<PAGE>
As filed with the Securities and Exchange Commission on June 22, 1998
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
---------------------
INNOPET BRANDS CORP.
(Name of Small Business Issuer in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 2047 65-0639984
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
1 East Broward Boulevard, Suite 1100
Fort Lauderdale, Florida 33301
(954) 453-2400
(Address and Telephone Number of Principal Executive Offices)
---------------------
Marc Duke
Chief Executive Officer
1 East Broward Boulevard, Suite 1100
Fort Lauderdale, Florida 33301
(954) 453-2400
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(Name, Address and Telephone Number of Agent for Service)
Copies to:
Daniel I. DeWolf, Esq.
Willie E. Dennis, Esq.
Camhy Karlinsky & Stein LLP
1740 Broadway, 16th Floor
New York, New York 10019-4315
(212) 977-6600
---------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act"), other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
Pursuant to Rule 429 under the Securities Act, the combined Prospectus
contained in this Registration Statement applies and shall be used in connection
with the Registrant's Registration Statement on Form SB-2, File No.
333-36755.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title Of Each Class Of Securities Amount To Be Offering Price Aggregate Offering Amount Of
To Be Registered Registered Per Share(1) Price(1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par
value (2) ........................ 14,126,686 shares $ 0.3281 $ 4,634,965.82 $ 1,367.31
- --------------------------------------------------------------------------------------------------------------------
Total .................................................................. $ 4,634,965.82 $ 1,367.31(3)
</TABLE>
===============================================================================
(1) Estimated solely for purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933 (the "Act") on the basis of the
average of the bid and asked prices of the Common Stock and Redeemable
Warrants of InnoPet Brands Corp. (the "Company") as quoted on the OTC
Electronic Bulletin Board on June 15, 1998.
(2) Includes: (i) 2.0 million shares of Common Stock being registered for offer
by the Company in connection with a proposed settlement of certain
litigation relating to the non-payment of principal, interest and fees due
in connection with a promissory note issued by the Company; (ii) 5.55
million shares of Common Stock being registered for offer by the Company,
which shares of Common Stock may be offered by the Company to, among others,
certain investors, at a discount to the market price of the Common Stock in
effect on the date of sale by the Company to such investors, to certain
vendors, and to satisfy other indebtedness of the Company; (iii) 412,491
shares of Common Stock which will be issued as a dividend on the Series A 4%
Cumulative Convertible Preferred Stock, which pays a quarterly dividend of
4% per annum (represents the aggregate dividend for a period from the date
of issuance through December 31, 1998) (such number of shares to be
registered is estimated based upon a per share purchase price equal to the
closing bid price as quoted on the OTC Electronic Bulletin Board on June 15,
1998); (iv) 5,747,778 shares of Common Stock being registered on behalf of
an investor in three private placement financings which underlie 19,925
shares of Series B 8% Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock"), which are convertible at any time, at the option of the
holder, into that number of shares of Common Stock which is equal to $100
divided by 80% of the average closing bid price for the Common Stock as
quoted on the OTC Electronic Bulletin Board for the five trading days
preceding the date of conversion (such number of shares to be registered is
estimated upon the basis of a per share purchase price equal to 80% of the
closing bid price for the Common Stock as quoted on the OTC Electronic
Bulletin Board on June 15, 1998); (v) 286,251 shares of Common Stock which
will be issued as a dividend on the Series B Preferred Stock, which pays a
quarterly dividend of 8% per annum (represents the aggregate dividend for a
period from the date of issuance through December 31, 1998) (such number of
shares to be registered is estimated based upon a per share purchase price
equal to the lowest closing bid price for the Common Stock as quoted on the
OTC Electronic Bulletin Board on June 15, 1998) and (vi) 130,166 shares of
Common Stock being registered on behalf of Innopet, Inc.
(3) Pursuant to Rule 429, this Registration Statement also relates to an
aggregate of 7,952,441 shares of Common Stock and 768,200 Redeemable
Warrants included in the Prospectus which is part of Registration Statement
No. 333-36755. A registration fee in the amount of $4,690.05 was previously
paid in connection with the prior registration of such securities.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold, nor may
offers to buy be accepted, prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JUNE 22, 1998
INNOPET BRANDS CORP.
Shares of Common Stock and Redeemable Warrants
This Prospectus covers an aggregate of 21,679,127 shares of common stock,
par value $.01 per share (the "Common Stock") and 768,200 redeemable warrants
(the "Redeemable Warrants," collectively with the Common Stock hereinafter
sometimes referred to as the "Securities") of InnoPet Brands Corp, a Delaware
corporation (the "Company" or the "Registrant") which may be offered, from time
to time, by the Company, certain selling shareholders named herein (the "Selling
Securityholders") or by the transferees of the Selling Securityholders. The
Company is offering: (i) 1.0 million shares in connection with (a) a proposed
financing whereby the Company will issue a total of $3.6 million of Common Stock
to an investor based upon the payment, over a twenty-four month period, of
$150,000 each month, at a per share purchase price equal to 80% of the lowest
closing bid price for the Common Stock for the twenty trading days preceding the
date of issuance; provided, however, that if the average closing bid price for a
share of Common Stock for the five trading days preceding any investment date
falls below $2.00 per share, the investor will forgo funding such monthly
investment (the "Investment") and (b) the grant by the Company of an option,
exercisable at any time within two years, to purchase up to $50.0 million of
Common Stock based upon a per share purchase price equal to 85% of the lowest
closing bid price for the Common Stock for the five trading days preceding the
date of issuance (the "Option"); (ii) 2.0 million shares of Common Stock in
connection with a proposed settlement of certain litigation relating to the
non-payment of principal, interest and fees due in connection with a promissory
note issued by the Company; and (iii) 5.55 million shares of Common Stock, which
may be offered by the Company to, among others, certain investors, at a discount
to the market price of the Common Stock in effect on the date of sale by the
Company, to certain vendors, and to satisfy other indebtedness of the Company.
The actual number of shares of Common Stock offered by the Company will, in
certain cases, be subject to increase or decrease dependent upon the purchase
price per share in effect on the actual date of sale by the Company. The Company
shall receive a portion of the proceeds of the sale of Common Stock by certain
Selling Securityholders, and shall receive proceeds upon the exercise of the
Redeemable Warrants. See "Use of Proceeds" and "Certain Transactions." The
Company has agreed to pay all costs and expenses incurred in connection with the
registration of the Securities offered hereby, such expenses estimated to be
approximately $41,368 including registration fees, estimated legal and
professional fees and miscellaneous offering expenses. The Selling
Securityholders shall be responsible for all selling commissions, transfer
taxes, fees of counsel to the Selling Securityholders and related charges in
connection with the offer and sale of the Securities by such Selling
Securityholders, except that the Company may agree to pay specifically
negotiated brokerage fees and commissions in connection with such sales. See
"Plan of Distribution" and "Certain Transactions."
<PAGE>
The Common Stock and Redeemable Warrants of the Company are quoted on the
OTC Electronic Bulletin Board under the symbols "INBC" and "INBCW",
respectively. On June 15, 1998, the closing bid price of the Company's Common
Stock and Redeemable Warrants as quoted on the OTC Electronic Bulletin Board
was $0.3125 and $0.0625, respectively. The Selling Securityholders may sell all
or a portion of the Securities offered hereby in private transactions or in the
over-the-counter market at prices related to the prevailing prices of the
Common Stock and Redeemable Warrants on the OTC Electronic Bulletin Board at
the time of sale. The Selling Securityholders may effect such transactions by
selling to or through one or more broker-dealers, and such broker-dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Company or the Selling Securityholders. The Selling
Securityholders and any broker-dealers that participate in the distribution
may, under certain circumstances, be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), and
any commissions received by such broker-dealers and any profits realized on
their resale of Securities may be deemed to be underwriting discounts and
commissions under the Securities Act. The Company and the Selling
Securityholders may agree to indemnify such broker-dealers against certain
liabilities, including liabilities under the Securities Act. In addition, the
Company has agreed to indemnify the Selling Securityholders, with respect to
the registration of the Securities, against certain liabilities, including
certain liabilities under the Securities Act. To the extent required, the
specified number of Securities to be sold, the names of the Selling
Securityholders, the public offering price, the names of any such
broker-dealers, and any applicable commissions or discounts with respect to any
particular offer will be set forth in a supplement to this Prospectus. Each of
the Selling Securityholders reserves the right to accept or reject, in whole or
in part, any proposed purchase of the Securities. See "Plan of Distribution."
Any securities covered by this Prospectus which qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under Rule 144 rather than
pursuant to this Prospectus.
---------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A
HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 7.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
---------------------
June , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission" or "SEC"). Such reports,
proxy statements and other information filed by the Company can be inspected and
copied, at the prescribed rates, at the public reference facilities of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, at the Northeast Regional Office of the Commission located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and at the Midwest
Regional Office of the Commission located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies may be obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
the Commission's Web site is http://www.sec.gov.
The Company has filed with the Commission, in Washington, D.C., a
Registration Statement on Form SB-2 (together with all amendments thereto, the
"Registration Statement"), under the Securities Act, with respect to the
Securities offered hereby. This Prospectus, filed as part of such Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules filed therewith, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
Securities offered hereby, reference is hereby made to the Registration
Statement and to the exhibits and schedules filed therewith. Statements
contained in this Prospectus regarding the contents of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being deemed to be qualified in its
entirety by such reference. The Registration Statement, including all exhibits
and schedules thereto, may be inspected, without charge, at the principal office
of the Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, at the Midwest Regional Office of the Commission located
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and at the Northeast Regional Office of the Commission located at
Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, upon the payment of
the prescribed fees therefor.
This Prospectus contains certain forward-looking statements or statements
which may be deemed or construed to be forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition and business of the Company. The words "estimate,"
"plan," "intend," "expect" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve, and are
subject to, known and unknown risks (including the ones set forth below),
uncertainties and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward-looking statements. Investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
related notes thereto appearing elsewhere in this Prospectus. Each prospective
investor is urged to read this Prospectus in its entirety.
THE COMPANY
The Company produces, markets and sells premium dog food primarily through
supermarkets and grocery stores under the name InnoPet Veterinarian Formula(TM)
Dog Food ("Veterinarian Formula"). In June 1996, the Company commenced sales of
its beef formula dog food to supermarkets in the Greater Metropolitan New York
area. As of June 15, 1998, the Company's products have been sold in the
following markets: the Greater Metropolitan New York area; the New England area;
Philadelphia, Pennsylvania and other areas of Pennsylvania; the Baltimore,
Maryland and Washington, D.C. area; Virginia; North Carolina; South Carolina;
Georgia; Alabama; Tennessee; Florida; and Texas.
The Company's objective is to become a national provider of premium pet
foods primarily through supermarket and grocery store retail outlets. The
Company intends to achieve its objective by: (i) providing to supermarkets a
brand of competitively-priced premium pet food to enable supermarkets to
recapture a share of the premium pet food market that they have lost to
specialty pet stores; (ii) expanding distribution to supermarkets and grocery
stores throughout the United States; (iii) increasing consumer awareness and
market penetration throughout the Company's market areas; and (iv) packaging its
products in unique single serving-sized inner- bags which are designed to
increase convenience of feeding, regulate portions, reduce product deterioration
and prevent contamination.
In June 1997, the Company began expansion of its line of dog foods with the
introduction of lamb and rice with barley formula in its existing markets. At
the same time, the Company also entered into long-term agreements with the North
Shore Animal League and Pet Savers Foundation, whereby Veterinarian Formula will
be exclusively fed to in-house dogs and recommended to adopters by both of these
not-for-profit humane organizations which place animals through thousands of
shelters each year. In addition, adopters will be provided with product samples,
literature and coupons, and will be able to purchase the products in retail
stores of some participating adoption centers. The Company was also recently
selected by The Kroger Co. ("Kroger"), one of the nation's largest supermarket
chains, to provide a full line of private label premium pet food to the chain's
approximately 1,300 retail outlets. This product line will initially target dog
owners; it is anticipated that cat food will be introduced at a later date. The
first products which the Company expects to introduce will be beef, lamb and
rice, and chicken-flavored dry dog foods. The Company anticipates that more than
ten stock keeping units will be brought to Kroger shelves in the first round of
product offerings.
The Company is in the process of implementing its overall marketing
strategy which commenced in February 1997. The Company's strategy is to provide
premium pet food products that are good for the pet and easy to use for the
owner. Programs include: radio and newspaper advertising; free-standing inserts;
in-store couponing; shopping cart signage and floorminders; trial size displays;
store feature ads and circulars; direct mail sampling programs to targeted
consumers, veterinarians and breeders; newspaper sample pouches; and extensive
in-store demonstrations with sampling. In addition, the Company participates in,
and supports with sampling, local pet-related events (e.g., pet walkathons, pet
shows, etc.) within its market areas, both independently and in conjunction with
local supermarkets.
3
<PAGE>
THE OFFERING
Securities Offered by the
Company....................... 8,550,000 shares of Common Stock(1)
Securities Offered by Selling
Security Holders.............. 13,129,127 shares of Common Stock(2).
768,200 Redeemable Warrants.
Use of Proceeds................ Assuming all payments are made in connection
with the Investment, and that all shares of
Common Stock being registered for offer by
the Company are sold, the Company will
receive net proceeds of approximately $2.8
million. Such net proceeds will be used for
repayment of existing debt and general
corporate purposes, including working
capital. See "Use of Proceeds."
Risk Factors................... The purchase of the Securities offered
hereby involves a high degree of risk.
Prospective investors should review
carefully and consider the information set
forth under "Risk Factors."
- -------------
(1) Includes: (i) 1.0 million shares of Common Stock being registered for offer
by the Company in connection with (a) a proposed financing whereby the
Company will issue a total of $3.6 million of Common Stock over a
twenty-four month period based upon the payment of $150,000 each month and a
per share purchase price equal to 80% of the lowest closing bid price for
the Common Stock for the twenty trading days preceding each investment date,
and (b) the grant by the Company of an option to purchase up to a total of
$50.0 million of Common Stock over a twenty-four month period based upon a
per share purchase price equal to 85% of the lowest closing bid price for
the Common Stock for the five trading days preceding each investment date;
(ii) 2.0 million shares of Common Stock being registered for offer by the
Company in connection with a proposed settlement of certain litigation
relating to the non-payment of principal, interest and fees due in
connection with a promissory note, issued by the Company; and (iii) 5.55
million shares of Common Stock being registered for offer by the Company,
which shares may be offered by the Company to, among others, certain
investors, at a discount to the market price of the Common Stock in effect
on the date of sale by the Company, to certain vendors, and to satisfy other
indebtedness of the Company.
(2) Includes: (i) 625,000 shares of Common Stock being registered on behalf of
an investor in a $2.5 million private placement financing (the "Series A
Private Placement") which underlie 625,000 shares of Series A 4% Cumulative
Convertible Preferred Stock (the "Series A Preferred Stock") which are
convertible at any time, at the option of the holder, into shares of Common
Stock; (ii) 544,000 shares of Common Stock which will be issued as a
dividend on the Series A Preferred Stock, which pays a quarterly dividend of
4% per annum (represents the aggregate dividend for a period from the date
of issuance through December 31, 1998, (such number of shares to be
registered is estimated based upon a per share purchase price equal to the
closing bid price as quoted on the OTC Electronic Bulletin Board on June 15,
1998)); (iii) 62,500 shares of Common Stock underlying an option for 62,500
shares of Series A Preferred Stock granted to the placement agent in the
Series A Private Placement; (iv) 600,000 shares of Common Stock being
registered on behalf of a loan creditor in connection with a $1.5 million
loan which the Company completed on July 9, 1997 (the "Loan"), which shares
were issued as security for the Loan; (v) 23,334 shares of Common Stock to
be issued to the Loan creditor as interest on the loan through its January
15, 1998 maturity date (the Company shall pay interest on the Loan at a rate
at 14% per annum and may, at the option of the holder pay the interest in
Common Stock valued at $4.50 per share); (vi) 7.97 million shares of Common
Stock being registered on behalf of an investor in three private placement
financings (the "Series B Private Placement"), which underlie
4
<PAGE>
19,925 shares of Series B 8% Cumulative Convertible Preferred Stock (the
"Series B Preferred Stock"), which are convertible at any time, at the option
of the holder, into that number of shares of Common Stock which is equal to
$100 divided by 80% of the average closing bid price for the Common Stock as
quoted on the OTC Electronic Bulletin Board for the five trading days
preceding the date of conversion (such number of shares to be registered is
estimated based upon a per share purchase price equal to 80% of the closing
bid price as quoted on the OTC Electronic Bulletin Board on June 15, 1998);
(vii) 476,012 shares of Common Stock which will be issued as a dividend on
the Series B Preferred Stock for a period from the date of issuance through
December 31, 1998 (such number of shares to be registered is estimated based
upon a per share purchase price equal to the closing bid price as quoted on
the OTC Electronic Bulletin Board on June 15, 1998); and (viii) 2,828,281
shares of Common Stock being registered on behalf of certain Securityholders.
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is derived from and
should be read in conjunction with the financial statements, including the notes
thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Inception
(January 11, 1996)
Three Months Ended Year Ended to
March 31, 1998 March 31, 1997 December 31, 1997 December 31, 1996
---------------- ---------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Net sales .................................. 673,689 575,028 3,066,489 1,859,936
Net loss ................................... (2,589,087) (2,199,908) (10,011,743) (6,518,304)
Net loss per common share .................. (0.52) (0.49) (2.24) (3.11)
Weighted average number of common shares
outstanding ............................... 4,935,916 4,465,878 4,474,000 2,094,000
</TABLE>
As of As of
March 31, 1998 December 31,1997
---------------- -----------------
Balance Sheet Data:
Working capital .................. (2,471,783) (1,262,152)
Total assets ..................... 4,835,742 5,185,619
Total liabilities ................ 6,703,219 5,741,433
Stockholders' deficiency ......... (1,867,477) (555,814)
6
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to
the other information contained in this Prospectus before purchasing the
Securities offered hereby. Because any investment in the Securities involves a
high degree of risk, only investors who can accommodate such risks, including a
complete loss of their investment, should purchase the Securities. Each
prospective investor should carefully consider, in addition to the other
information contained in this Prospectus, the following information in
evaluating the Company and its business before making an investment decision.
This Prospectus contains certain forward-looking statements or statements which
may be deemed or construed to be forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to the
financial condition and business of the Company. The words "estimate," "plan,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. These forward-looking statements involve, and are
subject to, known and unknown risks (including the ones set forth below),
uncertainties and other factors which could cause the Company's actual results,
performance (financial or operating) or achievements to differ from the future
results, performance (financial or operating) or achievements expressed or
implied by such forward- looking statements. Investors are cautioned not to
place undue reliance on these forward-looking statements, which speak only as of
the date hereof. The Company undertakes no obligation to release publicly any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.
Significant Need for Future Capital; Uncertainty of Additional Funding. In
order to accomplish its business objectives, the Company requires significant
additional financing. The Company is actively seeking such financing and if it
is unable to obtain it the Company will be required to alter substantially its
business objectives. Such additional financing, if any, may be either debt,
equity or a combination of debt and equity. An equity financing could result in
dilution in the Company's net tangible book value per share of Common Stock.
