($.67) per
share, reflecting selling, general and administrative expenses, including the
Chairman's compensation expense, and a loss on investments, in excess of
interest and dividend income.
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:
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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.
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, 1997 and 1996, 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.
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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 1997 $113,859
President and Chief 1996 $121,506
Executive Officer 1995 $119,856(2)
- - ------------------
(2) Excludes $34,622 of salary for 1994 which had been deferred by the Company
and paid in 1995.
Directors' Fees
Directors and committee members generally serve as such 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, 1996 through December 31, 1997, 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.
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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 Senior Preferred Stock as of March 25, 1998. 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
----------------------- ----------
Senior Senior
Common Preferred Common Preferred
Beneficial Owners Stock Stock Stock(1) Stock
- - ----------------- ----- ----- -------- -----
<S> <C> <C> <C> <C>
Flum Partners (2) 3,635,128 1,100,000(3) 90.9% 100%
c/o Jerome S. Flum (3)(4)
45 Graham Road
Scarsdale, New York 10583
Jerome S. Flum 3,748,353 1,100,000(4) 93.6% 100%
45 Graham Road (2)(3)(4)
Scarsdale, New York 10583
All officers and 3,751,603 (2) 93.8% 100%
directors as a group (3)(4)(5)
(3 persons)
- - ----------------
<FN>
(1) Percent of class is based on 399,830 shares of Common Stock outstanding
as of March 25, 1998, 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 Senior Preferred Stock are immediately
convertible by the record owner at its option into 3,598,299 shares of
Common Stock, and pending such conversion are entitled to 3,598,299
votes, the shares of Senior Preferred Stock are also counted as
3,598,299 shares of Common Stock.
(4) Includes 3,635,125 shares of Common Stock (36,829 shares of Common
Stock and 1,100,000 shares of Senior Preferred Stock convertible into
3,598,299 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
3,748,353 shares of Common Stock, or 93.6% of the outstanding shares of
Common Stock (giving effect to the conversion of the Senior Preferred
Stock), and all of the 1,100,000 shares of Senior 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.
</FN>
</TABLE>
10
<PAGE>
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.
As more fully described in "Payment of the Liquidation Preferences Issuance
of Senior Preferred Stock" above, the Company issued to Flum Partners 1,100,000
shares of Senior Preferred Stock and $1.8 million of cash as payment of the
liquidation preferences and accrued and unpaid dividends on the Series A
Preferred Stock and the Series B Preferred Stock.
Related Party Transactions
The Company entered into an employment agreement with Mr. Flum, effective
as of July 1, 1992. The employment agreement provided 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. As more fully described in "Payment of the Liquidation Preferences -
Issuance of Senior Preferred Stock" above, Mr. Flum agreed to a termination of
his Employment Agreement effective December 1, 1997.
11
<PAGE>
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)
3-F - Third Certificate of Amendment of The Certificate of
Designations of Series A Preferred Stock
3-G - Certificate of Amendment of The Certificate of Designations of
Series B Preferred Stock
3-H - Certificate of Designations of Senior Preferred Stock
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)
10-H - Letter Agreement dated November 18, 1997 between New
Generation Foods, Inc., Flum Partners and Jerome Flum
11 - Statements regarding computation of per share earnings.
21 - Subsidiaries of the Company.
27 - Financial Data Schedule
Exhibits 3-F, 3-G, 3-H, 10-H, 11, 21 and 27 are filed with this Form
10-KSB. All other 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 1997.
12
<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.
13
<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, 1997 and 1996.................F-3
Consolidated Statements of Operations - Years Ended
December 31, 1997 and 1996.............................................F-5
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997 and 1996.............................................F-6
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997 and 1996.............................................F-8
Notes to Consolidated Financial Statements -
December 31, 1997 and 1996.............................................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, 1997 and 1996, 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, 1997 and 1996, 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 20, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
ASSETS
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents .......................... $1,400,051 $1,963,394
Marketable investment securities, at market value .. -- 5,429
Interest receivable ................................ -- 16,090
Other receivables .................................. -- 1,184
---------- ----------
Total current assets ............................ 1,400,051 1,986,097
---------- ----------
EQUIPMENT, at cost (Note 3) .............................. -- 36,649
Less accumulated depreciation ...................... -- 19,988
---------- ----------
Net equipment ................................... -- 16,661
---------- ----------
TOTAL ASSETS ............................................. $1,400,051 $2,002,758
========== ==========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable - shareholder $ 460,000 $ --
Dividends payable 840,000 --
Accrued franchise taxes 45,200 45,200
Accrued compensation -- 10,125
Accrued expenses 784 986
------------ ------------
Total current liabilities 1,345,984 56,311
------------ ------------
REDEEMABLE CONVERTIBLE VOTING
SENIOR PREFERRED STOCK, $.01 par
value (stated at liquidation value of $1.00 per
share). Authorized 1,100,000 shares; issued
and outstanding 1,100,000 shares (Note 5) 1,100,000 --
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT)
(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 no shares in 1997 and
2,333,333 in 1996 -- 1,750,000
Series B (stated at liquidation value of $1.00 per
share). Authorized 350,000 shares; issued and
outstanding no shares in 1997 and 310,000
in 1996 -- 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 (23,868,861) (22,936,481)
------------ ------------
Total stockholders' equity (deficit) (1,045,933) 1,946,447
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,400,051 $ 2,002,758
============ ============
</TABLE>
These consolidated financial statements should be read
only in connection with the accompanying notes to
consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
OPERATING EXPENSES
Selling, general, and administrative $ 48,347 $ 36,583
Chairman's compensation expense 113,859 121,506