There can be no assurance that the Company will be able to secure additional
debt or equity financing or that such financing will be available on favorable
terms. See "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Limited Revenues and Operating History; Going Concern Qualification. The
Company was incorporated on January 11, 1996 to acquire certain pet food
formulas. As of the date of this Prospectus, the Company has generated limited
revenues. Accordingly, the Company has limited operating history upon which an
evaluation of its prospects can be made. The report of the Company's independent
auditors for the period from inception to December 31, 1997, contains an
explanatory paragraph raising the independent auditor's substantial doubt about
the Company's ability to continue as a going concern because the Company has
been in its development stage, has incurred a net loss and reflects a deficit
accumulated during this period of $16,530,047. The Company expects to continue
to incur losses at least through fiscal year 1998. The Company's ability to
achieve a profitable level of operations will depend in large part on the market
acceptance of its products. There can be no assurance that the Company will ever
achieve profitable operations. See "The Company's Financial Statements and
related notes thereto appearing elsewhere in this Prospectus, "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Sale of Common Stock by the Company at a Discount to the Market Price. The
Company may, from time to time, seek additional funding through the sale of
Common Stock at a discount to the market price of such Common Stock in effect on
the date of sale by the Company. This discount may be substantial. The potential
issuance of shares of Common Stock at a discount to the market price may have
the effect of discouraging additional investments in the Company upon terms
acceptable to the Company. If additional funds are raised by issuing Common
Stock at a discount to the market price of such Common Stock, substantial
dilution to existing shareholders may result. The sale of a substantial number
of shares of Common Stock at a discount and the resale of such shares of Common
Stock into the public market, or the potential for such sales, could materially
and adversely affect the prevailing market price for the Common Stock.
Recent Delisting from Nasdaq Small-Cap Market for Failure to Meet Net
Tangible Assets Requirement. On March 20, 1998, the Company was delisted by the
Nasdaq Small-Cap Market ("Nasdaq") for failing to meet the current net tangible
asset requirement of Nasdaq, which is $2.0 million. As of March 31, 1998, the
Company had net tangible assets for Nasdaq purposes of ($1,867,477). There can
be no assurances that the Company will in the future satisfy the net tangible
assets requirement of Nasdaq. The Company's securities as of March 23,
7
<PAGE>
1998 are quoted on the OTC Electronic Bulletin Board, an inter-dealer automated
quotation system sponsored and operated by the National Association of
Securities Dealers ("NASD"). See "Listing on OTC Electronic Bulletin Board;
Disclosure Relating to Low Priced Stocks."
Default on Certain Obligations Relating to Short Term Debt. On July 9,
1997, the Company issued a senior convertible note to Entrepreneurial Investors,
Ltd., ("EIL") a Bahamas corporation and principal stockholder of the Company, in
the principal amount of $1.5 million (the "Senior Note"). The Senior Note has a
stated interest rate of 14% per annum and matured on January 15, 1998. To date,
the Company has not made any payment of principal or interest under the Senior
Note and is in default on the Senior Note. EIL has taken possession of the
600,000 shares of Common Stock issued as collateral for the Senior Note and
claims that the Senior Note has priority over all other obligations of the
Company, whether in existence on the date of issuance of the Senior Note or
subsequently incurred. EIL has not converted the Senior Note into equity of the
Company. If EIL were to convert the Senior Note into equity of the Company, the
shares of Common Stock previously issued as collateral and currently in EIL's
possession would be insufficient to satisfy the amounts due under the Senior
Note based upon the current market price of the Common Stock. The Company is
currently in preliminary settlement negotiations with EIL and believes that it
will reach an amicable agreement with EIL. In the event that an agreement is not
reached and EIL successfully pursues its claims, such event could have a
material adverse effect on the Company, its financial condition, business and
operations. See "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Business -- Litigation."
On January 28, 1998, the Company issued to Interbank Special Purpose
Corporation II ("IBF") a secured promissory note in the principal amount of
$762,500 (the "IBF Note"). The IBF Note has a stated interest rate of 1.5% per
month (18% per annum) and matured on April 28, 1998. The IBF Note is secured by,
among other things, all inventory, equipment, vehicles, accounts receivables,
trade names and trademarks of the Company (the "Collateral"). As of the date
hereof, the Company has failed to make any principal or interest payments to
IBF. On March 17, 1998, IBF declared the IBF Note to be in default and
accelerated the payments due thereunder. IBF also made a written demand
requesting that the Company immediately deliver to IBF the Collateral. On April
27, 1998, IBF commenced an action against the Company in the Circuit Court of
the 17th Judicial Circuit of the State of Florida in and for Broward County,
seeking, among other things, (i) full payment of principal and interest on the
IBF Note, (ii) an accounting of all the Collateral, (iii) a judgment foreclosing
the Collateral and a deficiency judgement if the proceeds from the sale of the
Collateral are insufficient to pay any judgment obtained in the action, and (iv)
appointment of a receiver for the Company. The Company is currently in
settlement negotiations with IBF and believes that it will reach an amicable
agreement with IBF. Although the Company denies liability, it is contemplated
that the Registration Statement filed in connection with this Prospectus, in the
form that it becomes effective, will satisfy the Company's obligations under a
proposed settlement with IBF. Any payments made by the Company to IBF may be
subject to EIL's claim of priority. If the action is not settled, the Company
intends to vigorously defend this suit and to file a counter-claim against IBF.
In the event that the IBF action results in monetary damages in a material
amount in favor of IBF, or the appointment of a receiver for the Company, such
event could have a material adverse effect on the Company, its financial
condition, business and operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business -- Litigation."
In December, 1997, the Company completed a private placement of 4 units
(the "Units") to Curi Oil Co. LLC ("Curi"), each Unit consisting of a promissory
note of the Company in the principal amount of $25,000, bearing interest at the
rate of 10% per annum and maturing 90 days from the issuance thereof, and
Redeemable Warrants to purchase 25,000 shares of Common Stock, expiring on
December 5, 2001, at an exercise price of $6.00 per share. The Company extended
the maturity date of the promissory notes to May 30, 1998. As of the date
hereof, the Company has failed to make any principal or interest payments to
Curi. Any payments made by the Company to Curi may be subject to EIL's claim of
priority. Curtis Granet, a director of the Compay, holds a 40% membership
interest in Curi, and was issued 10,000 Redeemable Warrants in connection with
this transaction. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
<PAGE>
Uncertainty of Completion of the Investment. Pursuant to the terms of a
subscription agreement (the "Subscription Agreement") dated March 23, 1998
between the Company and HSBC James Capel Canada, Inc. ("HSBC") the Company will
issue a total of $3.6 million of Common Stock over a twenty-four month period
based upon the payment of $150,000 each month. The Subscription Agreement
provides however that HSBC will forego funding the monthly investment in the
event that the average closing bid price for a share of Common Stock as quoted
on the OTC Bulletin Board for the five trading days preceding any monthly
investment falls below $2.00 per share. On June 15, 1998, the closing bid price
for a share of Common Stock as quoted on the OTC Bulletin Board was $0.3125. As
of June 15, 1998, HSBC has funded $150,000 of the Investment. There can be no
assurances that the closing bid price for a share of Common Stock will equal or
exceed $2.00 in the future. If the Investment is not completed, the Company will
receive significantly less proceeds than is estimated in this Prospectus. As a
result, the financial condition and results of operations of the Company could
be materially adversely affected.
Uncertainty of Exercise of Option; Insufficient Common Stock Available.
Although the Company has granted to HSBC an option to purchase up to $50.0
million of Common Stock, there can be no assurances that HSBC will ever exercise
such option. In addition, in the event that the option is exercised in full, the
Company does not presently have a sufficient number of authorized and unissued
shares to issue. At the annual meeting to be held on June 25, 1998, the Company
is seeking shareholder approval to amend its certificate of incorporation
accordingly. The amendment of the certificate of incorporation requires
affirmative vote of a majority of all issued and outstanding shares entitled to
vote. There can be no asurances that such amendment will be effected.
New Product Introductions. The Company's success with its new line of
private label premium pet food is dependent upon its ability to market and
deliver this new product. As is typical with new products, demand for and market
acceptance of new products introduced by the Company are subject to uncertainty.
Achieving market acceptance for new products may require substantial marketing
and other efforts and the expenditure of significant funds to create customer
demand. There can be no assurance that the Company's efforts will be successful.
In addition, the failure of new products to gain sufficient market acceptance
could adversely affect the image of the Company's brand name and demand for
other products of the Company.
Highly Competitive Nature of the Pet Food Business. The pet food business
is highly competitive. Virtually all of the manufacturers, distributors and
marketers of pet food have substantially greater financial, research and
development, marketing and manufacturing resources than the Company. Competitors
in the premium pet food market include, among others: Colgate-Palmolive Co.
(Hills' Science Diet), Iams Co. and Ralston Purina Co. Brand loyalty to existing
products may prevent the Company from achieving its sales objectives.
Additionally, the long-standing relationships maintained by existing premium pet
food manufacturers with veterinarians and pet breeders may prevent the Company
from obtaining professional recommendations for its products. In addition, the
Company competes with current supermarket high-priced dog foods, which are not
considered premium when compared to Veterinarian Formula, and to the premium dog
foods offered in the specialty pet stores. Although the dominant existing
premium pet food brands are not currently available in supermarkets, there can
be no assurance that this situation will continue. In addition, no barriers to
entry exist with respect to such brands. The entrance into the supermarket
distribution channel of an existing or new premium pet food by any of the
Company's competitors could have a material adverse effect on the Company. See
"Business -- Competition."
Ability of the Company to Control the Costs of Raw Materials, Manufacturing
and Packaging. The Company's financial results will depend to a large extent on
the cost of raw materials, manufacturing and packaging and the ability of the
Company to pass along increases in these costs to the supermarkets and grocery
stores. Except as described below, the Company has no other agreements to
purchase raw materials. Fluctuations in prices of food stocks have historically
resulted from a number of factors, including changes in United States government
farm support programs, changes in international agricultural and trading
policies and weather conditions during growing and harvesting seasons.
Fluctuations in paper prices have historically resulted from changes in supply
and demand, general economic conditions and other factors. Although the Company
is unaware of any currently pending price increases, future price increases in
raw materials or packaging could have a material adverse effect on the Company.
See "Business -- Manufacturing and Distribution."
9
<PAGE>
Dependence on Third-Party Suppliers; Manufacturers and Food Brokers. The
Company has been and will continue to be dependent on third parties for the
supply, manufacture, packaging and sale of its pet foods. Currently, the Company
relies on two manufacturers and two packagers. The Company obtains beef for its
products pursuant to an agreement with Monfort, Inc. ("Monfort") a subsidiary of
ConAgra, Inc. ("ConAgra") that terminates in 1999, unless terminated earlier by
either party on 60 days notice. Any failure by Monfort to fulfill its
obligations under the agreement, or the failure by the Company to secure an
alternative source of beef at comparable prices upon the termination of the
Monfort agreement, whether at its expiration date or earlier, would have a
material adverse effect on the Company. In addition, to the extent the Company
requires other meats, (e.g., lamb or liver), to produce its products, it may
have difficulty acquiring sufficient amounts on a timely basis, and at
acceptable prices, to satisfy production schedules. The Company does not
maintain supply agreements with any other third party suppliers, but instead
purchases products pursuant to purchase orders in the ordinary course of
business. The Company will be substantially dependent on the ability of its
manufacturers and suppliers to, among other things, meet the Company's
performance and quality specifications. Failure by the Company's manufacturers
and suppliers to comply with these and other requirements could have a material
adverse effect on the Company. Furthermore, there can be no assurance that the
Company's manufacturers and suppliers will dedicate sufficient production
capacity to meet the Company's scheduled delivery requirements or that the
Company's suppliers or manufacturers will have sufficient production capacity to
satisfy the Company's requirements during any period of sustained demand. Their
failure to supply, or delay in supplying, the Company with products could have a
material adverse effect on the Company. See "Business -- Manufacturing and
Distribution."
In addition, the Company's ability to obtain authorizations to sell its
products in supermarkets and grocery stores depends upon the efforts and skill
of brokers retained by the Company. Although the Company believes it will be
able to locate and retain qualified brokers throughout the United States on
acceptable terms, there can be no assurance that the Company will be able to do
so. The failure to obtain authorizations or to locate and retain qualified
brokers could have a material adverse effect on the Company. See "Business --
Marketing and Sales."
Loss of Certain Third-Party Suppliers, Manufacturers and Food Brokers. The
ability of the Company to continue its operations successfully is dependent upon
its ability to retain third parties for the supply, manufacture, packaging,
marketing and sale of its pet foods. To date, the Company has accrued $2.9
million in trade accounts payable and is in default of its obligations under
agreements with certain suppliers, manufacturers and food brokers. Although the
Company intends to use the proceeds from this offering to repay such
indebtedness, there can be no assurance that the proceeds from this offering, if
any, will be sufficient to repay such indebtedness or that the Company will be
able to maintain successful relationships with its existing suppliers,
manufacturers or food brokers. The inability of the Company to maintain such
relationships or obtain new agreements could have a material adverse effect on
the Company. See "Business -- Manufacturing and Distribution."
Broad Discretion Over Application of Proceeds. The Company intends to use
approximately $1.0 million of the estimated net proceeds to repay outstanding
indebtedness and the balance for general corporate purposes, including working
capital. See "Use of Proceeds." Although the Company's current estimate as to
the amount of such net proceeds that will be used for each such other purpose is
set forth under "Use of Proceeds," the Company reserves the right to change the
amount of such net proceeds that will be used for any purpose to the extent that
management determines that such change is advisable. Consequently, management of
the Company will have broad discretion in determining the manner in which the
net proceeds are applied.
The Company's Ability to Manage Growth Effectively. The Company's planned
growth will result in increased responsibility for both existing and new
management personnel. Effective growth management will depend upon the Company's
ability to integrate new personnel, to improve its operational, management and
financial systems and controls, to train, motivate and manage its employees, and
to increase its sources of raw materials, product manufacturing and packaging.
If the Company is unable to manage growth effectively, the Company's business,
results of operations and financial condition would be materially and adversely
affected. In addition, there can be no assurance that any growth will occur or
that growth will produce profits for the Company. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and "Business --
Marketing and Sales."
10
<PAGE>
Dependence on Key Personnel; Potential Conflicts of Interests. The success
of the Company will be largely dependent on the personal efforts of Marc Duke,
its Chairman and Chief Executive Officer. Although the Company has entered into
an employment agreement with Mr. Duke which expires in 2000, the loss of his
services or certain other key management or scientific personnel could have a
material adverse effect on the Company. The success of the Company is also
dependent upon its ability to hire and retain qualified personnel. There can be
no assurance that the Company will be able to hire or retain such necessary
personnel. Mr. Duke is also a director and executive officer of InnoPet Inc.
("IPI") and its subsidiaries. IPI is the former parent company of the Company
and is its largest shareholder. As of June 15, 1998, IPI owns 1,742,065 shares
of Common Stock, which represents 34% of the shares outstanding. Although his
employment agreement requires him to devote substantially his full time and
attention to the Company, there can be no assurance that Mr. Duke's other
responsibilities will not have a material adverse effect on the Company. In
addition, Mr. Duke may have a conflict of interest with respect to business
opportunities offered to the Company. See "Management" and "Certain
Transactions."
Government Regulation. The manufacturing, labelling and marketing of the
Company's products are subject to regulation by federal agencies, including the
United States Department of Agriculture, and by various state and local
authorities. It is the responsibility of the Company's manufacturers to obtain
and maintain the manufacturing approvals. The Company's labels must be
registered in each state that the products are sold to consumers. If the Company
fails to register its labels or satisfy relevant labelling regulations, it may
be subject to fines or prohibited from selling its products until such
regulations are satisfied. Any failure to comply with applicable regulatory
requirements could have a material adverse effect on the Company. See "Business
- -- Government Regulation."
Dependence Upon Proprietary Formulations; Intellectual Property Claims. The
Company's success depends in part upon its ability to protect its proprietary
formulations and trademarks. The Company relies on a combination of copyright,
trademark and trade secret laws, nondisclosure and other contractual agreements
with employees and third parties, and technical measures to protect its
proprietary formulations and trademarks. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
protect misappropriation of such rights or that third parties will not
independently develop equivalent or superior formulations. The Company has no
patents, and existing trade secret and copyrights laws provide only limited
protection. The Company may be subject to or may initiate interference
proceedings in the United States Patent and Trademark Office, which can demand
significant financial and management resources. Although the Company believes
that its products and formulations do not infringe upon the proprietary rights
of others, there can be no assurance that third parties will not assert
infringement claims against the Company in the future. Litigation, which could
result in substantial cost to and diversion of effort by the Company, may be
necessary to enforce intellectual property rights of the Company or to defend
the Company against claimed infringement of the rights of others. The failure to
obtain necessary licenses or other rights or litigation arising out of
infringement claims could have a material adverse effect on the Company. See
"Business -- Intellectual Property."
Control by Principal Stockholders. Mr. Duke, through his position at IPI,
and by proxies granted to him, has voting power over 1,995,057 shares of Common
Stock (38% of such shares). Accordingly, he may be able to control the election
of all of the Company's directors and otherwise may control most matters
requiring approval by the stockholders of the Company, including approval of
significant corporate transactions. See "Principal Stockholders."
Absence of Dividends on Common Stock. The Company has not paid any cash
dividends on its Common Stock and does not expect to do so in the foreseeable
future. The Company is required to pay a quarterly dividend equal to 4% per
annum payable in shares of Common Stock, on its Series A Preferred Stock and a
quarterly dividend, payable in shares of Common Stock or in cash at the sole
option of the Company, equal to 8% per annum on its Series B Preferred Stock. As
of the date hereof, the Company has not issued any shares of Common Stock in
connection with the payment of dividends on the Series A and Series B Preferred
Stock. See "Dividend Policy."
Possible Adverse Effects of Authorization of Preferred Stock. The
Company's Certificate of Incorporation provides that up to 5,000,000 shares of
Preferred Stock may be issued by the Company from time to time in one
11
<PAGE>
or more series. As of June 15, 1998, 625,000 shares of Series A Preferred Stock
and 20,000 shares of Series B Preferred Stock have been issued, of which 625,000
shares of Series A Preferred Stock and 19,925 shares of Series B Preferred Stock
are outstanding and options to purchase an additional 62,500 shares of Series A
Preferred Stock have been granted. The Board of Directors is authorized to
determine the rights, preferences, privileges and restrictions granted to and
imposed upon any wholly unissued series of Preferred Stock and to fix the number
of shares of any series of Preferred Stock and the designation of any such
series, without any vote or action by the Company's stockholders. The Board of
Directors may authorize and issue Preferred Stock with voting or conversion
right that could adversely affect the voting power or other rights of the
holders of Common Stock. In addition, the potential issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock. See "Description of the Company's Securities -- Preferred
Stock."
Listing on OTC Electronic Bulletin Board; Disclosure Relating to Low Priced
Stocks; Illiquidity of Trading Market. The Securities are quoted on the OTC
Electronic Bulletin Board, an NASD sponsored and operated inter-dealer automated
quotation system for equity securities. The OTC Electronic Bulletin Board was
introduced eight years ago as an alternative to the NQB Pink sheets published by
the National quotation Bureau Incorporated for the trading of over-the-counter
securities. There can be no assurance that the OTC Electronic Bulletin Board
will be recognized by the brokerage community as an accepted alternative to
quotation on Nasdaq or in the NQB Pink Sheets. In the absence of such
recognition, the liquidity and stock price of the Securities in the secondary
market may be adversely affected, and there can be no assurance that a public
market for the Securities will be sustained. In addition, depending on several
factors including the future market price of the Common Stock or Redeemable
Warrants, the Securities are subject to the so-called "penny stock" rules that
impose additional sales practice and market-making requirements on
broker-dealers who sell and/or make a market in such securities, which could
affect the ability or willingness of broker-dealers to sell and/or make a market
in the Securities and the ability of purchasers of the Securities to sell such
Securities in the secondary market.