-------- --------
Total operating expenses 162,206 158,089
-------- --------
Operating loss (162,206) (158,089)
-------- --------
OTHER INCOME (DEDUCTIONS)
Interest and dividend income 96,790 105,972
Gain on sale of assets (Note 1) - 543,158
Loss on investments ( 15,633) ( 22,373)
Miscellaneous - 2,982
-------- --------
81,157 629,739
-------- --------
Income (loss) before income taxes ( 81,049) 471,650
INCOME TAXES (Note 4) - 265
--------- --------
NET EARNINGS (LOSS) $(81,049) $471,385
========= ========
NET EARNINGS (LOSS) PER SHARE (Note 8)
Basic $ (0.67) $ 0.72
========= ========
Dilutive $ (0.67) $ 0.72
========= ========
</TABLE>
These consolidated financial statements should be read
only in connection with the accompanying notes to
consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997 and 1996
Preferred Stock
Series A
Shares Amount
------ ------
<S> <C> <C>
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
Redemption and conversion
of preferred stock (Note 5) (2,333,333) (1,750,000)
Preferred stock dividends
(Note 5) - -
Net loss for year ended
December 31, 1997 - -
--------- -------
BALANCE AT DECEMBER 31,1997 - $ -
========= ===========
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<S>
Preferred Stock Additional Retained Total
Series B Common Stock Paid-in Earnings Stockholders'
Shares Amount Shares Amount Capital (Deficit) Equity
------ ------ ------ ------ ------- --------- ------
<C> <C> <C> <C> <C> <C> <C>
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
(310,000) (310,000) -- -- -- -- (2,060,000)
-- -- -- -- -- (851,331) (851,331)
-- -- -- -- -- (81,049) (81,049)
------------ ------------ ------------ ------------ ------------ -----------
-- $ -- 399,830 $ 3,998 $ 22,818,930 $(23,868,861) $(1,045,933)
========= ============ ============ ============ ============ ============ ============
</TABLE>
These consolidated financial statements should be read only
in connection with the accompanying notes to
consolidated financial statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (81,049) $ 471,385
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 5,330 4,274
Loss on sale or maturity of marketable investment securities 5,429 61,077
Unrealized holding gains on marketable investment securities -- (38,704)
Proceeds from sale of marketable investment securities -- (13)
Gain on sale of assets -- (543,158)
Gain (loss) on sale of fixed assets -- (34)
Change in assets and liabilities:
Decrease (increase) in receivables 17,274 (10,466)
Decrease in accounts payable (trade), accrued
compensation, and accrued expenses (10,327) (4,628)
----------- -----------
Total adjustments 17,706 (531,652)
----------- -----------
Net cash used in operating activities (63,343) (60,267)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures -- (13,954)
Proceeds from notes receivable -- 766,659
Proceeds from sale of fixed assets -- 5,200
----------- -----------
Net cash provided by investing activities -- 757,905
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred stock (500,000) --
----------- -----------
Net cash used in financing activities (500,000) --
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (563,343) 697,638
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,963,394 1,265,756
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,400,051 $ 1,963,394
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for taxes $ -- $ 265
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITIES
Partial conversion of Preferred Stock, Series A, to
Senior Preferred Stock $ 1,100,000 $ --
=========== ===========
REDEMPTION OF PREFERRED STOCK, SERIES B,
AND REMAINING SERIES A THROUGH
ACCOUNTS PAYABLE - SHAREHOLDER $ 460,000 $ --
=========== ===========
</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, 1997 and 1996
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.
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 Earnings (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings (loss) per share with basic and diluted earnings (loss) per
share. Unlike primary earnings (loss) per share, basic earnings (loss) per share
excludes any dilutive effects of options, warrants, and convertible securities.
Diluted earnings (loss) per share is very similar to the previously fully
diluted earnings (loss) per share. All earnings (loss) per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
Statement 128 requirements.
(d) Cash Equivalents
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
F-9
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(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) 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, 1996 follows:
Office furniture and equipment $22,695
Automobile 13,954
-------
$36,649
=======
Useful lives of assets for financial statement purposes are 3 years for
automobile and 5 years for office furniture and equipment.
F-10
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - INCOME TAXES
Components of income tax expense for 1996 are as follows:
Federal State Total
------- ----- -----
Current $ - $265 $265
Deferred - - -
------ ---- ---
Total $ - $265 $265
====== ==== ====
The actual tax expense for 1997 and 1996 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:
1997 1996
---- ----
Computed "expected" tax expense (benefit) $ (27,557) $ 160,361
Expiration of net operating loss carryforward 652,937 457,161
Expiration of investment tax carryforward 8,877 12,147
Underaccrual of prior year taxes - 265
Decrease in valuation allowance (633,605) (629,669)
Other (652) -
---------- ---------
Income tax expense $ - $ 265
========== ===========
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets at December 31, 1997 and 1996 are as follows:
1997 1996
---- ----
Deferred tax assets:
Net operating loss carryforwards $5,478,012 $6,092,344
Investment tax credit carryforwards 55,771 64,648
Unrealized loss on marketable investment securities - 11,049
Alternative minimum tax carryforward 6,655 6,002
----- -----
Total gross deferred tax assets 5,540,438 6,174,043
Less valuation allowance (5,540,438) (6,174,043)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
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,
1997 and 1996 was a decrease of $633,605 and $629,669, respectively.
F-11
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 4 - INCOME TAXES (CONTINUED)
At December 31, 1997, the Company has net operating loss carryforwards as
follows which are available to offset future federal taxable income, if any,
through 2017. The Company also has investment tax credit carryforwards as
follows which are available to reduce future federal income taxes, if any,
through 2000.
<TABLE>
<CAPTION>
<S>
Net Investment Year of
Operating Loss Tax Credit Expiration
-------------- ---------- ----------
<C> <C> <C>
$ 2,238,000 $ 21,000 1998
2,332,000 16,000 1999
3,436,000 19,000 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
114,000 - 2017
--------------- -----------
$ 16,111,000 $ 56,000
=============== ===========
</TABLE>
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 Series A and Series B Preferred Stock were
entitled to receive preference in liquidation before any distribution to the
holders of the common stock.
(a) Senior Preferred Stock
On November 17, 1997, the Company received a letter from the holder of all of
the shares of the Series A and Series B Preferred Stock, a related party,
demanding payment of the liquidation preference and accrued dividends relative
to those shares. The total amount payable pursuant to this demand was
approximately $2,959,000. On November 18, 1997, the Company's Board of Directors
approved settlement of this demand by issuing $1,100,000 of Senior Preferred
Stock, agreeing to pay $1,800,000 in cash, and agreeing to give computer
equipment and a Company car to the shareholder. Also, as part of the settlement,
the Chief Executive Officer of the Company, who was also a representative of the
shareholder, agreed to terminate his existing employment agreement effective
December 1, 1997. At December 31, 1997, there was $1,300,000 of cash owed to the
shareholder for this settlement which was paid subsequent to year end.
F-12
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 - PREFERRED STOCK (CONTINUED)
During 1997, 1,100,000 shares of Senior Preferred Stock were authorized and
issued. Each share of the Senior Preferred Stock is convertible into 3.2711808
common shares based upon a ratio utilizing a conversion price of $.3057 per
share. The ratio is determined by dividing $1.00 by the conversion price in
effect at the time of conversion. The conversion price is subject to adjustment
in certain events, including the issue or sale of common stock or any
convertible securities, rights, or related rights for a consideration per share
of common stock less than the conversion price in effect immediately prior to
the issuance of such common stock or convertible securities, rights, or related
rights. In such event the conversion price shall be reduced to the consideration
per share of common stock paid in connection with the issuance of common stock
or any convertible securities, rights, or related rights. At December 31, 1997,
the Senior Preferred Stock is convertible in the aggregate into 3,598,298
shares. The Senior Preferred Stock has a liquidation preference of $1.00 per
share.
Each holder of shares of Senior Preferred Stock shall be entitled to the number
of votes equal to the number of shares of common stock into which such shares of
Senior Preferred Stock may be converted and shall have voting rights equal in
all respects to those of the common stock into which the Senior Preferred Stock
is convertible on the record date for the vote in question.
The holders of the Senior Preferred Stock shall be entitled to receive dividends
at the same rate as dividends (other than dividends paid in additional shares of
common stock) are paid with respect to the common stock (treating each share of
Senior Preferred Stock as being equal to the number of shares of common stock
into which each share of Senior Preferred Stock is then convertible).
The Senior Preferred Stock is redeemable at the option of the holders of a
minimum of one-half of the aggregate number of shares then outstanding. The
redemption price of the Senior Preferred Stock shall be equal to the sum of (i)
$1.00 per share (as adjusted for any stock dividends, combination, or splits
with respect to such shares) and (ii) any accumulated and unpaid dividends on
any such share of Senior Preferred Stock. The redemption value at December 31,
1997 was $1,100,000.
(b) 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 was 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, 1997 and 1996. The conversion price was 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).
F-13
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 5 - PREFERRED STOCK (CONTINUED)
(b) Series A Preferred Stock (Continued)
Each share of Series A Preferred Stock had voting rights equal in all respects
to those of the common stock into which the Series A Preferred Stock was
convertible on the record date for the vote in question.
Dividends on the Series A Preferred Stock were payable annually each June 1,
commencing June 1, 1993, to holders of record on the May 1st preceding the
dividend payment date. Dividends were to be paid upon the discretion of the
Board; however, if not paid, the dividends were cumulative from June 1, 1992.
Dividends were to be paid at the rate of $0.0675 per share per year and were
payable in cash.
During 1997, the Series A Preferred Stock was retired. At the retirement date
unpaid dividends were $787,500, a majority of which were subsequently paid.
(c) 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 was 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, 1997 and 1996.
The conversion price was 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).
Each share of Series B Preferred Stock had voting rights equal in all respects
to those of the common stock into which the Series B Preferred Stock was
convertible on the record date for the vote in question.
Dividends on the Series B Preferred Stock were payable annually each June 1,
commencing June 1, 1994, to holders of record on the May 1st preceding the
dividend payment date. Dividends were to be paid upon the discretion of the
Board; however, if not paid, the dividends were cumulative from June 1, 1993.
Dividends were to be paid at the rate of $.09 per share per year and were
payable in cash, provided that during the period ended December 1, 1996 the
holders of a majority of the Series B Preferred Stock could 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.
During 1997, the Series B Preferred Stock was retired. At the retirement date
unpaid dividends were $111,600, a majority of which were subsequently paid.
F-14
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 6 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS
(a) Common Stock
At December 31, 1997, 3,601,548 shares of the Company's authorized common stock
were reserved for issuance under stock option plans and Senior Preferred Stock
(convertible) outstanding.
(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, 1997, 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,
1997, 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.
F-15
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 6 - COMMON STOCK, STOCK OPTIONS, AND STOCK APPRECIATION RIGHTS (CONTINUED)
(b) Stock Options and Stock Appreciation Rights (Continued)
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, 1997 and 1996,
nor are there any stock appreciation rights outstanding at December 31,
1997 and 1996.
Transactions with respect to the Company's stock option plans for the years
ended December 31, 1997 and 1996 are as follows:
Range of Number of
Price Per Shares Under
Share Options
--------- ------------
Outstanding at December 31, 1995 5,750
Expired $10.64 (2,500)
-------
Outstanding at December 31, 1996 3,250
Expired $ - -
-------
Exercisable at December 31, 1997 $.102-$2.1875 3,250
========
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, 1997 and 1996:
Cash and Cash Equivalents 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.
F-16
<PAGE>
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 8 - EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted earnings
(loss) per share:
1997 1996
---- ----
Net earnings (loss) $(81,049) $471,385
Dividends on cumulative preferred stock (185,400) (185,400)
-------- --------
Net earnings (loss) applicable to common stock $(266,449) $285,985
========= ========
Basic average common shares outstanding 399,830 399,830
========= ========
Earnings (loss) per share - basic $(0.67) $0.72
====== =====
Earnings (loss) per share - dilutive $(0.67) $0.72
====== =====
The effect of dilutive securities (convertible preferred stock and options) is
anti-dilutive for 1997 and 1996, therefore, basic and dilutive earnings (loss)
per share are the same for those years.