Limits on Secondary Trading. Under the blue sky laws of most states, public
sales of Common Stock and Redeemable Warrants after this offering by persons
other than the Company in "non-issuer transactions" must either be qualified
under applicable blue sky laws, or exempt from such qualification requirements.
Blue sky authorities in certain states may impose restrictions on the secondary
trading of Common Stock and Redeemable Warrants in those states. In many states,
secondary trading of the Common Stock and Redeemable Warrants will be permitted
only by virtue of an exemption so long as information about the Company is
published in a recognized manual such as manuals published by Moody's Investor
Service or Standard & Poor's Corporation. The Company is curently listed in a
manual published by Standard & Poor's Corporation. There may, however, be some
period of time after the date of this Prospectus during which purchasers of the
Securities will not be able to resell shares of Common Stock and Redeemable
Warrants in the states in which secondary trading is not exempted by virtue of a
recognized manual exemption. As a result of these or other restrictions that
might be imposed, purchasers in this offering, existing stockholders and future
stockholders may be restricted or prohibited from selling the Common Stock or
the Redeemable Warrants in particular states as a result of applicable blue sky
laws. Purchasers of the Securities should consult with their broker, counsel and
other advisers to determine whether there are any resale restrictions on public
resale of the Common Stock or the Warrants in the states in which they reside.
These restrictions may have the effect of reducing the liquidity of the Common
Stock or Redeemable Warrants and could adversely affect the market price of the
Common Stock or the Redeemable Warrants.
The Securities are also subject to the requirements of Rule 15g-9
promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Under such rule, broker/dealers who recommend low-priced securities to
persons other than established customers and accredited investors must satisfy
special sales practice requirements, including a requirement that they make an
individualized written suitability determination for the purchaser and receive
the purchaser's consent prior to the transaction. The Securities Enforcement
Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure
in connection with any trades involving a stock defined as a penny stock
(generally, according to recent regulations adopted by the SEC, any equity
security not traded on an exchange or quoted on Nasdaq that has a market price
of less than $5.00 per
12
<PAGE>
share, subject to certain exceptions), including the delivery, prior to any
penny stock transaction, of a disclosure schedule explaining the penny stock
market and the risks associated therewith. Such requirements could severely
limit the market liquidity of the Securities and the ability of purchasers to
sell their Securities in the secondary market.
THE COMPANY
The Company was incorporated under the laws of the State of Delaware on
January 11, 1996. The Company maintains its principal business operations at One
East Broward Boulevard, Suite 1100, Fort Lauderdale, Florida 33301. The
Company's telephone number is (954) 453-2400. The Company's Web Site is
http://www.innopet.com.
USE OF PROCEEDS
Assuming all payments are made in connection with the Investment the
Company will receive net proceeds (after deduction of estimated offering
expenses payable by the Company) of approximately $2.8 million. The Company
currently expects to use approximately $1.02 million of the net proceeds from
this offering for repayment of existing debt, in the approximate amount of $1.02
million, including (i) approximately $220,000 in connection with notes issued in
December, 1997 and February, 1998, with a stated interest rate of 10% per annum
and maturing 90 days from the date of issuance thereof, which maturity dates
have been extended an additional 90 days by the Company pursuant to the terms of
such notes; and (ii) approximately $800,000 in connection with a note issued in
January 1998, which has a stated interest rate of 1.5% per month (18% per annum)
and matured on April 28, 1998. Approximately $1.78 million of the remaining net
proceeds will be used for general corporate purposes, including working capital.
Any payments made by the Company may be subject to EIL's claim of priority.
Pending their application as described above, such proceeds will be invested in
short-term, investment grade, interest-bearing securities.
The Company shall receive a portion of the proceeds from the sale of Common
Stock by the Selling Securityholders, and shall receive proceeds upon the
exercise of the Redeemable Warrants. See "Selling Securityholders" and "Certain
Transactions."
PRICE RANGE OF COMMON STOCK
AND REDEEMABLE WARRANTS
The Common Stock and Redeemable Warrants are currently quoted on the OTC
Electronic Bulletin Board under the symbols "INBC" and "INBCW", respectively. On
March 20, 1998, the Company's Securities were delisted from Nasdaq. See "Risk
Factors -- Recent Delisting from Nasdaq Small-Cap Market for Failure to Meet Net
Tangible Assets Requirement." The following table sets forth for the fiscal
periods indicated (beginning with the date of the Company's initial public
offering) the high and low bid price information for the Common Stock and
Redeemable Warrants as quoted on the OTC Electronic Bulletin Board.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
High Bid Low Bid High Bid Low Bid
---------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
First Quarter ............................. $ 4.00 $ 1.375 $ 0.875 $ 0.1875
------ ------- ------- --------
Year Ended December 31, 1997:
First Quarter ............................. $ 6.125 $ 4.000 $ 2.375 $ 1.375
Second Quarter ............................ $ 5.875 $ 4.250 $ 2.250 $ 1.125
Third Quarter ............................. $ 6.125 $ 4.250 $ 2.125 $ 1.000
Fourth Quarter ............................ $ 5.375 $ 3.875 $ 1.750 $ 0.812
------- ------- ------- --------
Year Ended December 31, 1996:
December 5, 1996 through year end ......... $ 6.000 $ 4.000 $ 2.375 $ 1.375
</TABLE>
On June 15, 1998, the closing bid price as quoted by the OTC Electronic
Bulletin Board for the Common Stock and Redeemable Warrants were $0.3125 and
$0.0625, respectively. As of June 15, 1998, there were 44 holders of record of
the Common Stock and 36 holders of record of the Redeemable Warrants.
There is no public trading market for any of the Company's preferred stock.
13
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
It presently intends to retain earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The payment of
future cash dividends by the Company on its Common Stock will be at the
discretion of the Board of Directors and will depend on its earnings, financial
condition, cash flows, capital requirements and other considerations as the
Board of Directors may consider relevant with respect to the payment of
dividends. The Company's Series A Preferred Stock pays a dividend equal to 4%
per annum. The dividend is payable by the issuance of shares of Common Stock.
The number of shares to be issued as a dividend is determined based on the
average closing bid price for a share of Common Stock as quoted on the OTC
Electronic Bulletin Board for the 20 trading days preceding the record date for
the declaration of the dividend. The Company's Series B Preferred Stock pays a
cumulative dividend equal to 8% per annum, payable, at the Company's sole
option, by the issuance of shares of Common Stock, or in cash. The number of
shares to be issued as a dividend is equal to the amount of the dividend accrued
divided by the average closing bid price of the Common Stock as quoted on the
OTC Electronic Bulletin Board for the 5 trading days preceding the record date
for the declaration of the dividend.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 on a historical basis. This table should be reviewed in
conjunction with the Company's financial statements and related notes appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
---------------
<S> <C>
Short Term Debt
Notes payable to EIL .................................................................. $ 1,500,000
Notes payable to IBF .................................................................. 762,500
Notes payable to Curi Oil Co. LLC ..................................................... 100,000
Other Notes payable ................................................................... 100,000
Less: Unamortized Discount ............................................................ (55,427)
-------------
Total Short Term Debt .............................................................. 2,407,073
=============
Long Term Debt
Notes to IPI .......................................................................... 159,000
Capital Lease Obligations ............................................................. 12,303
-------------
Total Long Term Debt ............................................................... 171,303
-------------
Stockholder's equity (deficiency):
Series A 4% convertible preferred stock, $.01 par value; issued and outstanding 625,000
shares; stated at liquidation value .................................................. 2,500,000
Series B 8% convertible preferred stock, $100 par value; issued and outstanding 10,000
shares; stated at liquidation value .................................................. 2,000,000
Common Stock, $.01 par value; authorized 25,000,000 shares; issued 4,953,169 shares ... 49,531
Additional paid-in capital ............................................................ 15,009,859
Deficit accumulated during the development stage ...................................... (19,119,134)
Notes and interest receivable on sale of common stock ................................. (2,304,493)
Treasury stock, 957 shares of common stock, at cost and 600,000 collateral shares of
common stock ......................................................................... (3,236)
-------------
Total stockholders' equity (deficiency) ............................................ (1,867,477)
-------------
Total capitalization ..................................................................... $ (1,696,174)
=============
</TABLE>
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, the Company's Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The selected
financial data presented below are not necessarily indicative of the future
results of operations or financial performance of the Company. The selected
financial data for the year ended December 31, 1997 and inception period ended
December 31, 1996 are derived from the Company's financial statements audited by
Rachlin Cohen & Holtz, independent certified public accountants. The selected
financial data presented as of and for the periods ended March 31, 1998 and 1997
are derived from the unaudited financial statements of the Company, which are
contained elsewhere in this Prospectus. In the opinion of management of the
Company, the unaudited financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
data.
<TABLE>
<CAPTION>
Inception
(January 11, 1996)
Three Months Ended Year Ended to
March 31, 1998 March 31, 1997 December 31, 1997 December 31, 1996
------------------ ---------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue ................................... $ 673,689 $ 575,028 $ 3,066,489 $ 1,859,936
Cost of sales ............................. 424,394 383,574 2,183,275 1,498,486
----------- ------------ ------------ ------------
Gross profit .............................. 249,295 191,454 883,214 361,450
Sales, general and administrative expenses:
Marketing and Distribution ............. 793,361 1,397,956 6,077,555 3,140,114
Product development .................... 463,433 111,241 434,334 584,976
General and administrative ............. 1,274,164 896,287 3,751,917 1,782,795
----------- ------------ ------------ ------------
Operating loss ............................ (2,281,663) (2,214,030) (9,380,592) (5,146,436)
Interest, financing and other costs and
expenses ................................. (307,424) 14,122 (631,151) (1,371,868)
----------- ------------ ------------ ------------
Net loss .................................. $(2,589,087) $ (2,199,908) $(10,011,743) $ (6,518,304)
.........................................
Net loss per common share ................. $ (0.52) $ (0.49) $ (2.24) $ (3.11)
Common shares outstanding ................. 4,953,169 4,465,878 4,474,000 2,094,000
As of As of
March 31, 1998 December 31, 1997
------------------ -----------------
Balance Sheet Data:
Working capital ........................... $(2,471,783) $ (1,262,152)
Total assets .............................. 4,835,742 5,185,619
Long term debt, note payable to IPI (1996),
IPI note and capital lease obligation
(1997) ................................... 171,303 175,500
Total liabilities ...................... 6,703,219 5,741,433
Stockholders' deficiency .................. (1,867,477) (555,814)
</TABLE>
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
Overview
The Company produces, markets and sells premium dog food through
supermarkets and grocery stores under the name InnoPet Veterinarian Formula(TM)
Dog Food. The Company was created on January 11, 1996 to acquire the KenVet
Nutritional Care Line of dog and cat foods from a subsidiary of ConAgra.
The Company's objective is to become a national provider of premium pet
foods through supermarket and grocery store outlets. The Company intends to
achieve its objective by: (1) providing supermarkets a brand of
competitively-priced premium pet food to enable supermarkets to recapture a
share of the premium pet food market they have lost to specialty pet stores;
(ii) expanding distribution to supermarkets and grocery stores throughout the
United States; (iii) increasing consumer awareness and market penetration
throughout the Company's market areas; and (iv) packaging its products in unique
single serving-sized inner-bags which are designed to increase convenience of
feeding, regulate portions, reduce product deterioration and prevent
contamination. The Company's strategy is to provide premium pet food products
that are good for the pet and easy to use for the owner.
Since 1988, supermarkets' share of pet food sales in the United States has
fallen from 95% to 58%, mainly due to increased sales of premium pet foods
through specialty pet stores. Until the introduction of Veterinarian Formula,
premium pet foods, which represent approximately 20% of the total pet food
market, were not available in supermarkets. The Company believes that the
availability of a full line of premium pet foods at supermarkets will allow
supermarkets to stop the erosion of their market share and perhaps allow them to
recapture market share.
In June 1996, the Company commenced sales of its beef formula dog food to
supermarkets in the Greater Metropolitan New York area. As of June 15, 1998, the
Company's products have been sold in the following markets: the Greater
Metropolitan New York area; the New England area; Philadelphia, Pennsylvania and
other areas of Pennsylvania; the Baltimore, Maryland and Washington D.C. area;
Virginia; North Carolina; South Carolina; Georgia; Alabama; Tennessee; Florida;
and Texas.
During the next twelve months the Company anticipates that it will increase
its penetration into supermarkets throughout the central and western United
States. During 1998, the Company plans to increase its lamb and rice flavor dog
food offering to 9 stock keeping units ("SKUs"), and to introduce 4 SKUs each of
liver flavor and chicken flavor cat food. Additionally, the Company plans to
commence its first shipment of private label product, in Spring 1998. The
Company was selected by The Kroger Co. ("Kroger"), one of the nation's largest
supermarket chains, to provide a full line of private label premium pet food to
the chain's approximately 1,300 retail outlets. This product line will initially
target dog owners; it is anticipated that cat food will be introduced at a later
date. The first products which the Company expects to introduce will be beef,
lamb and rice, and chicken flavor dry dog foods. The Company anticipates that
more than ten SKUs will be brought to Kroger shelves in the first round of
product offerings.
Results of Operations
The three months ended March 31, 1998 compared to the three months ended
March 31, 1997.
Revenues. Revenues increased $98,661 or 17% to $673,689 during the first
quarter of 1998 from $575,028 for the comparable period in 1997.
Cost and Expenses. Cost of goods sold increased $40,820 or 11% to $424,394
during the first quarter of 1998 from $383,574 for the comparable period in
1997. Cost of goods sold for the first quarter of 1998 were
17
<PAGE>
63% of sales, providing a gross margin of 37% for the period, an improvement of
4 percentage points over the first quarter of 1997. The improved margin was the
result of increased volume and improved manufacturing efficiencies during the
first quarter of 1998 over the comparable period of 1997.
Sales expenses increased $40,857 or 25% to $201,757 during the first
quarter of 1998 from $160,900 for the comparable period in 1997. The increase
reflected an expanded sales force and increased commission expenses for brokers.
Sales expenses for the first quarter of 1998 totaled 30% of sales compared to
28% for the first quarter of 1997.
Slotting expenses decreased $296,114 or 67% to $143,321 during the first
quarter of 1998 from $439,435 for the comparable period in 1997. The decrease
reflected slower geographic expansion and reduced slotting fees during the first
quarter of 1998, compared to the rapid pace of geographic expansion and
associated slotting fees for the comparable period in 1997, Slotting fees are
fees charged manufacturers by retailers in order to facilitate the introduction
of new products. The fees represent charges for warehouse space (slots) to be
used to store a manufacturer's products, charges for retail shelf space and
related shelf sets to make room for the products and reimbursement of retailer
expenses (entering new items into their computer systems and in some cases
marketing support provided by the retailer). The practice by retailers of
charging slotting fees is a standard industry practice. The Company expects to
continue to incur slotting fees as it expands its geographic territory and as
new products are introduced.
Marketing expenses decreased $286,689 or 40% to $421,645 during the first
quarter of 1998 from $708,334 for the comparable period in 1997. The decrease
reflected maintenance of our established marketing plans compared to costly new
start-up programs during the first quarter of 1997. During the first quarter the
Company's marketing programs included radio and newspaper advertising, in-store
coupons, floorminder displays, direct sampling programs, in-store demonstrations
and cause-related programs.
Distribution expenses decreased $62,649 or 70% to $26,638 during the first
quarter of 1998 from $89,287 for the comparable period in 1997. The decrease
reflected more productive use of personnel, reduced freight expense and greater
efficiencies in distribution facilities used by the Company.
Product development costs increased $352,192 or 317% to $463,433 during the
first quarter of 1998 from $111,241 for the comparable period in 1997. The first
quarter of 1998 expense level reflected expenses associated with the ongoing
management of manufacturers and co-packers, and ongoing research and
development.
General and Administrative expenses increased $377,877 or 42% to $1,274,164
during the first quarter of 1998 from $896,287 for the comparable period in
1997. The increase resulted from increased reserve for bad debts against
chargebacks to customers (approximately $340,000), and other general office
expenses.
Total Other Income decreased $321,546 or 2,177% to a net expense of
$307,424 during the first quarter of 1998 from a net income of $14,122 during
the comparable period in 1997. The first quarter includes interest expense of
$297,628 on various financings and amortization of original issue discount.
Net Loss. Net loss increased $389,179 or 18% to $2,589,087 during the first
quarter of 1998 from $2,199,908 for the comparable period in 1997. The increase
was due primarily to increased reserve for bad debts. The Company expects to
continue to incur losses at least through the fourth quarter of 1998. The
Company's ability to achieve a profitable level of operations will depend in
large part on the market acceptance of its products, and the Company's ability
to obtain additional financing. There can be no assurance that the Company will
achieve profitable operations.
1997 Compared to 1996
Net Loss. The Company reported a net loss of $10,011,743, or ($2.24) per
share in 1997, an increase of 54% from a net loss of $6,518,304 for the initial
period of operations, from inception (January 11, 1996) through December 31,
1996 (the "prior period"). The 1997 net loss resulted chiefly from substantial
costs of marketing and expansion during this period, as the Company expanded
into new markets in the eastern portion of the United States.
Revenues. Revenues increased 65% to $3,066,489 during 1997, from
$1,859,936 in 1996. Revenue increases resulted from expansion markets
throughout the eastern United States, as well as increased penetration
18
<PAGE>
in markets entered during the prior period (Greater New York Metropolitan area
and Philadelphia). Cost of sales totaled $2,183,275 in 1997, an increase of 46%
from $1,498,486 for the prior period. Gross profit margin of 29% was increased
from the prior period, reflecting substantial improvements in manufacturing and
logistics efficiency.
Operating Expenses. Costs and expenses for the period totaled $10,263,806
in 1997 versus $5,507,886 for the prior period. These costs and expenses are
detailed below.
Marketing and Distribution Expenses. Marketing and distribution expenses of
$6,077,555 increased 94% versus $3,140,114 for the prior period. The 1997
marketing and distribution expenses includes sales department expense of
approximately $675,000 (including 5% broker commissions), slotting allowances of
approximately $1,244,000, and distribution expense of approximately $484,000.
The Company incurred substantial marketing costs in support of the introduction
of its products.
Product Development Expenses. Product development expenses, including
personnel and related costs, were $434,334, or 26% less than the $584,976
incurred during the prior period. This reflects the testing of formulations
(e.g., palatability and bioavailability), expenses associated with locating
manufacturers and suppliers and of certifying their facilities and processes.
Product development expenses will continue to be expended to manage
manufacturers and co-packers and to facilitate extension of the Company's
product lines and new product introductions.
General and Administrative Expenses. General and administrative expenses
were $3,751,917, or 110% greater than the $1,782,796 incurred during the prior
period. These were primarily composed of costs associated with the development
and implementation of the overall business strategy, marketing and financial
plans. Costs included personnel expenses of approximately $944,000,
approximately $244,000 of depreciation and amortization of intangibles (formulae
acquisition costs and the ConAgra non-compete agreement), $594,000 in bad debt
expense, and $439,000 in outside legal and professional fees.
Interest and Financing Costs. Interest and financing costs totaled
$631,151, or 54% less than the $1,371,868 incurred during the prior period.
These were primarily $470,372 amortization of original issue discount associated
with the Entrepreneurial Investors, Ltd. borrowing, and approximately $190,000
in other interest expense. The prior period included amortization of financing
costs associated with the start-up of the business, which were fully amortized
during 1996.
Income Taxes
Net operating losses generated in fiscal 1997 will be carried forward and
utilized to offset future income tax expense. The Company has a net operating
loss carryforward of approximately $16,500,000 for federal income tax purposes
at December 31, 1997. This net operating loss carryforward will be subject to
annual limitations in future periods pursuant to the "change in ownership" rules
under Section 382 of the Internal Revenue Code of 1986, as amended. The
Company's utilization of its tax benefit carryforward may be further restricted
in the event of subsequent changes in ownership.
Liquidity and Capital Resources
At March 31, 1998:
Working Capital. At March 31, 1998 the Company had a working capital
deficit of $2,471,783, compared to a working capital deficit of $1,262,152 at
December 31, 1997. The change in working capital was primarily due to the loss
incurred in the current period, partially offset by the sale of Series B 8%
Cumulative Convertible Preferred Stock.
Cash Flow. During the three month period ended March 31, 1998, the Company
had net cash used by operating activities of $1,533,374. The primary use of cash
was the net loss incurred for the period.
The Company had net cash used in investing activities of $15,162 for the
three-month period ended March 31, 1998. The primary use of cash during this
period was for acquisition of property and equipment.
During the three month period ended March 31, 1998, the Company had net
cash provided by financing activities of $1,537,786, reflecting the net proceeds
of a $1 million Private Placement of 8% Series B Cumulative Preferred Stock of
the Company at par value $100 per share and short term notes.
19
<PAGE>
In order to achieve its financial plan, the Company is seeking additional
funding, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional funding, the Company will be required to
modify its current business plan. There can be no assurance that the Company
will be able to obtain such additional funding. The Company has discussed
working capital financing with banks and factors. There can be no assurance that
any credit facility will be available to the Company, or if available, that it
will be available on acceptable terms.
On March 31, 1998, stockholders' equity (deficiency) approximated
($1,867,477), and working capital deficit approximated ($2,471,783).
At December 31, 1997:
Working Capital. At December 31, 1997, the Company had working capital
deficit of $1,262,152, compared to working capital of $4,113,187 at December 31,
1996. The change in working capital was primarily due to the loss incurred in
the current period, partially offset by the sale of Series A 4% Cumulative
Convertible Preferred Stock on April 29, 1997 and the sale of Series B
Cumulative Convertible Preferred Stock on December 18, 1997.
Cash Flow. In 1997, the Company had net cash used by operating activities
of $8,680,377. The primary uses of cash were the net loss incurred for the
period, combined with increased inventories and accounts receivable.
The Company had net cash used by investing activities of $379,907. The
primary use of cash was for acquisition of property and equipment.
The net cash provided from financing activities reflects the net proceeds
of a $2,500,000 private placement, a $1,000,000 private placement, and
short-term loans. The $2,500,000 private placement consisted of the sale of
625,000 shares of the Company's Series A 4% Cumulative Convertible Preferred
Stock, par value $.01 per share, at $4.00 per share. The net proceeds from the
sale approximated $1,988,000. The $1,000,000 private placement consisted of the
sale of 10,000 shares of the Company's Series B 8% Cumulative Convertible
Preferred Stock, par value $100 per share. The net proceeds from the sale
approximated $1,000,000 The short-term loans carry interest notes of between 10%
and 18% per annum and mature through April 30, 1998.
The Company entered into an Exchange Agreement with InnoPet Inc. ("IPI") to
convert $1,317,531 of its debt to IPI, consisting of $641,000 principal of an
existing $800,000 note payable, $132,703 in interest and $543,828 in current
accounts payable, in exchange for 396,847 shares of the Company's Common Stock,
par value $.01 per share, at $3.32 per share.
The proceeds of these offerings were used for the purchase of inventory
(includes raw materials, manufacturing and packaging), expansion of distribution
(includes marketing allowances supporting supermarket distribution and slotting
allowances), increases in marketing (includes advertising, in-store coupons,
floor walker displays, direct sampling programs and in-store demonstrations),
product development (including palatability and bioavailablility tests of
products to be introduced during the next year, as well as pilot manufacturing
runs) and working capital.
Default on Short-Term Debt Obligations
The Company is in default of certain short-term debt obligations in the
aggregate amount of approximately $2.5 million. On July 9, 1997, the Company
issued a senior convertible note to Entrepreneurial Investors, Ltd., ("EIL") a
Bahamas corporation and principal stockholder of the Company, in the principal
amount of $1.5 million (the "Senior Note"). The Senior Note has a stated
interest rate of 14% per annum and matured on January 15, 1998. To date, the
Company has not made any payment of principal or interest under the Senior Note
and is in default on the Senior Note.
20
<PAGE>
EIL has taken possession of the 600,000 shares of Common Stock issued as
collateral for the Senior Note and claims that the Senior Note has priority over
all other obligations of the Company, whether in existence on the date of
issuance of the Senior Note or subsequently incurred. EIL has not converted the
Senior Note into equity of the Company, If EIL were to convert the Senior Note
into equity of the Company, the shares of Common Stock previously issued as
collateral and currently in EIL's possession would be insufficient to satisfy
the amounts due under the Senior Note based upon the current market price of the
Common Stock. The Company is currently in preliminary settlement negotiations
with EIL and believes that it will reach an amicable agreement with EIL. In the
event that an agreement is not reached and EIL successfully pursues its claims,
such event could have a material adverse effect on the Company, its financial
condition, business and operations.
On January 28, 1998, the Company issued to Interbank Special Purpose
Corporation II ("IBF") a secured promissory note in the principal amount of
$762,500 (the "IBF Note"). The IBF Note has a stated interest rate of 1.5% per
month (18% per annum) and matured on April 28, 1998. The IBF Note is secured by,
among other things, all inventory, equipment, vehicles, accounts receivables,
trade names and trademarks of the Company (the "Collateral"). As of the date
hereof, the Company has failed to make any principal or interest payments to
IBF. On March 17, 1998, IBF declared the IBF Note to be in default and
accelerated the payments due thereunder. IBF also made a written demand
requesting that the Company immediately deliver to IBF the Collateral. On April
27, 1998, IBF commenced an action against the Company in the Circuit Court of
the 17th Judicial Circuit of the State of Florida in and for Broward County,
seeking among other things, (i) full payment of the principal and interest on
the IBF Note, (ii) an accounting of all the Collateral, (iii) a judgment
foreclosing the Collateral and a deficiency judgement if the proceeds from the
sale of the Collateral are insufficient to pay any judgement obtained in the
action, and (iv) appointment of a receiver for the Company. The Company is
currently in settlement negotiations with IBF and believes that it will reach an
amicable agreement with IBF. Although the Company denies liability, it is
contemplated that the Registration Statement filed in connection with this
Prospectus, in the form that it becomes effective, will satisfy the Company's
obligations under a proposed settlement with IBF. Any payments made by the
Company to IBF may be subject to EIL's claim of priority. If the action is not
settled, the Company intends to vigorously defend this suit and to file a
counter-claim against IBF. See "Business -- Litigation."
In December, 1997, the Company completed a private placement of 4 units
(the "Units") to Curi Oil Co. LLC ("Curi"), each Unit consisting of a promissory
note of the Company in the principal amount of $25,000, bearing interest at the
rate of 10% per annum and maturing 90 days from the issuance thereof, and
Redeemable Warrants to purchase 25,000 shares of Common Stock, expiring on
December 5, 2001, at an exercise price of $6.00 per share. The Company extended
the maturity date of the promissory notes to May 30, 1998. As of the date
hereof, the Company has failed to make any principal or interest payments to
Curi. Any payments made by the Company to Curi may be subject to EIL's claim of
priority. Curtis Granet, a director of the Compay, holds a 40% membership
interest in Curi, and was issued 10,000 Redeemable Warrants in connection with
this transaction.
In order to achieve its financial plan, the Company is seeking additional
funding, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional funding, the Company will be required to
modify its current business plan. There can be no assurance that the Company
will be able to obtain such additional funding. The Company has discussed
working capital financing with banks and factors. There can be no assurance that
any credit facility will be available to the Company, or if available, that it
will be available on acceptable terms.
On March 31, 1998, stockholders' equity (deficiency) approximated
$(1,867,477) and working capital deficit approximated ($2,471,783).
Readiness for the Year 2000
The Company has taken actions to make its systems, products and
infrastructure Year 2000 compliant. The Company is also beginning to inquire as
to the status of its key suppliers and vendors with respect to the Year 2000.
The Company believes it is taking the necessary steps to resolve Year 2000
issues, however, there can be no assurance that a failure to resolve any such
issue would not have a material adverse effect. Management believes, based on
available information, that it will be able to manage its total Year 2000
transition without any material adverse effect on its business operations,
products or financial prospects.
21
<PAGE>
BUSINESS
The Company
The Company produces, markets and sells premium dog food primarily through
supermarkets and grocery stores under the name InnoPet Veterinarian Formula(TM)
Dog Food ("Veterinarian Formula"). In June 1996, the Company commenced sales of
its beef formula dog food to supermarkets in the Greater Metropolitan New York
area. As of June 15, 1998, the Company's products have been sold in the
following markets: the Greater Metropolitan New York area; the New England area;
Philadelphia, Pennsylvania and other areas of Pennsylvania; the Baltimore,
Maryland and Washington, D.C. area; Virginia; North Carolina; South Carolina;
Georgia; Alabama; Tennessee; Florida; and Texas.
The Company's objective is to become a national provider of premium pet
foods primarily through supermarket and grocery store retail outlets. The
Company intends to achieve its objective by: (i) providing to supermarkets a
brand of competitively-priced premium pet food to enable supermarkets to
recapture a share of the premium pet food market that they have lost to
specialty pet stores; (ii) expanding distribution to supermarkets and grocery
stores throughout the United States; (iii) increasing consumer awareness and
market penetration throughout the Company's market areas; and (iv) packaging its
products in unique single serving-sized inner-bags which are designed to
increase convenience of feeding, regulate portions, reduce product deterioration
and prevent contamination.
In June 1997, the Company began expansion of its line of dog foods with the
introduction of lamb and rice with barley formula in its existing markets. At
the same time, the Company also entered into long-term agreements with the North
Shore Animal League and the Pet Savers Foundation, whereby InnoPet Veterinarian
Foods will be exclusively fed to in-house dogs and recommended to adopters by
both of these not-for-profit humane organizations which adopt out animals
through thousands of shelters each year. In addition, adopters will be provided
with product samples, literature and coupons, and will be able to purchase the
products in retail stores of some participating adoption centers.
The Company was recently selected by The Kroger Co. ("Kroger"), one of the
nation's largest supermarket chains, to provide a full line of private label
premium pet food to the chain's approximately 1,300 retail outlets. This product
line will initially target dog owners; it is anticipated that cat food will be
introduced at a later date. The first products which the Company expects to
introduce will be beef, lamb and rice, and chicken-flavored dry dog foods. The
Company anticipates that more than ten stock keeping units ("SKUs") will be
brought to Kroger shelves in the first round of product offerings.
The Company is in the process of implementing its overall marketing
strategy, which commenced in February 1997. The Company's strategy is to provide
premium pet food products that are good for the pet and easy for the owner.
Programs include: radio and newspaper advertising; free-standing inserts;
in-store couponing, shopping cart signage and floorminders; trial size displays;
store feature ads and circulars; direct mail sampling programs to targeted
consumers, veterinarians and breeders; newspaper sample pouches; and extensive
in-store demonstrations with sampling. In addition, the Company participates in,
and supports with sampling, local pet-related events (e.g., pet walkathons, pet
shows, etc.) within its market area, both independently and in conjunction with
local supermarkets.
Industry Background
In 1996, approximately 53 million United States households, or over
one-half of all United States households, owned at least one pet; over half of
these pet-owning households owned more than one pet.(1) Retail sales of pet food
in the United States in 1996 were approximately $9.4 billion (an increase of 3%
over 1995), of which approximately 25% was estimated to be premium pet food.(1)
The Company believes sales of premium pet food
- ------------
(1) This information is derived from The Maxwell Consumer Report, Wheat First
Butcher Singer (June 25, 1997 and May 24, 1996); J. Palmer, Well, Aren't You
the Cat's Meow, Barron's, April 1, 1996 at p.29; and Packaged Facts for the
Pet Food Market (February 1997 and February 1996); The Information
Catalogue, Marketing Intelligence Studies, Find/SVP Worldwide Consulting
Research and Advisory Services (1997 and 1996, respectively).
22
<PAGE>
have increased in recent years primarily due to heightened concern for animal
welfare and nutrition. Premium pet food is generally characterized by quality
ingredients, such as pure meat, higher nutritional value, increased
digestibility, increased nutrient absorption and higher pricing. The Company
believes that its product qualifies as premium because of, among other things,
its use of pure beef as the primary source of protein, corn gluten instead of
corn meal, and rice instead of other grains.
Historically, the pet food industry was dominated by relatively low priced,
grain-based or animal byproduct-based nationally branded products sold through
supermarkets. In the early 1980's, supermarkets sold in excess of 90% of all pet
foods.(1) From 1988 to 1996, however, the percentage of pet food sales made
through supermarkets and grocery stores decreased from approximately 95% to 56%,
mainly due to increased sales of premium pet foods through specialty pet
stores.(1) These premium pet foods are currently not available to supermarkets
and grocery stores. Between 1989 and 1996, sales of pet foods through outlets
other than the supermarket/grocery store segment rose approximately 103%.(1)
The Company believes supermarkets and grocery stores have been unable to
reverse their loss of pet food market share because of their inability to obtain
a full line of premium pet foods. The Company believes that manufacturers of
premium pet foods have not supplied supermarkets and grocery stores in order to
preserve their primary distribution channel, the specialty pet store. Market
research commissioned by the Company, and conducted by Bruskin Goldring
Research, indicates that approximately one-half of households in the United
States with one or more dogs would be likely to try a line of premium dog food
if it were available in supermarkets.
Products
In January 1996, the Company acquired from a subsidiary of ConAgra the
formulas for 51 SKUs of premium dog and cat foods grouped in 14 basic
formulations, including both dry and canned foods. The formulas were developed
by ConAgra under the name KenVet Nutritional Care to be prescribed and sold only
through veterinarians. Some of these formulations have been used to create the
Company's initial products. Further, the Company repackaged and repositioned the
product for sales in the supermarkets. The Company's current products are based
on 100% beef protein. The Company believes its use of pure beef protein, corn
gluten instead of corn meal, and rice instead of other grains makes its product
premium as compared to other pet food currently sold in supermarkets and grocery
stores. Independent laboratory tests commissioned by the Company indicated that
its dog food products meet or exceed other national premium food products in
digestibility and are comparable in palatability. These tests determine the
percentage of protein, fat and energy used by the dog as compared to the
contents of the food prior to ingestion. The high degree of nutrient absorption
of the Company's products, known as "bioavailability," promotes less body fat by
decreasing the dog's ingestion of nonuseable calories and increases the per
dollar value of the food by reducing the volume of food required to deliver the
appropriate nutrient level.
Existing Products. The Company currently offers 12 SKUs of dry dog food for
puppies, adults and seniors to meet the nutritional requirements of pets at each
stage of their lives, in three outer and three inner bag sizes. The 3.75, 8.125
and 15-pound outer bag sizes provide approximately one week's food supply for
small, medium and large dogs, respectively. Both beef and lamb and rice with
barley products are available for adult dogs and beef product is available for
puppies and seniors. The outer bag sizes are designed to promote weekly
purchases during the consumer's normal food buying trip to the supermarket or
grocery store.
Future Products. During the next 12 months, the Company anticipates
introducing additional products, including puppy and senior lamb and rice with
barley formulas, four life stage SKUs for cats and special needs SKUs for dogs
and cats. The Company's planned special needs products will be formulated to
meet specific dietary needs, such as obesity and allergies, and in response to
the dictates of the consumer, such as lamb and rice formulations.
Packaging. Unlike conventional bulk packaging in large bags, the Company
uses inner-seal packs inside larger bags. This packaging system is comparable in
cost to traditional dry food bulk packaging since the Company's outer-bag does
not require an oxidation or fat transfer barrier. Products for different sized
animals are packaged in different sized inner-seal bags. The inner-seal bags
contain a single suggested serving for the animal's size. The inner-seal bags
help prevent oxidation of protein, fat, vitamins and minerals in the pet food, a
23
<PAGE>
process that begins immediately upon exposure to air and lowers the nutritional
value of bulk-packed dry foods. Additionally, contamination of product due to
insects, vermin and other sources can be substantially reduced because the
packaging for a single portion need not be opened until the pet's feeding time.
The inner-seal packaging helps maintain the appeal of the product to the pet,
thus helping to reduce waste and cost to the owner. The Company's inner-seal
packaging also promotes portion control feeding recommended by veterinarians to
prevent obesity, a leading ailment among dogs and cats. The inner-seal bags are
easily transported which allow owners traveling with pets or leaving pets in
kennels to more easily feed their pets. Each inner-seal bag is also labeled for
resale, which the Company believes increases the potential number of retail
outlets for the Company's products by allowing single serving sales in
supermarkets and smaller stores.
Marketing and Sales
The Company's marketing strategy is designed to respond to both the
supermarket's need to stem the loss of pet food customers to specialty pet
stores and the consumers' desire for the convenience of purchasing a premium pet
food in the supermarket. The Company currently sells its products primarily
through supermarkets and grocery stores. The Company believes its products are
nutritionally superior to currently available branded products sold through
supermarkets and specialty pet stores' premium products.
Market research commissioned by the Company indicates that approximately
one-half of United States homeowners with a dog would be willing to try a
product defined as the Company's premium dog food formulations if it was
available in supermarkets. Fewer than 3% of the respondents who would not try
such a product expressed doubts that supermarkets would offer a premium dog
food. A similar small percentage responded that price would be a barrier to
trying such a product. Similar research conducted under the auspices of Woman's
Day Magazine in June 1997, concerning the willingness of consumers to try such
product, resulted with 60% or more positive responses.
The Company generates brand awareness of its products through integrated
marketing communications programs. The Company plans to use in-store promotions,
such as floorminders, trial size displays, in-store sampling, instantly
redeemable coupons and point of purchase displays. The Company also uses free
standing inserts in newspapers and mails product samples, literature and coupons
to demographically targeted consumers, veterinarians and breeders. The Company
plans to participate in pet-related events, such as dog walks and pet welfare
fundraisers, as well as general events such as tennis tournaments and
veterinarian conferences.
As an additional marketing tool, in June 1997, the Company became the pet
food partner of the North Shore Animal League of Long Island ("NSAL") and the
international Pet Savers Foundation, which NSAL administers. This program, which
had featured Iams products for several years, targets 6,000 animal shelters,
accounting for 2.5 million pet adoptions annually, where the Company's products
are exclusively fed to sheltered animals, given away as a free sample when a dog
or cat is adopted and sold in over 400 animal shelter store participating in the
pet Savers program. The Company views this program, which is structured under a
multi-year contract (due to expire in 2002) as a vital way to introduce pet
owners to the Company's products at the earliest possible point in pet ownership
and, in addition, as a valuable sales channel.
The Company's suggested retail prices for its products are approximately
15% below comparable specialty pet store prices for premium brands and are
significantly higher than the highest priced branded products sold through the
supermarkets, thereby providing supermarkets with a higher profit margin with
the Company's products than with other pet food products.
In March 1996, the Company began contacting supermarkets in the Greater
Metropolitan New York area which, eventually, resulted in authorization from a
majority of the supermarket and grocery store chains in this territory. In June
1996, shipments of the Company's dog food began. As of June 15, 1998, the
Company's products have been sold in the following markets: the Greater
Metropolitan New York area; the New England area; Philadelphia, Pennsylvania and
other areas of Pennsylvania; the Baltimore, Maryland and Washington, D.C. area;
Virginia; North Carolina; South Carolina; Georgia; Alabama; Tennessee; Florida;
and Texas.