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
April 15, 1998
<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, April 15, 1998
- - ------------------
Jerome S. Flum Chief Executive Officer,
Principal Financial Officer
/s/ Leslie Charm Director April 15, 1998
- - ------------------
Leslie Charm
/s/ Richard J. James Director April 15, 1998
- - --------------------
Richard J. James
/s/ Janice Page Controller April 15, 1998
Janice Page
<PAGE>
Exhibits
- - --------
3-F Third Certificate of Amendment of The Certificate of Designations of Series
A Preferred Stock
3-G Certificate of Amendment of The Certificate of Designations of Series B
Preferred Stock
3-H Certificate of Designations of Senior Preferred Stock
10-H Letter Agreement dated November 18, 1997 between New Generation Foods,
Inc., Flum Partners and Jerome Flum
11 Statements regarding computation of per share earnings
21 Subsidiaries of the Company
27 Financial Data Schedule
<PAGE>
Exhibit 3-F
THIRD CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF DESIGNATIONS
OF SERIES A PREFERRED STOCK
OF
NEW GENERATION FOODS, INC.
New Generation Foods, Inc. (the "Corporation"), a corporation organized
and existing under the Nevada Corporation Law,
DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of
the Corporation by its Articles of Incorporation, as amended, and pursuant to
Section 7.1 of the Certificate of Designations of the Series A Preferred Stock
of the Corporation, as previously amended (the "Certificate of Designations"),
on November 18, 1997, said Board of Directors adopted a resolution providing for
the further amendment of the Certificate of Designations, subject to the consent
of the holder of all of the outstanding shares of Series A Preferred Stock of
the Corporation, which consent has been duly obtained, which resolution is as
follows:
RESOLVED, that pursuant to ARTICLE FOURTH of the Corporation's Articles
of Incorporation, as amended, relating to the shares of the Corporation, and
Section 7.1 of the Certificate of Designations of the Series A Preferred Stock,
as amended to date (the "Certificate of Designations"), and subject to the
written consent of the holder of all of the outstanding shares of Series A
Preferred Stock of the Corporation, the Board of Directors hereby amends Section
5.2 of the Certificate of Designations to read in its entirety as follows:
"5.2 Ratable Distribution. If after payment or provision for corporate
debts, the assets available for distribution upon liquidation to the holders of
Series A Preferred Stock and other capital stock ranking on a parity therewith
upon liquidation are not sufficient to pay such holders in full the amounts to
which they are entitled, the holders of Series A Preferred Stock and any other
stock ranking on a parity therewith upon liquidation shall be entitled to a
distribution of assets ratably, in proportion to the sums that would be payable
to such holders of all such sums were paid in full, and any remaining unpaid
amount may be paid, at the discretion of the Board of Directors and with the
written consent of the holders of all the outstanding shares of Series A
Preferred Stock and subject to applicable law, by the issuance of equity
securities of the Corporation (including without limitation shares of a new
series of Preferred Stock) having a fair market value (as determined by a
majority of the members of the Board of Directors who are independent and not
affiliated with any holder of shares of Series A Preferred Stock) equal to the
unpaid amount payable to the holders of Series A Preferred Stock upon
liquidation of the Corporation and which shall include such other terms and
conditions as the Board and the holders of all of the outstanding shares of
Series A Preferred Stock may otherwise agree."
IN WITNESS WHEREOF, New Generation Foods, Inc. has caused this Certificate
to be signed by its duly authorized officers this ____ day of November, 1997.
NEW GENERATION FOODS, INC.
By: /s/ Jerome S. Flum
-------------------------
Jerome S. Flum, Chairman and
Chief Executive Officer
ATTEST:
By:____________________________
Title:
<PAGE>
Exhibit 3-G
CERTIFICATE OF AMENDMENT OF
THE CERTIFICATE OF DESIGNATIONS
OF SERIES B PREFERRED STOCK
OF
NEW GENERATION FOODS, INC.
New Generation Foods, Inc. (the "Corporation"), a corporation organized
and existing under the Nevada Corporation Law,
DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of
the Corporation by its Articles of Incorporation, as amended, and pursuant to
Section 7.1 of the Certificate of Designations of the Series B Preferred Stock
of the Corporation (the "Certificate of Designations"), on November 18, 1997,
said Board of Directors adopted a resolution providing for the further amendment
of the Certificate of Designations, subject to the consent of the holder of all
of the outstanding shares of Series B Preferred Stock of the Corporation, which
consent has been duly obtained, which resolution is as follows:
RESOLVED, that pursuant to ARTICLE FOURTH of the Corporation's Articles
of Incorporation, as amended, relating to the shares of the Corporation, and
Section 7.1 of the Certificate of Designations of the Series B Preferred Stock,
as amended to date (the "Certificate of Designations"), and subject to the
written consent of the holder of all of the outstanding shares of Series B
Preferred Stock of the Corporation, the Board of Directors hereby amends Section
5.2 of the Certificate of Designations to read in its entirety as follows:
"5.2 Ratable Distribution. If after payment or provision for corporate
debts, the assets available for distribution upon liquidation to the holders of
Series B Preferred Stock and other capital stock ranking on a parity therewith
upon liquidation are not sufficient to pay such holders in full the amounts to
which they are entitled, the holders of Series B Preferred Stock and any other
stock ranking on a parity therewith upon liquidation shall be entitled to a
distribution of assets ratably, in proportion to the sums that would be payable
to such holders of all such sums were paid in full, and any remaining unpaid
amount may be paid, at the discretion of the Board of Directors and with the
written consent of the holders of all the outstanding shares of Series B
Preferred Stock and subject to applicable law, by the issuance of equity
securities of the Corporation (including without limitation shares of a new
series of Preferred Stock) having a fair market value (as determined by a
majority of the members of the Board of Directors who are independent and not
affiliated with any holder of shares of Series B Preferred Stock) equal to the
unpaid amount payable to the holders of Series B Preferred Stock upon
liquidation of the Corporation and which shall include such other terms and
conditions as the Board and the holders of all of the outstanding shares of
Series B Preferred Stock may otherwise agree."