In order to make sales to supermarkets and wholesalers, who function as
distribution organizations for supermarkets and other grocery stores, the
Company, using brokers and field sales managers, must first obtain authorization
for its pet foods. Generally, authorizations are made by the supermarket's
corporate buying office
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<PAGE>
or buying committee. An authorization from a supermarket or similar organization
is the acceptance of the Company's pet foods for sale in the supermarket's
stores. Obtaining an authorization involves the presentation of the Company's
products, and the negotiation of product set-up or slotting fees, minimum order
quantities, initial scope and duration of product shelf space allocation, and
marketing program participation. The Company works closely with its independent
food brokers in obtaining authorizations.
Once an authorization has been obtained, the Company's brokers, overseen by
its field sales managers, coordinate initial orders with the supermarket's pet
products category buyer. The Company engages its food brokers, all of whom are
paid on a commission basis, on an exclusive basis with respect to premium pet
food.
The Company's ability to obtain authorizations to sell its products in
supermarkets and grocery stores depends upon the efforts and skills of brokers
retained by the Company. Although the Company believes it will be able to locate
and retain qualified brokers throughout the United States on acceptable terms,
there can be no assurance that the Company will be able to do so. The failure to
obtain authorizations or to locate and retain qualified brokers could have a
material adverse effect on the Company.
Manufacturing and Distribution
The manufacture of the Company's dog food begins with the purchase of the
raw materials which are then processed into kibble. The kibble is then
transported in bulk to companies which package the kibble for retail sale. The
packaged food is then distributed to supermarkets.
The Company outsources the manufacturing, packaging and transporting of its
products. The Company does not maintain supply agreements with any third party
suppliers, but instead purchases products pursuant to purchase orders in the
ordinary course of business. The Company will be substantially dependent on the
ability of its manufacturers and suppliers to, among other things, meet the
Company's performance and quality specifications. Failure by the Company's
manufacturers and suppliers to comply with these and other requirements could
have a material adverse effect on the Company. Furthermore, there can be no
assurance that the Company's manufacturers and suppliers will dedicate
sufficient production capacity to meet the Company's scheduled delivery
requirements or that the Company's suppliers or manufacturers will have
sufficient production capacity to satisfy the Company's requirements during any
period of sustained demand. Their failure to supply, or delay in supplying, the
Company with products could have a material adverse effect on the Company. The
Company believes that its suppliers' manufacturing capacity will be adequate for
the Company's needs for the foreseeable future. The inability of the Company's
current suppliers to fulfill the Company's production requirements, or the
Company's failure to obtain alternative production supply relationships, would
have a material adverse effect on the Company.
The Company's sub-contracted manufacturers are responsible for the
emulsification of the meat and the purchase and preparation of the other raw
materials that make up the Company's pet food. The principal raw material
required for the Company's products is beef. The Company obtains beef for its
products pursuant to an agreement with Monfort, a subsidiary of ConAgra, that
terminates in 1999, unless terminated earlier by either party on 60 days notice.
This agreement provides for the delivery of up to 15 million pounds of beef per
year at a fixed price. The fixed price is comparable to current beef prices.
Accordingly, if beef prices fall, the Company will be able to terminate the
agreement. Conversely, if beef prices increase, Monfort will be able to
terminate the agreement. In addition, any failure by Monfort to fulfill its
obligations under the agreement, or the failure by the Company to secure an
alternative source of beef at comparable prices upon the termination of the
Monfort agreement, whether at its expiration date or earlier, would have a
material adverse effect on the Company.
Adverse Relationship Due to Failure to Pay. The ability of the Company to
continue its operations successfully is dependent upon its ability to retain
third parties for the supply, manufacture, packaging, marketing and sale of its
pet foods. To date, the Company has accrued $2.9 million in trade accounts
payable and is in default of its obligations under agreements with certain
suppliers, manufacturers and food brokers. Although the Company intends to use
the proceeds from this offering to repay such indebtedness, there can be no
assurance that the proceeds from this offering, if any, will be sufficient to
repay such indebtedness or that the Company
25
<PAGE>
will be able to maintain successful relationships with its existing suppliers,
manufacturers or food brokers. The inability of the Company to maintain such
relationships or obtain new agreements could have a material adverse effect on
the Company.
The Company owns no warehouses, trucks or other distribution facilities or
equipment. The Company distributes its products directly to supermarket
distribution centers and distribution centers operated by grocery store
wholesalers. The Company may lease space in public warehouses from time to time.
All transport and distribution of the Company's products will be done through
common carriers or fleets operated by the Company's customers.
Competition
The pet food business is highly competitive. Virtually all of the
manufacturers, distributors and marketers of pet food have substantially greater
financial, research and development, marketing and manufacturing resources than
the Company does. Competitors in the premium pet food market include, among
others, Colgate- Palmolive Co. (Hills' Science Diet), Iams Co. and Ralston
Purina Co. Brand loyalty to existing products may prevent the Company from
achieving its sales objectives. Additionally, the long-standing relationships
maintained by existing premium pet food manufacturers with veterinarians and pet
breeders may prevent the Company from obtaining professional recommendations for
its products. It is expected that the advertisements of North Shore Animal
League and the Pet Savers Foundation will partially offset this concern. In
addition, the Company competes with current supermarket high-priced dog foods
which are not considered premium when compared to Veterinarian Formula and to
the premium dog foods offered in the specialty pet stores.
Although the dominant existing premium pet foods are not currently
available in supermarkets and grocery stores, there can be no assurance that
this will continue. In addition, no barriers to entry exist with respect to such
brands. The entrance into the supermarket and grocery store distribution channel
of an existing or new premium pet food by any of the Company's competitors could
have a material adverse effect on the Company.
As compared to its competition, the Company believes that its products
offer the following advantages: (i) a premium pet food available exclusively in
supermarkets, (ii) a superior packaging system, (iii) a supermarket and grocery
store distribution network, and (iv) competitive pricing with other premium
products. There can be no assurance, however, that these perceived advantages
will enable the Company to compete successfully.
Intellectual Property
InnoPet and InnoPet Veterianarian Formula are registered trademarks of the
Company. The Company has filed applications for trademarks covering InnoPet
Brands and Quota.
Government Regulation
The Company's products must be produced in USDA approved facilities. It is
the responsibility of the Company's manufacturers to obtain and maintain such
approvals. In addition, the Company's products are subject to federal and state
labelling regulations and must be registered in each state that the products are
sold to consumers. If the Company fails to register its labels or satisfy
relevant labelling regulations, it may be subject to fines or prohibited from
selling its products until such regulations are satisfied. The Company believes
it is in material compliance with such regulations.
Insurance
The Company has obtained product liability insurance and excess liability
insurance which provide aggregate coverage of $1,000,000 and $2,000,000,
respectively.
Employees
As of June 15, 1998, the Company employed 34 people, one of whom is
employed on a part time basis. This includes eight persons engaged in sales,
eight in marketing, four in manufacturing/research and development, and 14 in
administration/accounting and support. Management believes its labor relations
are satisfactory.
26
<PAGE>
Litigation
On December 22, 1997, Ryt-Way Industries, Inc. d/b/a Ryt-way Packaging
Company commenced an action against the Company in the District Court, State of
Minnesota, for alleged non-payment for packaging services. Plaintiff seeks money
damages of $119,084.33, plus interest. Plaintiff filed a motion for summary
judgment on the ground of account stated. The Company filed a cross-motion for
lack of personal jurisdiction and opposed the motion by plaintiff for summary
judgment. The Company previously answered the complaint, denying all liability,
and asserted counter-claims.
On April 27, 1998, Interbank Special Purposes Corporation II ("IBF")
commenced an action against the Company in the Circuit Court on the 17th
Judicial Circuit of the State of Florida in and for Broward County in connection
with the non-payment by the Company of principal and interest on a promissory
note in the principal amount of $762,500 (the "IBF Note"). The IBF Note has a
stated interest rate of 1.5% per month (18% per annum) and matured on April 28,
1998. As of the date hereof, the Company has failed to make any principal or
interest payments, to IBF. The IBF Note is secured by, among other things, all
inventory, equipment, vehicles, accounts receivables, trade names and trademarks
of the Company (the "Collateral"). IBF is seeking among other things, (i) full
payment of principal and interest on the IBF Note, (ii) an accounting of all the
Collateral, (iii) a judgement of foreclosing the Collateral and a deficiency
judgement if the proceeds from the sale of the Collateral are insufficient to
pay any judgement in the action, and (iv) appointment of a receiver for the
Company. The Company is currently in settlement negotiations with IBF and
believes that it will reach an amicable agreement with IBF. Although the Company
denies liability, it is contemplated that the Registration Statment filed in
connection with this Prospectus, in the form that it becomes effective, will
satisfy the Company's obligations under a proposed settlement with IBF. Any
payments made by the Company to IBF may be subject to EIL's claim of priority.
If the action is not settled, the Company intends to vigorously defend this
action and file a counter-claim against IBF.
On May 6, 1998, Menasha Corporation commenced an action against the Company
in the United States District Court for the Eastern District of Wisconsin for
alleged non-payment for goods and services. Plaintiff seeks money damage of
$177,875,35, plus interest and costs. The Company has not filed an answer and is
currently in settlement negotiations with the plaintiff. Absent a settlement on
terms attainable by the Company, the Company intends to file an answer in this
action.
Properties
The Company currently leases from IPI under a facilities agreement its
corporate office located at 1 East Broward Boulevard, Suite 1100, Fort
Lauderdale, Florida 33301, where the Company occupies approximately 11,900
square feet of office space. The monthly rent is approximately $22,650. The
facilities agreement with respect to the offices expires April 30, 2001. See
"Certain Transactions." The Company believes it has adequate space to conduct
its operations.
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<PAGE>
MANAGEMENT
The following table sets forth certain information with respect to the
Company's Directors and Executive Officers:
<TABLE>
<CAPTION>
Company Position
Name Age and Offices Held
- ----------------- ------ -----------------------------------------------------
<S> <C> <C>
Marc Duke 51 Chairman of the Board and Chief Executive Officer
John Bieber 53 Vice President of Marketing and Director
Albert A. Masters 66 Vice President, Private Label Sales and Director
Linda Duke 51 Vice President of Operations
Michael L. Winer 39 Vice President, Chief Financial Officer and Secretary
Curtis Granet 48 Director
Richard P. Greene 41 Director
Burnett W. Donoho 58 Director
</TABLE>
Marc Duke is the Chairman of the Board of Directors and Chief Executive
Officer of the Company and has held such positions since January 1996. He is
also the Chairman of the Board of Directors and Chief Executive Officer of IPI
and its subsidiaries, and has held such positions since September 1995. From
1993 to 1995, he was President of The Original Pet Drink Company, a subsidiary
of IPI. From 1990 to 1992, he was President of Madison South International, Inc.
("Madison"), a national and international marketing consulting company.
John Bieber is the Vice President of Marketing of the Company and has held
such position since January 1997. From 1990 to 1996 Mr. Bieber was an
independent marketing consultant. From April 1989 to January 1990, he was
President and Chief Operating Officer of the MD&A Group, Inc. ("MD&A"), an
advertising and marketing consulting firm. From 1987 to 1989, Mr. Bieber was
Vice President and Director of Account Services with MD&A. From 1976 to 1986,
Mr. Bieber was Vice President/Account Supervisor with BBDO Advertising Inc.
Albert A. Masters is the Vice President, Private Label Sales of the Company
and has held such position since June 1996. From September 1995 to May 1996, Mr.
Masters was the Vice President of Sales of IPI. From 1991 to 1995, he was a Vice
President of Sales for Professional Laboratory Systems.
Linda Duke is Vice President of Operations and has held such position since
June 1996. From September 1995 to May 1996, she was the Director of Operations
for IPI. From 1993 to 1995, she was the Director of Operations for The Original
Pet Drink Company. From 1990 to 1992 she was Vice President of Operations of
Madison. Linda Duke is married to Marc Duke.
Michael L. Winer is Vice President, Chief Financial Officer and Secretary
of the Company and has held such positions since October 1997. From March 1997
to September 1997, Mr. Winer was the Executive Vice President of Operations and
Finance for L. Luria's & Sons, Inc., a retail chain. From March 1996 to
February 1997, Mr. Winer was Chief Financial Officer/Comptroller of CardioLife
Corporation, a healthcare company. From June 1987 to March 1996, Mr. Winer
served as Assistant Vice President of Finance (1987-1992), and later Vice
President of Finance (1992-1996) for several subsidiaries of Citibank, N.A. and
Citicorp, Inc. Mr. Winer holds Certified Public Accountant, Certified
Management Accountant, and Certified in Financial Management credentials.
Curtis Granet is a partner in the certified public accounting firm of
Levine & Granet, C.P.A. in the State of New York, and has held such position
since 1981.
Richard P. Greene is an attorney engaged in the practice of corporate and
securities law in the State of Florida and has maintained his own practice since
1988. He is the Secretary of IPI.
Burnett W. Donoho has 33 years of experience in top positions in retailing,
more recently as Vice Chairman and Chief Operating Officer of Montgomery Ward.
From June 1995 to January 1996, Mr. Donoho served as a consultant and chief
operating officer of Broadway, a retail chain. From July 1992 to December 1994,
Mr. Donoho served as the Vice Chairman and Chief Operating Officer of Macy's
East. Prior to that he had also served as President and Chief Executive Officer
of Marshall Field in Chicago and Gimbel's Midwest in Milwaukee.
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<PAGE>
Director Compensation
Non-employee directors receive a fee of $250 for each meeting of the Board
attended and a fee of $125 for each meeting of any committee of the Board
attended and reimbursement of their actual expenses. In addition, pursuant to
the Company's Stock Option Plan, each non-employee director will be granted
options to purchase 2,500 shares of Common Stock per annum at an exercise price
equal to the fair market value of the underlying common stock on the date of
grant, which shall be the last trading date in November of each year. These
option grants began in November 1997.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table sets forth certain information for the fiscal year
ended December 31, 1997 with respect to the compensation earned by the Company's
Chief Executive Officer. No other executive officers received salary and bonus
compensation for the fiscal year ended December 31, 1997 exceeding $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
---------------------------------------- -------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation Options Compensation
- ----------------------------- ------ ----------- ------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marc Duke, 1997 $188,750 -0- $ 10,000(1) -0- -0-
Chief Executive Officer
</TABLE>
- ------------
(1) Represents car allowance payments to Mr. Duke.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
The following is a description of the employment contracts between the
Company and its executive officers. In June 1997, the Company and each executive
officer, other than the current Chief Financial Officer, agreed to reduce
immediately each executive's salary by 25%. As of June 15, 1998 this reduction
in base salary was still in place.
The Company has entered into an employment agreement with Mr. Marc Duke,
Chief Executive Officer, which expires on May 31, 2000. Mr. Duke currently
receives a base salary of $250,000. Under the terms of the agreement, Mr. Duke
is eligible to receive a bonus of up to 25% of his base salary at the discretion
of the Board of Directors and a performance bonus to be determined each year by
the Board of Directors. If the agreement is terminated by the Company without
cause, he is entitled to receive three times his average annual salary over the
course of the previous five years (or for whatever lesser period he has been
employed.) Such payment shall be paid half on the date of termination and the
balance six months thereafter. In the event there is a change-in-control of the
Company, and Mr. Duke is terminated, he is entitled to receive a payment equal
to three times his average annual salary and bonus over the course of the
previous five years (or for whatever lesser period he has been employed.) Such
payment shall be paid half on the date of the change-in-control and the other
half six months thereafter. The agreement also contains certain restrictions on
competition.
The Company entered into an employment agreement with Mr. John Bieber, Vice
President of Marketing, as of January 6, 1997, which expires on December 31,
1999. The agreement will automatically renew for one (1) additional year unless
terminated by the Company or Mr. Bieber. Mr. Bieber currently receives a base
salary of $100,000. Under the terms of the agreement, Mr. Bieber is eligible to
receive a merit bonus at the discretion of the Board of Directors. The agreement
provides that if Mr. Bieber is terminated without cause, he is entitled to
receive a severance payment equal to six months of his annual salary payable
over the six months following his termination. As part of the agreement, Mr.
Bieber has been granted options to purchase 25,000 shares of Common Stock of the
Company. The options vest over three years beginning on December 31, 1997. The
agreement also contains certain restrictions on competition.
The Company has entered into an employment agreement with Ms. Linda Duke,
Vice President of Operations. The agreement expires on May 31, 1999 and
contains an automatic renewal for one (1) additional year unless terminated by
the Company or Ms. Duke. Ms. Duke currently receives a base salary of $82,500.
Under
29
<PAGE>
the terms of the agreement, Ms. Duke is eligible to receive a merit bonus at the
discretion of the Board of Directors. The agreement provides that if Ms. Duke is
terminated without cause, she is entitled to receive a severance payment equal
to six months of her annual salary payable over the six months following her
termination. The agreement also contains certain restrictions on competition.
The Company has entered into an employment agreement with Mr. Michael
Winer, Vice President and Chief Financial Officer. The agreement expires on
December 31, 2000 and contains an automatic renewal for one (1) additional year
unless terminated by the Company or Mr. Winer. Mr. Winer currently receives a
base salary of $104,000. Under the terms of the agreement, Mr. Winer is eligible
to receive a merit bonus at the discretion of the Board of Directors. Mr.
Winer's base salary will increase by $25,000 when the Company reports net income
after taxes, in accordance with generally accepted accounting principles
consistently applied, for three (3) consecutive calendar months. The agreement
provides that if Mr. Winer is terminated without cause, he is entitled to
receive a severance payment equal to six months of his annual salary payable
over the six months following his termination. The agreement also contains
certain restrictions on competition.
The Company has entered into an employment agreement with Mr. Albert
Masters, Vice President, Private Label Sales. The agreement expires on May 31,
1999 and contains an automatic renewal for one (1) additional year unless
terminated by the Company or Mr. Masters. Mr. Masters currently receives a base
salary of $104,000. Under the terms of the agreement, Mr. Masters is eligible to
receive a merit bonus at the discretion of the Board of Directors. The agreement
provides that if Mr. Masters is terminated without cause, he is entitled to
receive a severance payment equal to six months of his annual salary payable
over the six months following his termination. The agreement also contains
certain restrictions on competition.
30
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Company's certificate of incorporation and by-laws provide that the
Company shall indemnify all directors and officers of the Company to the fullest
extent permitted by the Delaware General Corporation Law. Under such provisions,
any director or officer, who in his capacity as such is made or threatened to be
made, party to any suit or proceeding, shall be indemnified if it is determined
that such director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company. Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and persons controlling the Company pursuant to
the foregoing provision, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
The Company has acquired directors' and officers' liability insurance
providing aggregate coverage of $5,000,000.
31
<PAGE>
STOCK OPTION PLAN
A total of 400,000 shares of Common Stock are reserved for issuance under
the Stock Option Plan. As of June 15, 1998, the Company has granted 493,375
shares of Common Stock under the Stock Option Plan, of which 269,938 have
vested. The Board of Directors approved an amendment to the plan to increase the
number of shares of Common Stock authorized for issuance thereunder from 400,000
shares to 2,500,000 shares (the "Plan Amendment"), in order to help the Company
secure and retain the services of key employees. At the annual meeting to be
held on June 25, 1998, the Company is seeking shareholder approval of the Plan
Amendment. The plan provides for the award of options, which may either be
incentive stock options ("ISOs") within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options
("NQOs") which are not subject to special tax treatment under the Code. The
Stock Option Plan is administered by the Board or a committee appointed by the
Board (the "Administrator"). Officers, directors, and employees of, and
consultants to, the Company or any parent or subsidiary corporation selected by
the Administrator are eligible to receive options under the plan. Subject to
certain restrictions, the Administrator is authorized to designate the number of
shares to be covered by each award, the terms of the award, the dates on which
and the rates at which options or other awards may be exercised, the method of
payment and other terms.