IN WITNESS WHEREOF, New Generation Foods, Inc. has caused this Certificate
to be signed by its duly authorized officers this ____ day of November, 1997.
NEW GENERATION FOODS, INC.
By: /s/ Jermone Flum
-------------------------
Jerome Flum, Chairman and
Chief Executive Officer
ATTEST:
By:____________________________
Title:
<PAGE>
Exhibit 3-H
CERTIFICATE OF DESIGNATIONS
OF
SENIOR PREFERRED STOCK
OF
NEW GENERATION FOODS, INC.
New Generation Foods, Inc. (the "Corporation"), a corporation organized and
existing under the Nevada Corporation Law;
DOES HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors of the
Corporation by its Articles of Incorporation, as amended, and pursuant to the
Nevada Corporation Law, on November 18, 1997, said Board of Directors adopted a
resolution providing for the issuance of a series of shares of preferred stock,
par value $.01 per share, which resolution is as follows:
RESOLVED, that pursuant to Article FOURTH of the Corporation's Articles of
Incorporation, as amended, relating to the shares of the corporation, the Board
of Directors hereby authorizes, fixes and creates a series of preferred stock
having the following powers, preferences, designations, rights and other
characteristics.
The designation of the series of preferred stock created by this resolution
shall be "Senior Preferred Stock" (hereinafter referred to as "Senior Preferred
Stock") and shall consist of 1,100,000 shares. The powers, preferences, rights,
restrictions of, and other matters relating to, the Senior Preferred Stock are
as follows:
1. Dividends.
The holders of the Senior Preferred Stock shall be entitled to receive, out
of funds legally available therefor, dividends at the same rate as dividends
(other than dividends paid in additional shares of Common Stock) are paid with
respect to the Common Stock (treating each share of Senior Preferred Stock as
being equal to the number of shares of Common Stock into which each share of
Senior Preferred Stock is then convertible).
2. Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Senior
Preferred Stock shall be entitled to receive, prior and in preference to any
distribution of the assets or surplus funds of the Corporation to the holders of
the Common Stock, the amount of $1.00 per share (as adjusted for any stock
dividends, combinations or splits with respect to such shares), plus all
accumulated and unpaid dividends on such share for each share of Senior
Preferred Stock held by them (the "Liquidation Preference"). If upon the
occurrence of any of the events described in this Section 2, the assets and
funds thus distributed among the holders of the Senior Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amount, than the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the Senior
Preferred Stock in proportion to the preferential amount each such holder is
otherwise entitled to receive.
(b) For purposes of this Section 2, (i) any acquisition of the Corporation
by means of merger or other form of corporate reorganization in which
outstanding shares of the Corporation are exchanged for securities or other
consideration issued, or caused to be issued, by the acquiring corporation or
its subsidiary (other than a mere reincorporation transaction) or (ii) a sale of
all or substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding up of the Corporation. Upon the occurrence
of any of the events described in paragraph (b), immediately after the holders
of Senior Preferred Stock shall have been paid in full the Liquidation
Preference, the remaining net assets of the Corporation available for
distribution shall be distributed ratably among the holders of Senior Preferred
<PAGE>
Stock and Common Stock (with each share of Senior Preferred Stock being deemed,
for such purpose, to be equal to the number of shares of Common Stock into which
such share of Senior Preferred Stock is convertible immediately prior to the
close of business on the business day fixed for such distribution).
3. Redemption. (a) At the option of the holders of a minimum of one-half of
the aggregate number of shares of Senior Preferred Stock then outstanding
delivered in writing to the Corporation at any time, the Corporation, on the
thirtieth (30th) day after delivery of such notice (the "Redemption Date"),
shall redeem the outstanding shares of the Senior Preferred Stock originally
issued. The redemption price of the Senior Preferred Stock (the "Redemption
Price"), shall be equal to the sum of (i) $1.00 per share (as adjusted for any
stock dividends, combinations or splits with respect to such shares) and (ii)
any accumulated and unpaid dividends on any such share of Senior Preferred
Stock.
(b) If the funds of the Corporation legally available for redemption of
shares of the Senior Preferred Stock are insufficient to redeem the total number
of shares of Senior Preferred Stock to be redeemed on the Redemption Date, those
funds which are legally available will be used to redeem the maximum possible
number of such shares ratably among the holders of such shares to be redeemed
based upon their holdings of Senior Preferred Stock. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Senior Preferred Stock, such funds will immediately be used to redeem
the balance of the shares which the Corporation has become obliged to redeem on
the Redemption Date, but which it has not redeemed.
(c) In the event the Corporation shall be required to redeem shares of
Senior Preferred Stock, notice of such redemption shall be given by first class
mail, postage prepaid, mailed not less than 20 days prior to the Redemption
Date, to each holder of record of the shares to be redeemed at such holder's
address as the same appears on the share register of the Corporation. Each such
notice shall state (i) the Redemption Date, (ii) the Redemption Price, (iii) the
place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price and (iv) that dividends on the shares to be
redeemed will cease to accrue on the Redemption Date.
(d) Notice having been mailed as aforesaid, from and after the Redemption
Date (unless default shall be made by the Corporation in providing money for the
payment of the Redemption Price of the shares called for redemption), dividends
on the shares of Senior Preferred Stock so called for redemption shall cease to
accrue, and said shares shall no longer be deemed to be outstanding and shall
have the status of authorized but unissued shares of Preferred Stock, and shall
not be reissued as shares of Senior Preferred Stock, and all rights of the
holders thereof as stockholders of the Corporation with respect to said shares
(except the right to receive from the Corporation the Redemption Price and
accrued but unpaid dividends) shall cease. Upon surrender in accordance with
said notice of the certificates for any shares so redeemed (properly endorsed or
assigned for transfer, if the Board of Directors of the Corporation shall so
require and the notice shall so state), such shares shall be redeemed by the
Corporation at the Redemption Price as aforesaid. In the event less than all the
shares represented by any certificate for such shares are redeemed, a new
certificate shall be issued representing the unredeemed shares.
(e) Anything in this Section 3 to the contrary notwithstanding, the holder
of shares of Senior Preferred Stock to be redeemed in accordance with this
Section 3 shall have the right, exercisable at any time up to the close of
business on the Redemption Date (unless the Corporation is legally prohibited
from redeeming such shares on such date, in which event such right shall be
exercisable until the removal of such legal disability), to convert all or any
part of such shares to be redeemed as herein provided into shares of Common
Stock pursuant to Section 5 hereof.
<PAGE>
4. Voting Rights.
Each holder of shares of Senior Preferred Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such
shares of Senior Preferred Stock may be converted and shall have voting rights
and powers equal to the voting rights and powers of the Common Stock (except as
otherwise expressly provided herein or as required by law, voting together with
the Common Stock as a single class) and shall be entitled to notice of any
stockholders' meeting in accordance with the By-Laws of the Corporation.
Fractional votes shall not, however, be permitted and any fractional voting
rights resulting from the above formula (after aggregating all shares into which
shares of Senior Preferred Stock held by each holder may be converted) shall be
rounded upward to the nearest whole number. Each holder of Common Stock shall be
entitled to one (1) vote for each whole share of Common Stock held.
5. Conversion. The holders of the Senior Preferred Stock shall have
conversion rights as follows:
(a) Each share of Senior Preferred Stock shall be convertible, at the
option of the holder thereof, at any time and from time to time into the number
of fully paid and non-assessable shares of Common Stock of the Corporation as is
determined by dividing $1.00 by the Conversion Price (as hereinafter defined) in
effect at the time of conversion. The Conversion Price at which shares of Common
Stock shall be deliverable upon conversion of the Senior Preferred Stock shall
initially be $0.3057 per share.
(b) In order for a holder of Senior Preferred Stock to convert such shares
into shares of Common Stock, such holder shall surrender the certificate or
certificates representing such shares of Senior Preferred Stock, at the office
of the transfer agent for the Senior Preferred Stock, together with written
notice that such holder elects to convert all or any number of the shares of the
Senior Preferred Stock represented by such certificate or certificates. Such
notice shall state such holder's name or the names of the nominees in which such
holder wishes the certificate or certificates for shares of Common Stock to be
issued. If required by the Corporation, certificates surrendered for conversion
shall be endorsed or accompanied by a written instrument or instruments of
transfer, in form satisfactory to the Corporation, duly executed by the
registered holder or its attorney duly authorized in writing. The date of
receipt of such certificates and notice by the transfer agent is referred to
herein as the "Conversion Date". The Corporation shall, as soon as practicable
after the Conversion Date, issue and deliver to such holder, or to its nominee,
at such holder's address as shown in the records of the Corporation, a
certificate or certificates for the number of whole shares of Common Stock (and
any shares of Senior Preferred Stock represented by the certificate delivered to
the transfer agent by the holder thereof which are not converted into Common
Stock) issuable upon such conversion in accordance with the provisions hereof,
together with cash in lieu of fractional shares calculated in accordance with
paragraph (c) of this Section 5. If less than all of the shares of Senior
Preferred Stock represented by a stock certificate are converted into shares of
Common Stock, the Corporation shall issue a new stock certificate in the amount
of the shares not so converted.
(c) No fractional shares of Common Stock shall be issued upon conversion of
shares of Senior Preferred Stock and any fractional share to which the holder
would otherwise be entitled shall be rounded up to the nearest whole number.
(d) The Corporation shall at all times when the Senior Preferred Stock
shall be outstanding, reserve and keep available out of its authorized but
unissued stock, for the purpose of effecting the conversion of the Senior
Preferred Stock, such number of its duly authorized shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all
outstanding shares of Senior Preferred Stock.
<PAGE>
(e) All shares of Senior Preferred Stock which shall have been surrendered
for conversion as herein provided shall no longer be deemed to be outstanding,
and all rights with respect to such shares shall immediately cease and terminate
on the Conversion Date, except only the right of the holders thereof to receive
shares of Common Stock in exchange therefor and the payment of any declared and
unpaid dividends thereon. On the Conversion Date, the shares of Common Stock
issuable upon such conversion shall be deemed to be outstanding, and the holder
thereof shall be entitled to exercise and enjoy all rights with respect to such
shares of Common Stock. All shares of Senior Preferred Stock tendered for
conversion shall, from and after the Conversion Date, be deemed to have been
retired and cancelled and shall not be reissued as Senior Preferred Stock, and
the Corporation may thereafter take such appropriate action as may be necessary
to reduce accordingly the authorized number of shares of Senior Preferred Stock.
(f) The initial conversion price as stated in paragraph (a) of this Section
5 shall be subject to adjustment from time to time and such conversion price as
adjusted shall likewise be subject to further adjustment, all as hereinafter set
forth. The term "Conversion Price" shall mean, as of any time, the conversion
price of the Senior Preferred Stock at that time, as specified in paragraph (a)
of this Section 5 in case no adjustment shall have been required, or such
conversion price as adjusted pursuant to this paragraph (f) of this Section 5,
as the case may be:
(i) If at any time the Corporation shall issue any shares of Common
Stock or any Convertible Securities, Rights or Related Rights (as
herein defined) (such Convertible Securities, Rights or Related
Rights being hereinafter referred to collectively as
"Securities") (other than a dividend or other distribution
payable in Common Stock or such Securities) for a consideration
per share of Common Stock (the consideration in each case to be
determined in the manner provided in (E) and (F) below) less than
the Conversion Price in effect immediately prior to the issuance
of such Common Stock or Securities, then the Conversion Price in
effect immediately prior to each such issuance shall forthwith be
reduced to the consideration per share of Common Stock paid in
connection with such issuance of Common Stock or Securities.