The exercise price for ISOs cannot be less than the fair market value of
the stock subject to the option on the grant date (110% of such fair market
value in the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination.
Generally, awards must be exercised by cash payment to the Company of the
exercise price. However, the Administrator may allow a participant to pay all or
a portion of the exercise price by means of a promissory note, stock or other
lawful consideration. The Stock Option Plan also allows the Administrator to
provide for withholding and employment taxes payable by a participant to the
Company upon exercise of the award. Additionally, the Company may make cash
grants or loans to participants relating to the participant's withholding and
employment tax obligations and the income tax liability incurred by a
participant upon exercise of an award.
In the event of any change in the outstanding shares of Common Stock by
reason of any reclassification, recapitalization, merger, consolidation,
reorganization, spin-off, split-up, issuance of warrants or rights or
debentures, stock dividend, stock split or reverse stock split, cash dividend,
property dividend or similar change in the corporate structure, the aggregate
number of shares of Common Stock underlying any outstanding options may be
equitably adjusted by the Administrator in its sole discretion.
The Administrator may, at any time, modify, amend or terminate the plan as
is necessary to maintain compliance with applicable statutes, rules or
regulations; provided, however, that the Administrator may condition the
effectiveness of any such amendment on the receipt of stockholder approval as
may be required by applicable statute, rule or regulation. In addition, this
Stock Option Plan may be terminated by the Board of Directors as it shall
determine in its sole discretion, in the absence of stockholder approval;
provided, however, that any such termination will not adversely alter or impair
any option awarded under the Stock Option Plan prior to such termination without
the consent of the holder thereof.
32
<PAGE>
CERTAIN TRANSACTIONS
Capital for the development of the Company has been provided by IPI. From
January 1996 through August 31, 1996, IPI made capital contributions of
$2,221,348 in the form of costs and expenses ($1,323,125), funds used to
purchase the KenVet formulations and inventories ($699,794), and financing costs
($198,429). In return, IPI received 1,182,432 shares of Common Stock.
Additionally, on June 1, 1996, the Company sold 43,497 shares of Common Stock to
IPI in exchange for $139,190. Mr. Duke is the principal shareholder of IPI.
The Company also issued a note, dated June 5, 1996, to IPI in the amount of
$1,000,000 (the "IPI Note") which bears interest at one percent above the prime
rate (on March 6, 1998 the prime rate was 8.50%). The IPI Note has a term of
five years. Interest is payable quarterly and principal is payable annually. On
June 1, 1996, the Company entered into a facilities agreement with IPI (the
"Facilities Agreement") pursuant to which the Company has agreed to lease its
offices, furnishings and equipment from IPI until April 30, 2001. The Company is
required to pay an annual amount of approximately $349,000 to IPI for the lease
of the offices, furnishings and equipment which represents a direct pass through
of the rent expenses and reimbursement for the costs of equipment, furniture and
fixtures. In addition, through December 23, 1997, IPI also provided $724,394 in
working capital for inventories, costs and expenses, which were recorded as
accounts payable by the Company. As of December 23, 1997, the balance payable
for IPI was $543,828, reflecting the above working capital advances plus
balances due less amounts paid under the facilities agreement.
In August 1997, IPI cancelled $91,000 of debt owed to it as consideration
for the issuance of 26,000 shares of Common Stock by the Company in settlement
of claims brought against IPI and the Company by certain investors.
On December 23, 1997 the Company entered into an exchange agreement with
IPI (the "Exchange Agreement") pursuant to which, (i) principal and accrued
interest in the aggregate amount of $773,702.97 payable pursuant to the IPI Note
and (ii) accounts payable in the amount of $543,828.42, pursuant to the
Facilities Agreement (collectively, the "Debt") was satisfied in exchange for
Common Stock of the Company. On January 30, 1998 and February 26, 1998, the
Company issued and delivered to IPI, and IPI accepted 317,478 and 79,329 shares
of Common Stock, respectively, and discharged the Debt. Pursuant to the terms of
the Exchange Agreement, the number of shares of Common Stock delivered to IPI
was that number of shares of Common Stock equal to the sum of the Debt divided
by a number equal to eighty percent (80%) of the average closing bid price for a
share of Common Stock as reported on the Nasdaq Small-Cap Market for the five
(5) trading days immediately preceding the December 31, 1997 closing date (the
"Exchange Rate"). Pursuant to the Exchange Agreement, the Exchange Rate shall be
adjusted such that if, at any time during the one year period following the
closing date, the average closing bid price for a share of the Company's Common
Stock, as quoted on the OTC Electronic Bulletin Board, is less than or equal to
$2.50 per share of Common Stock for forty-five (45) consecutive days, the
Company shall issue to IPI additional shares of Common Stock equal to the
difference between (a) the number of shares of Common Stock which would have
resulted if the Debt had been exchanged at an Exchange Rate of $2.50 and (b) the
number of the shares previously issued. In accordance with this provision, on
May 13, 1998, the Company issued to IPI an additional 130,166 shares of Common
Stock.
On July 9, 1997, the Company issued a senior convertible note (the "Senior
Note") to Entrepreneurial Investors, Ltd. ("EIL"), a Bahamas corporation and
principal stockholder of the Company, in the principal amount of $1.5 million.
The Senior Note has a stated interest rate of 14% per annum and matured on
January 15, 1998, such interest to be paid, at the option of the holder, in
Common Stock valued at $4.50 per share. The Senior Note is collateralized by
600,000 shares of Common Stock being registered in this offering and may be
converted, at the option of EIL, into Common Stock at a conversion price of
$4.50 per share. EIL has taken possession of the 600,000 shares of Common Stock
issued as collateral for the Senior Note and claims that the Senior Note has
priority over all other obligations of the Company, whether in existence on the
date of issuance of the Senior Note or subsequently incurred. EIL has not
converted the Senior Note into equity of the Company. If EIL were to convert the
Senior Note into equity of the Company, the shares of Common Stock previously
issued as collateral and currently in EIL's possession would be insufficient to
satisfy the amounts
33
<PAGE>
due under the Senior Note based upon the current market price of the Common
Stock. The Company is currently in preliminary settlement negotiations with EIL
and believes that it will reach an amicable agreement with EIL. In connection
with the loan, the Company issued 225,000 Redeemable Warrants to purchase
225,000 shares of Common Stock to EIL.
On January 28, 1998, the Company increased the principal amount of the
secured promissory note issued on December 3, 1997, by the Company to Interbank
Special Purpose Corporation II ("IBF"), a wholly-owned special purpose
subsidiary of Coleman and Coleman Securities, Inc. (the "IBF Note"), from
$262,500 to $762,500. The IBF Note has a stated interest rate of 1.5% per month
(18% per annum), payable on a monthly basis, and matured on April 28, 1998. The
IBF Note is secured by, among other things, all inventory, equipment, vehicles,
accounts receivable, trade names and trademarks of the Company (the
"Collateral"). As of the date hereof, the Company has failed to make any
principal or interest payments to IBF. On March 17, 1998, IBF declared the IBF
note to be in default and accelerated the payments due thereunder. IBF also made
a written demand requesting that the Company immediately deliver to IBF the
Collateral. On April 27, 1998, IBF commenced an action against the Company in
the Circuit Court of the 17th Judicial Circuit of the State of Florida in and
for Broward County, seeking, among other things, (i) full payment of principal
and interest on the IBF Note, (ii) an accounting of all the Collateral, (iii) a
judgement foreclosing the Collateral and a deficiency judgement if the proceeds
from the sale of the Collateral are insufficient to pay any judgement obtained
in the action, and (iv) appointment of a receiver for the Company. The Company
is currently in settlement negotiations with IBF and believes that it will reach
an amicable agreement with IBF. Although the Company denies liability, it is
contemplated that the Registration Statement filed in connection with this
Prospectus, in the form that it becomes effective, will satisfy the Company's
obligations under a proposed settlement with IBF. Any payments made by the
Company to IBF may be subject to EIL's claim of priority. If the action is not
settled, the Company intends to vigorously defend this suit and to file a
counterclaim against IBF. In the event that the IBF action results in monetary
damages in a material amount in favor of IBF, or the appointment of a receiver
for the Company, such event could have a material adverse effect on the Company,
its financial condition, business and operations.
On December 18, 1997 the Company entered into a private placement of up to
$4.0 million, consisting of the sale of shares of 8% Series B Cumulative
Convertible Preferred Stock of the Company (the "Series B Preferred Stock") at
$100 per share, to Explorer Partners LLC ("Explorer"). Explorer purchased
10,000, 2,000 and 8,000 shares of the Series B Preferred on December 18, 1997,
February 20, 1998 and March 18, 1998, respectively. Net proceeds to the Company
to date from such private placement are approximately $2.0 million. In
accordance with the Company's December 17, 1997 Certificate of Designation, each
share of Series B Preferred Stock is convertible at any time, at the option of
the holder thereof, into that number of shares of Common Stock which is equal to
$100 divided by 80% of the average closing bid price for a share of Common Stock
as quoted on the OTC Electronic Bulletin Board for the five trading days
preceding the conversion date, provided that such conversion price shall not
exceed $6.00 per share of Common Stock. The Series B Preferred Stock pays a
quarterly dividend of 8% per annum, and is payable, at the Company's sole
option, in cash or by the issuance of shares of Common Stock. The number of
shares of Common Stock to be issued as a dividend shall be determined based upon
the average closing bid price for a share of Common Stock as quoted on the OTC
Electronic Bulletin Board for the five trading days preceding the last day of
the calendar quarter for the applicable dividend period. In connection with the
private placement, the Company issued 40,000, 8,000 and 32,000 Redeemable
Warrants to Explorer Fund Management, L.L.C. on December 18, 1997, February 20,
1998 and March 18, 1998, respectively. On May 4, 1998, Explorer converted 75
shares of Series B Preferred Stock into 4,747 shares of Common Stock.
On June 1, 1996, the Company sold a total of 652,449 shares of Common Stock
to Messrs. Duke and Masters and Ms. Duke and to 14 other employees of the
Company at that time, in exchange for three-year notes to the Company bearing
interest at 5.75% annually, in the aggregate principal amount of $2,087,839. The
notes are secured by the shares owned by the employees. On February 6, 1998,
Dana Vaughn, a former vice president of the Company, assigned his shares of
Common Stock (86,993 issued in connection with the delivery of a promissory
note) and all the rights and obligations of the promissory note securing such
shares to Michael Winer and John Bieber. In June, 1998, the Company released its
security interest in 600,000 shares of Common Stock issued to certain employees
of the Company and canceled the outstanding principal and interest due on the
notes issued as payment for such shares to the extent that (i) the principal and
interest due on the notes exceeded the
34
<PAGE>
proceeds of the sales of the shares of Common Stock by the respective employees
and (ii) the proceeds of the sales of the shares of Common Stock were paid to
the Company. Subsequently, in June, 1998, Messrs. Bieber and Masters, vice
presidents of marketing and private label sales, respectively, each sold 43,497
shares of Common Stock at a purchase price of $0.309575 per share. The proceeds
from the sales of these shares of Common Stock were paid to the Company in full
payment of principal and interest accrued on the notes issued as payment for
such shares. In addition, Mr. Duke sold 13,006 and 300,000 shares of Common
Stock at a purchase price of $0.309576 and $0.309377 per share, respectively.
The proceeds from the sales of these shares of Common Stock were paid to the
Company as payment of 71.845% of the principal of the note issued as payment for
such shares, plus interest accrued thereon, in accordance with the portion of
the shares of Common Stock sold by Mr. Duke vis-a-vis the total amount purchased
under the note. The Company paid commissions in the aggregate amounts of
$8,663.94 and $11,250.00 to The Malachi Group, Inc. and Pegasus Capital, Inc.,
respectively, in connection with these transactions. Messrs. Duke, Bieber and
Masters are directors of the Company.
On December 4, 1997, the Company completed a private placement of 4 units
(the "Units") to Curi Oil Co. LLC, each Unit consisting of a promissory note of
the Company in the principal amount of $25,000, bearing interest at the rate of
10% per annum and maturing 90 days from the date of issuance, and redeemable
warrants to purchase 30,000 shares of Common Stock, expiring on December 5,
2001, at an exercise price of $6.00 per share. The Company has extended the
maturity date of the promissory notes to May 30, 1998. As of the date hereof,
the Company has failed to make any principal or interest payments to Curi Oil
Co. LLC. Any payments made by the Company to Curi Oil Co. LLC may subject to
EIL's claim of priority. Curtis Granet, a director of the Company, holds a 40%
membership interest in Curi Oil Co. LLC, and received 10,000 Redeemable Warrants
in connection with the private placement.
Richard Greene is a Director of the Company. The Company has paid Mr.
Greene approximately $96,446 for various legal and other services which he has
provided to the Company.
Mr. Duke is the Chief Executive Officer, Chairman of the Board of
Directors and a significant shareholder in IPI as well as an officer of the
three other subsidiaries of IPI. While it is expected that Mr. Duke will
continue to hold these positions in the immediate future, during the term of
his employment agreement, Mr. Duke will devote substantially all of his time
and efforts to the management and development of the Company. See "Risk Factors
- -- Dependence on Key Personnel; Potential Conflicts of Interests."
All completed, on-going and future transactions between the Company and its
officers, directors, principal stockholders or other affiliates have been and
will be on terms no less favorable to the Company then could be obtained from
unaffiliated third parties on an arm's-length basis, and will be approved by a
majority of the Company's independent and disinterested directors.
35
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 15, 1998 (i) by each person
who is known by the Company to beneficially own more than 5% of the Company's
Common Stock, fully diluted, (ii) by each of the Company's directors, (iii) by
each officer named under "Management -- Executive Compensation -- Summary
Compensation Table" and (iv) by all officers and directors as a group. Except as
indicated in the footnotes to this table, the persons named in the table have
sole voting and investment power with respect to all shares beneficially owned,
subject to community property laws where applicable. The table assumes that
5,195,225 shares of Common Stock are outstanding as of June 15, 1998.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner (1) Beneficially Owned Percentage (2)
- ------------------------------------------ -------------------- ---------------
<S> <C> <C>
Marc Duke 2,070,057(3) 39.3%
John Bieber 35,100(4) *
Albert A. Masters 7,500(5) *
Michael L. Winer 58,596(6) 1.1%
Linda Duke 58,597(7) 1.1%
Richard Greene 5,000(8) *
Curtis Granet 120,000(9) 2.3%
Burnett W. Donoho 100,000(10) 1.9%
InnoPet Inc. 1,742,065 33.5%
One East Broward Boulevard
Fort Lauderdale,
Florida 33301
Entrepreneurial Investors, Ltd. 2,017,334(11) 28.0%
Citibank Building
East Mall Drive
Freeport, Bahamas
Joseph Stevens & Company, L.P. 450,000(12) 8.0%
33 Maiden Lane
New York, New York
Explorer Partners LLC 8,446,012(13) 61.9%
444 N. Michigan Avenue
Suite 2910
Chicago, Illinois 60611
HSBC James Capel Canada, Inc. 1,000,000(14) 16.4%
105 Adelaide Street West
Suite 1200
Toronto, Ontario M5H 1P9
Canada
Idalari, S.A. 300,000 5.8%
c/o Greenwich Financial Group
2001 West Main Street, Suite 208
Stamford, Connecticut 06902
Interbank Special Purpose Corporation II 2,000,000(15) 27.8%
1733 Connecticut Avenue, Northwest
Washington, D.C,
All Officers and Directors 2,375,057 42.6%
as a Group (8 persons)
</TABLE>
- ------------
* Less than one percent (1%).
(1) Unless otherwise indicated, all addresses are c/o InnoPet Brands Corp., One
East Broward Boulevard, Suite 1100, Fort Lauderdale, Florida 33301.
(2) Beneficial ownership has been determined in accordance with Rule 13d-3 under
the Exchange Act and unless otherwise indicated, represents shares for which
the beneficial owner has sole voting and investment power. The percentage of
class is calculated in accordance with Rule 13d-3.
36
<PAGE>
(3) Includes 75,000 shares of Common Stock that may be acquired upon the
exercise of a presently exercisable option. Includes 148,432 shares of
Common Stock owned by management and current and former employees of the
Company (including 58,597 shares beneficially owned by Linda Duke, Mr.
Duke's wife, of which 1,300 are held by the Dukes in joint tenancy) of which
Mr. Duke has been granted a proxy to vote the shares. This number also
includes 1,742,065 shares of Common Stock owned by IPI as to which Mr. Duke
disclaims beneficial ownership. Mr. Duke is the record owner of 104,560
shares of Common Stock.
(4) Includes 35,000 shares of Common Stock that may be acquired upon the
exercise of a presently exercisable option.
(5) Includes 7,500 shares of Common Stock that may be acquired upon the exercise
of a presently exercisable option.
(6) Includes 15,000 shares of Common Stock that may be acquired upon the
exercise of a presently exercisable option.
(7) Includes 22,500 shares of Common Stock that may be acquired upon the
exercise of a presently exercisable option and 1,300 shares held in joint
tenancy with Mr. Duke.
(8) Includes 5,000 shares of Common Stock that may be acquired upon the exercise
of a presently exercisable option.
(9) Includes 120,000 shares held by Curi Oil LLC. Mr. Granet is one of two
members of this limited liability company and owns a 40% membership interest
therein.
(10) Includes 100,000 shares of Common Stock that may be acquired upon the
exercise of a presently exercisable option.
(11) This number includes: (i) 625,000 shares of Common Stock issuable upon
conversion of 625,000 shares of Series A Preferred Stock at a conversion
ratio of one share of Common Stock for one share of Series A Preferred
Stock; (ii) 544,000 shares of Common Stock which will be issued as a
dividend on the Series A Preferred Stock (represents the aggregate 4%
dividend for a period of one year from the date of issuance assuming a
price of $0.3125, representing the closing bid price for the Common Stock
of the Company as quoted on the OTC Electronic Bulletin Board on June 15,
1998); (iii) 225,000 shares of Common Stock underlying 225,000 currently
exercisable Redeemable Warrants; (iv) 600,000 shares of Common Stock being
registered in connection with a $1.5 million loan (the "Loan") pursuant to
which such shares were issued as security; and (v) 23,334 shares of Common
Stock to be issued as interest on the Loan through January 15, 1998.
(12) Consists of (i) 225,000 shares of Common Stock which may be acquired, upon
the exercise of warrants to purchase 225,000 units, each unit consisting of
one share of Common Stock and one warrant to purchase one share of Common
Stock for $8.70 per share; and (ii) 225,000 shares of Common Stock
underlying the warrants that may be acquired upon the exercise of the
warrant to purchase the units.
(13) Represents: (i) 7.97 million shares of Common Stock issuable upon
conversion of 19,925 shares of Series B Preferred Stock at a conversion
price of $100 divided by $0.25 (represents 80% of the closing bid price for
the Common Stock of the Company on the OTC Electronic Bulletin Board on
June 15, 1998); and (ii) 476,012 shares of Common Stock which will be
issued as a dividend on the Series B Preferred Stock (represents the
aggregate 8% dividend for a period from the date of issuance through
December 31, 1998, assuming a price of $0.3125, representing the closing
bid price for the Common Stock of the Company on the OTC Electronic
Bulletin Board on June 15, 1998).
(14) Includes 1,000,000 shares of Common Stock being registered for offer by the
Company in connection with (i) a proposed financing whereby the Company
will issue a total of $3.6 million of Common Stock over a twenty-four month
period based upon the payment of $150,000 each month at a per share
purchase price equal to 80% of the lowest closing bid price for the Common
Stock for the twenty trading days preceding each investment date; and (ii)
the grant by the Company of an option to purchase up to a total of $50.0
million of Common Stock over a twenty-four month period commencing on the
date of this offering based upon a per share purchase price equal to 85% of
the lowest closing bid price for the Common Stock for the five trading days
preceding each investment date.
(15) Includes 2.0 million shares of Common Stock being registered for offer by
the Company in connection with a proposed settlement of certain litigation
relating to the non-payment of principal, interest and fees due in
connection with a promissory note issued by the Company.
37
<PAGE>
SELLING SECURITYHOLDERS
The following table sets forth the number of shares of Common Stock and
Redeemable Warrants covered by this Prospectus with respect to each Selling
Securityholder, and the amount and percentage ownership of each Selling
Securityholder after the offering of the Securities offered hereby, assuming all
of the Securities covered by this Prospectus are sold by the Selling
Shareholders. Except as otherwise indicated by footnote below, none of the
Selling Securityholders has had any position, office or other material
relationship with the Company within the past three years, other than as a
result of the ownership of the Securities or other securities of the Company.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
---------------------------------------- ----------------------------------
Number Owned Number Owned
Prior to and Percent of Prior to and Percent of
Registered in Class After Registered in Class After
Name of Selling Securityholder the Offering the Offering (1) the Offering the Offering(1)
- --------------------------------- ------------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
Explorer Partners LLC 8,446,012 (2) 0% -- --
Entrepreneurial Investors, Ltd. 2,017,334 (3) 0% 225,000 0%
InterBank Special Purpose
Corporation II 2,000,000 (4) 0% -- --
InnoPet, Inc. (5) 1,742,065 (6) 0% -- 0%
HSBC James Capel Canada, Inc. 1,000,000 (7) 0% -- --
Curi Oil LLC (8) 120,000 (9) 0% 120,000 0%
Marc Duke (10) 104,560 0% -- --
Coleman and Company Securities,
Inc. 100,000 (11) 0% 100,000 0%
Manuel Arvesu 85,000 (12) 0% 75,000 0%
Explorer Fund Management LLC 80,000 (13) 0% 80,000 0%
Equity Services, Ltd. 62,500 (14) 0% -- --
Rafael Pratts, Jr. 50,000 (15) 0% 50,000 0%
Michael L. Winer (16) 43,496 (17) 0% -- --
National Securities Corp. 40,000 0% -- --
Linda Duke (18) 34,797 0% -- --
Ted Benghiat 25,000 (19) 0% 25,000 0%
Lynn M. Esco 25,000 (19) 0% 25,000 0%
Joaquin Soler 25,000 (19) 0% 25,000 0%
Southlake Trading 25,000 (19) 0% 25,000 0%
Eric Zurbuchen 17,399 0% -- --
Charles Johnston 13,000 (20) 0% -- --
Beverage Canners International
Corporation 10,877 (21) 0% -- --
Manuel Arvesu & Maria Celeste
Arvesu, Trustees for Julian
Arvesu 10,000 (21) 0% -- --
Carl Levine 10,000 (22) 0% 10,000 0%
Oppenheimer FBO Ronald Rust 6,500 (20) 0% -- --
Ashley Rust 5,000 (20) 0% -- --
MW Houck 4,444 0% -- --
Joanne & Howard Brandish Trust 3,400 (23) 0% 1,600 0%
Mark Houzer 3,000 (24) 0% 1,500 0%
John Quigley 2,600 (25) 0% 1,300 0%
Robert C. Lammert & Kathleen E.
Lammert 2,000 (26) 0% 1,000 0%
Steven A. Werber 2,000 (26) 0% 1,000 0%
Susan Leonhardt 1,740 0% -- --
Margaret Rust 1,500 (20) 0% -- --
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
-------------------------------------- ----------------------------------
Number Owned Number Owned
Prior to and Percent of Prior to and Percent of
Registered in Class After Registered in Class After
Name of Selling Securityholder the Offering the Offering (1) the Offering the Offering(1)
- ---------------------------------- ----------------- ------------------ --------------- ----------------
<S> <C> <C> <C> <C>
John Jablonski 1,305 0% -- --
Will Berry 1,000 (27) 0% 500 0%
Salvatore J. Mancuso 1,000 0% -- --
Michael Patoff 1,000 (26) 0% 1,000 0%
Henry Ford 783 0% -- --
Tara Slack 783 0% -- --
Deardra Thompson 783 0% -- --
Francis Rufty, Custodian for Sara
F. Parkton 600 (28) 0% 300 0%
Michael Zealy 522 0% -- --
David Santos 435 0% -- --
Mary Lou Bole 348 0% -- --
Gabriel Iglesias 300 0% -- --
James Kane 261 0% -- --
Pamela Medlin 261 0% -- --
Mary Huff 174 0% -- --
Michelle Raglind 174 0% -- --
Eve Uydess 174 0% -- --
</TABLE>
- ------------
(1) Assumes no purchase by any Selling Securityholder of any Common Stock or
Redeemable Warrants in the offering.
(2) This number represents: (i) 7,970,000 shares of Common Stock issuable upon
conversion of 19,925 shares of Series B Preferred Stock at a conversion rate
of $100 divided by $0.25 (represents 80% of the closing bid price for the
Common Stock of the Company on the OTC Electronic Bulletin Board on June 15,
1998); and (ii) 476,012 shares of Common Stock which will be issued as a
dividend on the Series B Preferred Stock (represents the aggregate 8%
dividend for a period from the date of issuance through December 31, 1998,
assuming a price of $0.3125, representing the closing bid price for the
Common Stock of the Company on the OTC Electronic Bulletin Board on June 15,
1998).
(3) This number includes: (i) 625,000 shares of Common Stock issuable upon
conversion of 625,000 shares of Series A Preferred Stock at a conversion
ratio of one share of Common Stock for one share of Series A Preferred
Stock; (ii) 544,000 shares of Common Stock which will be issued as a
dividend on the Series A Preferred Stock (represents the aggregate 4%
dividend for a period of one year from the date of issuance assuming a price
of $0.3125, representing the closing bid price for the Common Stock of the
Company as quoted on the OTC Electronic Bulletin Board on June 15, 1998);
(iii) 225,000 shares of Common Stock underlying 225,000 currently
exercisable Redeemable Warrants; (iv) 600,000 shares of Common Stock being
registered in connection with a $1.5 million loan (the "Loan") pursuant to
which such shares were issued as security; and (v) 23,334 shares of Common
Stock to be issued as interest on the Loan through January 15, 1998.
(4) Includes 2,000,000 shares of Common Stock being registered for offer by the
Company in connection with a proposed settlement of certain litigation
relating to the non-payment of principal, interest and fees due in
connection with a promissory note issued by the Company.
(5) The Company was incorporated on January 11, 1996 as a wholly-owned
subsidiary of InnoPet, Inc. ("IPI"). From inception until approximately June
30, 1996, substantially all of the Company's costs and expenses, and the
acquisition of the Company's assets, were paid or incurred on behalf of the
Company by its parent, IPI.
(6) Excludes 10,877 shares of Common Stock which IPI transferred to Beverage
Canners International Corporation on March 25, 1998.
(7) Includes 1,000,000 shares of Common Stock being registered for offer by the
Company in connection with (i) a proposed financing whereby the Company will
issue a total of $3.6 million of Common Stock over a twenty-four month
period based upon the payment of $150,000 each month at a per share purchase
price
39
<PAGE>
equal to 80% of the lowest closing bid price for the Common Stock for the
twenty trading days preceding each investment date; and (ii) the grant by
the Company of an option to purchase up to a total of $50.0 million of
Common Stock over a twenty-four month period commencing on the date of this
offering based upon a per share purchase price equal to 85% of the lowest
closing bid price for the Common Stock for the five trading days preceding
each investment date.
(8) Curtis Granet, a director of the Company since June, 1996, is one of two
members of this limited liability company and owns a 40% percent membership
interest therein.
(9) Includes 120,000 shares of Common Stock underlying 120,000 Redeemable
Warrants.
(10) Marc Duke is Chairman of the Board and Chief Executive Officer of the
Company and has been Chairman of the Board and Chief Executive Officer of
IPI since September, 1995.
(11) Includes 100,000 shares of Common Stock underlying 100,000 Redeemable
Warrants.
(12) Includes 10,000 shares of Common Stock issued in lieu of payment for legal
services rendered to the Company and 75,000 shares of Common Stock
underlying 75,000 Redeemable Warrants.
(13) Includes 80,000 shares of Common Stock underlying 80,000 Redeemable
Warrants.
(14) Represents 62,500 shares of Common Stock issuable upon conversion of 62,500
shares of Series A Preferred Stock which are the subject of an option.
(15) Includes 50,000 shares of Common Stock underlying 50,000 Redeemable
Warrants.
(16) Michael Winer has been Vice President and Chief Financial Officer of the
Company since October, 1997.
(17) On February 6, 1998, Dana Vaughn, a former vice president of the Company,
assigned his shares of Common Stock (86,993 issued in connection with the
delivery of a promissory note) and all the rights and obligations of the
promissory note securing such shares to Michael Winer and John Bieber, in
amounts of 43,496 and 43,497, respectively.
(18) Linda Duke has been Vice President of Operations of the Company since June
1996 and was Director of Operations of IPI from September 1995 to May 1996.
(19) Includes 25,000 shares of Common Stock underlying 25,000 Redeemable
Warrants.
(20) Includes shares of Common Stock issued in settlement of threatened
litigation, which shares may not be transferred or sold by the holder for a
period of twelve months from the date of issuance.
(21) Includes 10,000 shares of Common Stock issued in lieu of payment for legal
services rendered to the Company.
(22) Includes 10,000 shares of Common Stock underlying 10,000 Redeemable
Warrants.
(23) Includes 1,600 shares of Common Stock underlying 1,600 Redeemable Warrants.
(24) Includes 1,500 shares of Common Stock underlying 1,500 Redeemable Warrants.
(25) Includes 1,300 shares of Common Stock underlying 1,300 Redeemable Warrants.
(26) Includes 1,000 shares of Common Stock underlying 1,000 Redeemable Warrants.
(27) Includes 500 shares of Common Stock underlying 500 Redeemable Warrants.
(28) Includes 300 shares of Common Stock underlying 300 Redeemable Warrants.
40
<PAGE>
PLAN OF DISTRIBUTION
One milion shares of Common Stock being registered for offer by the Company
will be issued directly to HSBC James Capel Canada, Inc. ("HSBC") in connection
with a proposed financing whereby the Company (i) agreed to issue to HSBC a
total of $3.6 million of Common Stock over a twenty-four month period based upon
the payment of $150,000 each month and a per share purchase price equal to 80%
of the lowest closing bid price for the Common Stock for the twenty days
preceding each investment date, and (ii) granted HSBC an option to purchase up
to a total of $50.0 million of Common Stock over a twenty-four month period
based upon a per share purchase price equal to 85% of the lowest closing bid
price for the Common Stock for the five trading days preceding each investment
date; and, 2.0 million shares of Common Stock being registered for offer by the
Company will be issued to Interbank Special Purpose Subsidiary, II ("IBF"), in
connection with a proposed settlement of certain litigation relating to
non-payment of principal, interest and fees due in connection with a promissory
note issued by the Company to IBF, which note is the subject of pending
litigation. The Company may offer shares of Common Stock to, among others,
certain investors, at a discount to the market price of the Common Stock in
effect on the date of sale by the Company, to certain vendors, and to satisfy
other indebtedness of the Company.
The Company reserves the right to seek the support of certain members of
the National Association of Securities Dealers ("Finders") to assist with
introductions to prospective investors. In this regard, such Finders may be paid
a finder's fee equal to a percentage of the gross price paid by purchasers of
the Securities.
The sale of all or a portion of the Securities by the Company and the
Selling Securityholders may be effected, from time to time, in private
transactions or in the over-the-counter market at prices related to the
prevailing prices of the Securities on the OTC Electronic Bulletin Board at the
time of the sale, or at negotiated prices. The Selling Securityholders may
effect such transactions by selling to or through one or more broker-dealers,
and such broker-dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Selling Securityholders. The
Selling Securityholders and any broker-dealers that participate in the
distribution of the Securities may, under certain circumstances, be deemed to be
"underwriters" within the meaning of the Securities Act, and any commissions
received by such broker-dealers and any profits realized on the resale of
Securities by them may be deemed to be underwriting discounts and commissions
under the Securities Act. The Company and the Selling Securityholders may agree
to indemnify such broker-dealers against certain liabilities, including
liabilities under the Securities Act. In addition, the Company has agreed to
indemnify the Selling Securityholders, with respect to the Securities offered
hereby, against certain liabilities, including certain liabilities under the
Securities Act.
To the extent required under the Securities Act, a supplemental prospectus
will be filed, disclosing (a) the name of any such broker-dealers, (b) the
number of Securities involved, (c) the price at which such Securities are to be
sold, (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable, (e) that such broker-dealers did not conduct
any investigation to verify the information set out in this Prospectus, as
supplemented, and (f) other facts material to the transaction.
Each Selling Securityholder may be subject to applicable provisions of the
Exchange Act and the rules and regulations promulgated thereunder, including,
without limitation, Regulation M, which provisions may limit the timing of
purchases and sales of any of the Company's securities by the Selling
Securityholders.
There is no assurance that any of the Selling Securityholders will sell any
of the Securities.
The Company has agreed to pay all costs and expenses incurred in connection
with the registration of the Securities offered hereby, except that the Selling
Securityholders shall be responsible for all selling commissions, transfer taxes
and related charges in connection with the offer and sale of such Securities and
the fees of the Selling Securityholders' counsel.
The Company has agreed to keep the Registration Statement relating to the
offering and sale, by the Selling Securityholders, of the Securities,
continuously effective until the earlier of sale of all the securities or 12
months.
41
<PAGE>
DESCRIPTION OF THE COMPANY'S SECURITIES
The authorized capital stock of the Company consists of 25,000,000 shares
of Common Stock and 5,000,000 shares of Preferred Stock.
Common Stock
The Company's authorized Common Stock consists of 25,000,000 shares of
Common Stock. As of June 15, 1998, there were issued and outstanding 5,195,225
shares of Common Stock of the Company. Additionally, stock options to purchase
up to 533,375 shares of Common Stock have been granted. In addition, the Company
has issued preferred stock convertible into shares of Common Stock and
Redeemable Warrants that may be exercised to purchase shares of Common Stock as
detailed below. The holders of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of shareholders. Subject
to preferences that may be applicable to outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Company's Board of Directors out of funds legally
available therefor. Holders of Common Stock have no preemptive, subscription or
redemption rights, and there are no conversion or similar rights with respect to
such shares. The outstanding shares of Common Stock are fully paid and
nonassessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of undesignated
Preferred Stock. The Board of Directors has the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued shares of undesignated Preferred Stock, as well as to fix the number of
shares constituting any series and the designation of such series, without any
further vote or action by the shareholders. As of June 15, 1998, there were
issued and outstanding 625,000 shares of Series A 4% Cumulative Preferred Stock
(the "Series A Preferred Stock"). The holders of Series A Preferred Stock have
no voting power whatsoever, except as otherwise provided by the General
Corporation Law of the State of Delaware. Pursuant to the terms of the Company's
April 28, 1997 Certificate of Designation of Preferred Stock, each share of
Series A Preferred Stock is convertible at any time, at the option of the holder
thereof, into one share of Common Stock. The Series A Preferred Stock pays a
dividend equal to 4% per annum. The dividend shall be payable by the issuance of
additional shares of Common Stock. The number of shares to be issued as a
dividend shall be determined based on the average closing bid price for a share
of Common Stock as quoted on the OTC Electronic Bulletin Board for the twenty
trading days preceding the applicable record date for the declaration of the
dividend. Additionally, as of June 15, 1998 options have been granted to
purchase 62,500 shares of Series A Preferred Stock. The option has a term of
five years commencing on April 29, 1998.
As of June 15, 1998 there were issued 20,000 shares of Series B 8%
Cumulative Convertible Preferred Stock (the "Series B Preferred Stock"), of
which 19,925 are outstanding. The holders of Series B Preferred Stock have no
voting power whatsoever, except as otherwise provided by the General Corporation
Law of the State of Delaware. Each share of Series B Preferred Stock is
convertible at any time, at the option of the holder thereof, into shares of
Common Stock. Each share of Series B Preferred Stock shall convert into that
number of shares of Common Stock which is equal to $100 divided by 80% of the
average closing bid price for the Common Stock as quoted on the OTC Electronic
Bulletin Board for the five trading days preceding the applicable conversion
date (the "Series B Conversion Price"); provided, however, that in no event
shall the Series B Conversion Price exceed $6.00 per share of Common Stock. All
shares of Series B Preferred Stock outstanding and not converted prior to the
date which is three (3) years from the date of their issuance shall
automatically convert on such date into shares of Common Stock. The Series B
Preferred Stock pays a dividend of 8% per annum, and is payable, at the
Company's sole option, in cash or by the issuance of shares of Common Stock. The
number of shares of Common Stock to be issued as a dividend, if applicable,
shall be determined based on the average closing bid price for a share of Common
Stock as quoted on the OTC Electronic Bulletin Board for the five trading days
preceding the last day of the calendar quarter for the applicable dividend
period.
The Board of Directors, without shareholder approval, may issue additional
Preferred Stock with voting and conversion rights which could materially
adversely affect the voting power of the holders of Common Stock.
42
<PAGE>
The issuance of additional Preferred Stock could also decrease the amount of
earnings and assets available for distribution to holders of Common Stock. In
addition, the issuance of additional Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. See "Risk
Factors -- Possible Adverse Effects of Authorized Preferred Stock."
Redeemable Warrants
Each Redeemable Warrant entitles the registered holder thereof to purchase
one share of Common Stock at a price of $6.00 per share, subject to adjustment,
commencing immediately. As of June 15, 1998, 4,347,500 Redeemable Warrants were
issued and outstanding. The Redeemable Warrants expire on December 5, 2001. The
Redeemable Warrants are subject to redemption, subject to the prior written
consent of the underwriter of the Company's initial public offering, at a price
of $.05 per Redeemable Warrant commencing immediately on 30 days' written notice
provided the average closing bid price of the Common Stock as quoted on the OTC
Electronic Bulletin Board (or the last sale price if listed on a national
securities exchange), equals or exceeds 150% of the warrant exercise price per
share for any 20 trading days within a period of 30 consecutive trading days
ending on the fifth trading day prior to the date of the notice of redemption.
The holder of a Redeemable Warrant will lose his right to purchase if such right
is not exercised prior to redemption by the Company on the date for redemption
specified in the Company's notice of redemption or any later date specified in a
subsequent notice. Notice of redemption by the Company shall be given by first
class mail to the holders of the Redeemable Warrants at their addresses set
forth in the Company's records.
The exercise price of the Redeemable Warrants and the number and kind of
shares of Common Stock or other securities and property to be obtained upon
exercise of the Redeemable Warrants are subject to adjustment in certain
circumstances including a stock split of, or stock dividend on, or a
subdivision, combination or recapitalization of, the Common Stock. Additionally,
an adjustment would be made upon the sale of all or substantially all of the
assets of the Company so as to enable Redeemable Warrant holders to purchase the
kind and number of shares of stock or other securities or property (including
cash) receivable in such event by a holder of the number of shares of Common
Stock that might otherwise have been purchased upon exercise of such Redeemable
Warrant. No adjustment for previously paid cash dividends, if any, will be made
upon exercise of the Redeemable Warrants.