(ii) For the purpose of any adjustment of the Conversion Price
pursuant to this paragraph (f) of this Section 5, the following
provisions shall be applicable:
(A) In the case of the issuance of options or warrants to
purchase or rights to subscribe for Common Stock
(collectively, such "Rights"), the ------ aggregate maximum
number of shares of Common Stock deliverable upon exercise
of such Rights shall be deemed to have been issued at the
time such Rights were issued, for a consideration equal to
the consideration (determined in the manner provided in (E)
and (F) below), if any, received by the Corporation upon the
issuance of such Rights, plus the minimum purchase price
provided in such Rights for the Common Stock covered
thereby.
(B) In the case of the issuance of securities by their terms
convertible into or exchangeable for Common Stock
(collectively, such "Convertible Securities"), or options or
<PAGE>
warrants to purchase or rights to subscribe for securities
by their terms convertible or exchangeable for Common Stock
(collectively, such "Related Rights") the aggregate maximum
number of shares of Common Stock deliverable upon
conversion, exchange or exercise of any such Convertible
Securities or such Related Rights shall be deemed to have
been issued at the time such Convertible Securities or such
Related Rights were issued and for a consideration equal to
the consideration received by the Corporation upon issuance
of such Convertible Securities or such Related Rights
(excluding any cash received on account of accrued interest
or accrued dividends), plus the additional consideration, if
any, to be received by the Corporation upon the conversion,
exchange or exercise of such Convertible Securities or
Related Rights (the consideration in each case to be
determined in the manner provided in (E) and (F) below).
(C) On any change in the number of shares of Common Stock
deliverable upon the exercise of such Rights or Related
Rights or upon the conversion, exchange or exercise of such
Convertible Securities or on any change in the minimum
purchase price of such Rights, Related Rights or Convertible
Securities other than any change resulting from the anti-
dilution provisions of such Rights, Related Rights or
Convertible Securities, the Conversion Price shall forthwith
be readjusted to such Conversion Price as would have been in
effect had the adjustment that was made upon the issuance of
such Rights, Related Rights or Convertible Securities not
converted, exchanged or exercised prior to such change been
made on the basis of such change, but no further adjustment
shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such Right, Related Right
or Convertible Security.
(D) On the expiration of any such Rights, Related Rights or
Convertible Securities, the Conversion Price shall forthwith
be readjusted to the Conversion Price as would have been
obtained had the adjustment made upon the issuance of such
Rights or Related Rights or the issuance of any such
Convertible Securities been made upon the basis of the
issuance of only the number of shares of Common Stock
actually issued upon the exercise of such Rights or Related
Rights or the conversion, exchange or exercise of any such
Convertible Securities.
(E) In the case of the issuance of such Common Stock or
Securities for cash, the consideration shall be deemed to be
the amount of cash paid therefor.
(F) In the case of the issuance of such Common Stock or
Securities for a consideration in whole or in part other
than cash, the consideration other than cash shall be deemed
to be the fair value thereof as determined in good faith by
the Board of Directors of the Corporation.
(G) In the event of any adjustment to the Conversion Price
resulting from the issuance of any Securities, no further
adjustment shall be made for the actual issuance of Common
Stock upon the exercise or conversion of any such
Securities.
(iii)Anything to the contrary contained in this paragraph f) of Section 5
notwithstanding, no adjustment shall be made in the Conversion Price as a
result of or pursuant to (1) the granting of any Right or Related Right, or
the issuance of Common Stock to, officers, employees or directors of, or
consultants to, the Corporation, pursuant to any agreement, plan or
arrangement approved by the Board of Directors of the Corporation; (2) a
dividend or distribution on Senior Preferred Stock or (3) the conversion of
shares of Senior Preferred Stock.
(g) In case the Corporation shall effect a reorganization,
shall merge with or consolidate into another
corporation, or shall sell, transfer or otherwise
dispose of all or substantially all of its property,
assets or business and, pursuant to the terms of such
reorganization, merger (other than a reincorporation
transaction), consolidation or disposition of assets,
shares of stock or other securities, property or assets
of the Corporation, successor or transferee or an
affiliate thereof are to be received by or distributed
to the holders of Common Stock, then each holder of
Senior Preferred Stock shall be provided with written
notice from the Corporation informing each holder of
Senior Preferred Stock of the terms of such
reorganization, merger, consolidation or disposition of
assets and of the record date thereof for any
distribution pursuant thereto, at least 30 days in
advance of such record date, and each holder of Senior
Preferred Stock shall have, in addition to the rights
provided for herein, the right to receive, in addition
to payment of the Liquidation Preference pursuant to
Section 2 hereof, at the holder's election, either (i)
upon conversion of such Senior Preferred Stock, the
number of shares of stock or other securities, property
or assets of the Corporation, successor or transferee
or affiliate thereof or cash receivable by the holders
of the Common Stock upon or as a result of such
reorganization, merger, consolidation or disposition of
assets or (ii) the securities into which the shares of
Senior Preferred Stock are converted, upon, or as a
result of such reorganization, merger, consolidation or
disposition of assets. The provisions of this paragraph
(g) of this Section 5 shall similarly apply to
<PAGE>
succesive reorganizations, mergers, consolidations or
dispositions of assets.
(h) If the Corporation shall effect a subdivision of the
outstanding Common Stock, the Conversion Price then in
effect immediately before such subdivision shall be
proportionately decreased. If the Corporation shall
combine the outstanding shares of Common Stock, the
Conversion Price then in effect immediately before the
combination shall be proportionately increased. If the
Corporation shall make or issue a dividend or other
distribution payable in securities, then and in each
such event provision shall be made so that the holders
of shares of the Senior Preferred Stock shall receive
upon conversion thereof in addition to the number of
shares of Common Stock receivable thereupon, the amount
of securities that they would have received had their
Senior Preferred Stock been converted into Common Stock
on the date of such event and had they thereafter
during the period from the date of such event to and
including the Conversion Date, retained such securities
receivable by them as aforesaid during such period
giving effect to all adjustments called for during such
period under this paragraph, with respect to the rights
of the holders of the Senior Preferred Stock.
(i) Whenever the Conversion Price shall be adjusted as
provided in this Section 5, the Corporation shall
forthwith file, at the office of the transfer agent for
the Senior Preferred Stock a statement, certified by
the chief financial officer of the Corporation, showing
in detail the facts requiring such adjustment and the
Conversion Price that shall be in effect after such
adjustment. The Corporation shall also cause a copy of
such statement to be sent by first class mail, postage
prepaid, to each holder of record of Senior Preferred
Stock at such holder's address as shown in the records
of the Corporation.
(j) If a state of facts shall occur which, without being
specifically controlled by the provisions of this
Section 5, would not fairly protect the conversion
rights of the holders of the Senior Preferred Stock in
accordance with the essential intent and principles of
such provisions, then the Board of Directors of the
Corporation shall make an adjustment in the application
of such provisions, in accordance with such essential
intent and principles, so as to protect such conversion
rights.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by its duly authorized officers this ___ day of November, 1997, who
affirms under penalties of perjury that this Certificate is the act and deed of
the Corporation and that the facts stated herein are true.
NEW GENERATION FOODS, INC.
By: /s/ Jermone Flum
-------------------------------
Jerome Flum, Chairman and Chief
Executive Officer
ATTEST:
By:________________________
<PAGE>
Exhibit 10-H
NEW GENERATION FOODS, INC.
45 Graham Road
Scarsdale, New York 10583
November 18, 1997
Flum Partners
45 Graham Road
Scarsdale, New York 10583
Mr. Jerome Flum
45 Graham Road
Scarsdale, New York 11583
Gentlemen:
An Independent Committee of the Board of Directors of New Generation
Foods, Inc., a Nevada corporation (the "Company"), has considered the letter
from Flum Partners of November 17, 1997. Based on the current cash position of
the Company, and the requirement that a minor cash balance be maintained by the
Company to pay potential creditors' claims and other expenses and for working
capital, the cash amount of $1.8 million is available to pay a portion of the
liquidation preferences (and accrued dividends) on all of the shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock owned by
Flum Partners and tendered for payment, leaving an unpaid amount of
approximately $1.16 million.
This letter will constitute the agreement of the Company and Flum
Partners that the unpaid amount of approximately $1.16 million referred to in
the preceding paragraph shall be paid by the issuance of 1,100,000 shares of a
new series of "Senior Preferred Stock" of the Company (the "Senior Preferred
Shares") having the rights, powers, privileges and preferences specified in the
attached form of "Certificate of Designations for Senior Preferred Stock". By
its execution below, Flum Partners also consents to the amendments effected by
the attached forms of "Third Certificate of Amendment of Series A Convertible
Preferred Stock" and "Certificate of Amendment of Series B Convertible Preferred
Stock," which are required in order to implement the issuance of the Senior
Preferred Stock.
In consideration for the issuance of the Senior Preferred
Shares to Flum Partners as provided in this letter agreement, Flum Partners
agrees to cause its affiliate, Mr. Jerome Flum, to agree to a termination of Mr.
Flum's existing Employment Agreement with the Company (effective December 1,
1997), with no further obligation of either party thereunder, provided that, in
consideration therefor, the Company transfer and assign to Mr. Flum an
automobile and certain computer equipment with an aggregate value not exceeding
$10,000, and provided further that Mr. Flum agrees to continue to serve as
Chairman of the Board and Chief Executive Officer of the Company, without pay,
on an "at will" basis.
As additional consideration for the issuance of the Senior
Preferred Shares to Flum Partners as provided in this letter agreement, Mr. Flum
and Flum Partners agree, for a period of one year from the date hereof, to
attempt to identify and consummate a transaction involving the Company which
would increase the value of the Company.
<PAGE>
By his execution below, Mr. Flum agrees to the provisions of
the two preceding paragraphs.
This letter agreement shall be governed by and construed in
accordance with the laws of the State of New York (other than with respect to
matters solely involving Nevada corporate law) without giving effect to
principles of conflicts of law applicable thereto. This letter agreement may be
executed in counterparts, each of which shall be deemed an original and all of
which shall constitute one and the same instrument.
Please execute this letter where indicated below to signify
your agreement with the foregoing.
NEW GENERATION FOODS, INC.
By: /s/ Jermone Flum
--------------------------------
Name: Jerome Flum, Chairman of the
Board and Chief Executive Officer
ACCEPTED AND AGREED
AS OF THIS ____ DAY OF
NOVEMBER, 1997
FLUM PARTNERS
By:/s/ Jerome Flum
- - ----------------------------
Jerome Flum, General Partner
/s/ Jerome Flum
- - -------------------------
Jerome Flum
<PAGE>
Exhibit 11
NEW GENERATION FOODS, INC. AND SUBSIDIARIES
Net Loss Per Share
Net loss per share - basic is computed by dividing net loss less dividends on
preferred stock by the weighted average number of shares of common stock
outstanding during each year. Net loss per share - diluted is computed by
dividing net income by the weighted average number of shares of common stock and
the number of additional common shares that would have been outstanding if the
dilutive potential common shares had been issued. The computation excludes the
effect of dilutive potential securities (convertible preferred stock and
options) because their inclusion would have had an antidilutive effect.
Loss Per Share Computation
For the Year Ended December 31, 1997
Net loss $ 81,049
Dividends on cumulative preferred stock 185,400
--------------
Net loss applicable to common stock $ 266,449
==============
Basic average common shares outstanding 399,830
==============
Loss per share - basic and dilutive $ 0.67
==============
<PAGE>
Exhibit 21
SUBSIDIARIES OF
NEW GENERATION FOODS, INC.
% of Ownership
State of By New Generation
Name Incorporation Foods, Inc.
- - ---- ------------- -----------------
Spicer's International, Inc. Nevada 100%
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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,400
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,400
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,400
<CURRENT-LIABILITIES> 1,346
<BONDS> 0
1,100
0
<COMMON> 4
<OTHER-SE> (1,050)
<TOTAL-LIABILITY-AND-EQUITY> 1,400
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (81)
<INCOME-TAX> 0
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (81)
<EPS-PRIMARY> (0.67)
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