The Redeemable Warrants do not confer upon the holder any voting or any
other rights of a stockholder of the Company. Upon notice to the Redeemable
Warrant holders, the Company has the right to reduce the exercise price or
extend the expiration date of the Redeemable Warrants.
Transfer Agent, Warrant Agent and Registrar
The Company's Transfer Agent, Warrant Agent and Registrar is Continental
Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
As of June 15, 1998, the Company has 5,195,225 shares of Common Stock and
4,347,500 Redeemable Warrants outstanding. Of these securities, 2,299,390 shares
of Common Stock and 2,912,500 Redeemable Warrants are currently freely tradeable
in the public market. 21,679,127 shares of Common Stock and 768,200 Redeemable
Warrants included in this offering will be freely tradeable without restriction
or further registration under the Securities Act unless held by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act. The
remaining 2,895,835 shares may be deemed "restricted securities," and may not be
sold except in compliance with Rule 144 under the Securities Act. Rule 144, in
essence, provides that a person holding restricted securities for a period of
one year may publicly sell in brokerage transactions at an amount equal to one
percent of the Company's outstanding Common Stock every three months or, if
greater, a percentage of the shares publicly traded during a designated period.
Of such 2,895,835 shares, 2,091,330 are currently eligible for sale under Rule
144. Of the remaining 804,505 shares of Common Stock, 26,000 shares were issued
in settlement of certain litigation and 527,013 were issued
43
<PAGE>
to IPI in exchange for the cancellation of certain indebtedness. Such shares
will not be eligible for sale under Rule 144 until, at the earliest, one year
from the date of issuance thereof. The remaining 251,492 shares were purchased
by employees in exchange for notes. Accordingly, at this time it is not possible
to state when such shares will be eligible for sale under Rule 144 other than
the earliest they might be eligible for sale under Rule 144 is June, 1999, if
the notes were to be satisfied in June, 1998.
The foregoing is a summary of all material terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Camhy Karlinsky & Stein LLP, New York, New York. One partner in the
firm has options to purchase 8,000 shares of Common Stock and one partner may be
deemed to have beneficial ownership (although such beneficial ownership is
disclaimed) of options to purchase 32,000 shares of Common Stock.
EXPERTS
The financial statements as of December 31, 1997, included in this
Prospectus and in the Registration Statement, have been included herein in
reliance upon the report of Rachlin Cohen & Holtz, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
44
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
CONDENSED FINANCIAL STATEMENTS OF INNOPET BRANDS CORP. (Unaudited)
Balance Sheet ................................................. F-2
Statements of Operations ...................................... F-3
Statement of Stockholders' Deficiency ......................... F-4
Statements of Cash Flows ...................................... F-5 to F-6
Notes to Condensed Financial Statements ....................... F-7 to
FINANCIAL STATEMENTS OF INNOPET BRANDS CORP.
Report of Independent Certified Public Accountants ............ F-9
Balance Sheet ................................................. F-10 to F-11
Statements of Operations ...................................... F-12
Statements of Stockholders' Equity (Deficiency) ............... F-13 to F-14
Statements of Cash Flows ...................................... F-15
Notes to Financial Statements ................................. F-16 to F-32
</TABLE>
F-1
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
CONDENSED BALANCE SHEET
MARCH 31, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash .................................................................................. $ 367,778
Accounts receivable ................................................................... 1,125,854
Inventories ........................................................................... 1,905,240
Prepaid expenses and other current assets ............................................. 661,261
-------------
Total current assets ............................................................... 4,060,133
-------------
Property and Equipment ................................................................... 405,122
-------------
Intangible Assets:
Deferred slotting fees, net of accumulated amortization ............................... 58,625
Product formulae acquisition costs, net of accumulated amortization ................... 216,921
Non-compete agreement, net of accumulated amortization ................................ 84,941
-------------
360,487
-------------
Other Assets ............................................................................. 10,000
-------------
Total assets ....................................................................... $ 4,835,742
=============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
Notes payable ......................................................................... $ 2,325,393
Accounts payable:
Trade .............................................................................. 2,839,895
Slotting fees ...................................................................... 380,127
Accrued expenses and other payables ................................................... 986,501
-------------
Total current liabilities .......................................................... 6,531,916
-------------
Long-Term Liabilities .................................................................... 171,303
-------------
Stockholders' Deficiency:
Series A 4% convertible preferred stock, $.01 par value; issued and outstanding 625,000
shares at liquidation value .......................................................... 2,500,000
Series B 8% convertible preferred stock, $100 par value; issued and outstanding 20,000
shares at liquidation value .......................................................... 2,000,000
Common stock, $.01 par value; authorized 25,000,000 shares; issued 4,953,169 shares.... 49,531
Additional paid-in capital ............................................................ 15,009,855
Deficit accumulated during the development stage ...................................... (19,119,134)
Notes and interest receivable on sale of common stock ................................. (2,304,493)
Treasury stock, 957 shares of common stock, at cost and 600,000 collateral common
shares ............................................................................... (3,236)
-------------
Total stockholders' deficiency ..................................................... (1,867,477)
-------------
Total liabilities and stockholders' deficiency ..................................... $ 4,835,742
=============
</TABLE>
See notes to condensed financial statements.
F-2
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Cumulative
--------------------------------- from
1998 1997 Inception
--------------- --------------- ----------------
<S> <C> <C> <C>
Net Sales ..................................... $ 673,689 $ 575,028 $ 5,600,114
Cost of Sales ................................. 424,394 383,574 4,106,155
------------ ------------ -------------
Gross Profit .................................. 249,295 191,454 1,493,959
------------ ------------ -------------
Other Operating Expenses:
Sales expenses ............................... 201,757 160,900 1,390,117
Slotting allowances .......................... 143,321 439,435 2,482,258
Marketing expenses ........................... 421,645 708,334 5,451,728
Distribution ................................. 26,638 89,287 686,930
Product development .......................... 463,433 111,241 1,482,743
General and administrative ................... 1,274,164 896,287 6,808,874
------------ ------------ -------------
2,530,958 2,405,484 18,302,650
------------ ------------ -------------
Loss Before Other Income (Expenses): .......... (2,281,663) (2,214,030) (16,808,691)
------------ ------------ -------------
Other Income (Expenses):
Interest Income .............................. 231 36,930 86,341
Interest expense and financing costs ......... (307,655) (22,808) (2,341,546)
Other income (expense) ....................... -- -- (55,238)
------------ ------------ -------------
(307,424) 14,122 (2,310,443)
------------ ------------ -------------
Net Loss ...................................... $ (2,589,087) $ (2,199,908) $ (19,119,134)
============ ============ =============
Net Loss Per Common Share ..................... $ (0.52) $ (0.49)
============ ============
</TABLE>
See notes to condensed financial statements.
F-3
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
CONDENSED STATEMENT OF STOCKHOLDERS' DEFICIENCY
THREE MONTHS ENDED MARCH 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock Common Stock
------------------------ ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
--------- ------------- -------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ...... 625,000 $2,500,000 10,000 $1,000,000 4,928,725 $49,287
Sale of Series B preferred
stock ($100 per share),
net of related costs ........ 10,000 1,000,000
Common stock issued in
settlement of various
obligations (average
$3.6875 per share)........... 24,444 244
Interest accrued on notes
receivable on sale of
common stock ................
Original Issue Discount --
on Short Term Notes .........
Fees Associated with
Equity Financing ............
Net loss .....................
Balance, March 31, 1998....... 625,000 $2,500,000 20,000 $2,000,000 4,953,169 $49,531
======= ========== ====== ========== ========= =======
<CAPTION>
Notes and
Deficit Interest
Accumulated Receivable Treasury Stock
Additional During the on Sale of -----------------------
Paid-In Development Common
Capital Stage Stock Shares Amount Total
-------------- ----------------- ---------------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 ...... $14,702,788 $ (16,530,047) $ (2,274,606) 600,957 $ (3,236) $ (555,814)
Sale of Series B preferred
stock ($100 per share),
net of related costs ........ 1,000,000
Common stock issued in
settlement of various
obligations (average
$3.6875 per share)........... 90,140 90,384
Interest accrued on notes
receivable on sale of
common stock ................ 29,887 (29,887)
Original Issue Discount --
on Short Term Notes ......... 166,280 166,280
Fees Associated with
Equity Financing ............ 20,760 20,760
Net loss ..................... (2,589,087) (2,589,087)
------------- ------------
Balance, March 31, 1998....... $15,009,855 $ (19,119,134) $ (2,304,493) 600,957 $ (3,236) $ (1,867,477)
=========== ============= ============ ======= ======== ============
</TABLE>
See notes to condensed financial statements.
F-4
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Cumulative
----------------------------------- from
1998 1997 Inception
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................. $ (2,589,087) $ (2,199,908) $ (19,119,134)
Adjustments to reconcile net loss to net cash used in
operating activities:
Costs and expenses paid on behalf of the Company
by the InnoPet Inc. .................................. -- -- 1,580,327
Depreciation ........................................... 33,508 24,378 175,795
Amortization:
Slotting fees ........................................ 119,808 439,435 2,458,744
Financing costs ...................................... -- -- 872,759
Original issue discount .............................. 254,036 -- 726,408
Other ................................................ 32,432 32,432 281,911
Provision for doubtful accounts ........................ 340,046 -- 914,227
Offsets against accounts receivable
for slotting fees .................................... (40,000) (181,273) (1,316,519)
Interest paid from proceeds of public offering ......... -- -- 61,944
Loss on disposal of equipment .......................... 3,143 -- 3,484
Non-cash expense related to issuance of shares in
settlement of dispute ................................ 199,699 -- 238,699
Changes in Operating Assets and Liabilities:
(Increase) Decrease in:
Accounts receivable .................................. (265,290) (199,196) (1,604,678)
Inventory ............................................ 15,959 (925,626) (1,401,209)
Prepaid expenses and other current assets ............ 114,683 89,466 (2,091,475)
Deposits and other assets ............................ -- (54,298) --
Increase (Decrease) in:
Accounts payable, trade .............................. 110,512 305,623 2,839,912
Accounts payable slotting fees ....................... (156,548) 2,235 380,127
Accounts payable, InnoPet Inc. ....................... (38,353) (89,953) 527,668
Accrued expenses and other current liabilities ....... 332,078 -- 770,939
------------ ------------ -------------
Net cash used in operating activities ............... (1,533,374) (2,756,685) (13,700,071)
------------ ------------ -------------
Cash Flows from Investing Activities:
Acquisition of property and equipment ..................... (15,162) (250,308) (479,609)
------------ ------------ -------------
Cash Flows from Financing Activities:
Payments on capital lease obligation ...................... (4,214) -- (29,114)
Proceeds from initial public offering ..................... -- -- 6,851,487
Proceeds from issuance of preferred stock ................. 942,000 -- 3,928,900
Proceeds of long-term financing from InnoPet Inc., net..... -- -- 202,014
Proceeds from private placement financing ................. -- -- 1,672,236
Proceeds from notes payable ............................... 600,000 -- 2,462,500
Offering costs ............................................ -- -- (472,641)
Deferred financing costs .................................. -- -- (67,924)
------------ ------------ -------------
Net cash provided by financing activities ............... 1,537,786 -- 14,547,458
------------ ------------ -------------
Net Increase (Decrease) in Cash and Cash Equivalents ....... (10,750) (3,006,993) 367,778
Cash and Cash Equivalents, Beginning ....................... 378,528 4,614,312 --
------------ ------------ -------------
Cash and Cash Equivalents, Ending .......................... $ 367,778 $ 1,607,319 $ 367,778
============ ============ =============
</TABLE>
See note to condensed financial statements.
F-5
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
CONDENSED STATEMENTS OF CASH FLOWS
(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Cumulative
------------------- from
1998 1997 Inception
-------- -------- -------------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow Information:
Non-Cash Investing and Financing Activities:
Common stock issued to InnoPet Inc. in
satisfaction of debt ............................ $ -- $ -- $1,317,530
===== ===== ==========
Common stock issued on behalf of InnoPet
Inc. as settlement of dispute ................... $ -- $ -- $ 91,000
===== ===== ==========
Capital lease obligation incurred for acquisition
of equipment .................................... $ -- $ -- $ 44,000
===== ===== ==========
Expenditures for various assets paid on behalf
of the Company by InnoPet Inc.:
Product formulae, non-compete agreement
and inventory ................................. $ -- $ -- $1,072,772
===== ===== ==========
Deferred financing costs ........................ $ -- $ -- $ 227,071
----- ----- ----------
Deferred slotting fees .......................... $ -- $ -- $ 291,957
===== ===== ==========
Property and equipment and other assets ......... $ -- $ -- $ 195,732
===== ===== ==========
Deferred financing costs paid from proceeds of
private placement financing ..................... $ -- $ -- $ 327,764
===== ===== ==========
Offering costs paid from proceeds of initial
public offering ................................. $ -- $ -- $1,436,611
===== ===== ==========
Notes payable paid from proceeds of initial
public offering ................................. $ -- $ -- $2,000,000
===== ===== ==========
</TABLE>
See notes to condensed financial statements.
F-6
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. FINANCIAL STATEMENTS
The accompanying financial statements as of March 31, 1998 and for the
three months ended March 31, 1998 and 1997 are unaudited and have been prepared
in accordance with generally accepted accounting principles for interim
financial information. The financial statements should be read in conjunction
with the audited financial statements of the Company from inception (January 11,
1996) to December 31, 1997 for a description of the significant accounting
policies, which have continued without change, and other footnote information.
All adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operations and cash flows
have been included. For purposes of interim financial reporting, the Company
uses the standard cost method in determining the estimate of the lower of cost
or market for inventory valuation. The results of operations for interim periods
are not necessarily indicative of the results for the full year.
NOTE 2. BASIS OF PRESENTATION
The Company was incorporated on January 11, 1996, and, since that time, has
been primarily involved in organizational activities, developing a strategic
plan for the marketing and distribution of its pet food products, and raising
capital. Planned operations, as described above, have commenced, but revenue
therefrom generated to date is not considered significant in relation to the
Company's strategic plan. Accordingly, the Company is considered to be in the
development stage, and the accompanying interim financial statements represent
those of a development stage enterprise.
The accompanying interim financial statements have been presented in
accordance with generally accepted accounting principles, which assume the
continuity of the Company as a going concern. However, as discussed above, the
Company is in the development stage and, therefore has generated little revenue
to date. As reflected in the accompanying interim financial statements, the
Company has incurred a net loss and reflects a deficit accumulated during the
development stage of $19,119,134 for the period from inception (January 11,
1996) through March 31, 1998. This condition raises substantial doubt as to the
ability of the Company to continue as a going concern.
Management's plans with regard to this matter encompass the following
actions:
Business Plan
Product shipments began in Fall 1996 after wholesale marketing programs
were begun in July 1996; consumer marketing programs were implemented once the
Company's products appeared on supermarket shelves. The Company developed an
integrated marketing communications program based on sampling as the method most
likely to produce trial and conversion of consumers. Using highly articulated
mailing lists that define target consumers by pet ownership and proximity to
outlets for the Company's products, the Company began an aggressive direct mail
program in core areas such as New York and Philadelphia. In addition, in-store
demonstrations at stores, pet fairs and shows add names to the Company's base of
sampling targets. Couponing through advertising (generally store-sponsored),
free standing inserts in Sunday newspapers and in-store programs are used to
disseminate samples and literature about the product.
Slotting, a system whereby the vendor pays the supermarket chain to
integrate their products into the stores and warehouse systems, presented a
high-cost factor during the product's introduction. The Company determined that
it would pay such slotting fees only with product (as opposed to cash), and at
no more than forty percent of the chain's listed slotting rate. Of the 31 chains
that have purchased the product, this has been adhered to in all but two cases
where a concession was made to certain market-leading chains which the Company
deemed were vital to penetrating specific geographic areas.
As an additional marketing tool, in June 1997, the Company entered into
long-term agreements with North Shore Animal League of Long Island ("NSAL") and
the international Pet Savers Foundation, which NSAL administers. This program,
which had featured Iams products for several years, targets approximately 6,000
animal shelters, accounting for approximately 2.5 million pet adoptions
annually, where the Company's products
F-7
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited) -- (Continued)
NOTE 2. BASIS OF PRESENTATION -- (Continued)
are exclusively fed to sheltered animals, given away as a free sample when a dog
is adopted and sold in over 400 animal shelter stores participating in the Pet
Savers program. The Company views this program, which is structured under a
multi-year contract (due to expire in 2002) as a vital way to introduce pet
owners to the Company's products at the earliest possible point in pet ownership
and in addition, as a valuable sales channel.
In November 1997, the Company successfully presented to and acquired its
first customer for premium private label pet food, the Kroger Company, the
nation's largest supermarket chain. The Company believes that it was able to
beat its competition for this business as a result of its superior product
quality and its marketing expertise in the premium pet foods segment. The
Company has established a separate private label sales effort to support this
area. The Company plans to commence its first shipment in Spring 1998.
As of March 31, 1998, the Company had placed its products in more than
6,000 stores in twenty states. Market penetration to date varies from 15% to
70%, depending on the market and geographic spread of its customer chains.
The eventual outcome of the success of management's plans cannot be
ascertained with any degree of certainty. The accompanying financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
NOTES 3. NOTE PAYABLE -- EIL
On July 9, 1997, the Company secured short-term financing in the form of a
senior convertible note of $1,500,000 from Entrepreneurial Investors, Ltd.
("EIL"), a Bahamas corporation and principal stockholder of the Company. The
note had a stated interest rate of 14%, was scheduled to mature on January 15,
1998, and was collateralized with 600,000 shares of the Company's common stock,
held in escrow at December 31, 1997. The terms of the senior convertible note
provided, among other things, that the note be a general obligation of the
Company and senior and not subordinated to any and all obligations of the
Company regardless of whether such obligations were presently existing or
subsequently incurred. The note provided for conversion of the principal and
interest into common stock of the Company at $4.50 per share at the option of
the holder.
The Company failed to make any interest or principal payment of the senior
notes and, consequently, EIL took possession of the collateral and commenced an
action for specific performance demanding, among other items, that such
collateral be registered. As a consequence of the Registration Statement filed
by the Company with the SPC having gone effective on April 16, 1998, the EIL
action was rendered moot and has been voluntarily withdrawn. EIL claims that (i)
the entire principal amount of the note plus interest is due and owing to EIL
(ii) EIL has not agreed to convert the note into equity of the Company (iii) if
EIL were to convert the note into equity of the Company, the shares of Common
Stock issued to EIL as collateral and in EIL's possession would be insufficient
to satisfy the amounts due under such note and (iv) the Senior Note has priority
over all other obligations of the Company whether in existence on the date of
issuance of the Senior Note or subsequently incurred. The Company is currently
in negotiations with EIL and believes that it will sreach an amicable agreement
with EIL.
Although EIL has foreclosed on the collateral, in light of the
circumstances described above in which the conversion is being contested by EIL,
the Company has not reflected the conversion of this note into stockholders'
equity in the accompanying financial statements. The 600,000 shares of common
stock continue to be accounted for as collateral shares held in treasury, and
the note is included in current liabilities at March 31, 1998.
The Company will record the conversion of this obligation, together with
accrued interest, at such time as an agreement with EIL as to the terms of such
conversion has been formally agreed to and documented. Assuming that such
agreement had been formalized as of March 31, 1998, current liabilities would
have been reduced and stockholders' deficiency reduced by approximately
$1,609,000.
F-8
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
InnoPet Brands Corp.
We have audited the accompanying balance sheet of InnoPet Brands Corp. as of
December 31, 1997, and the related statements of operations, stockholders'
equity (deficiency), and cash flows for each of the two years in the period
ended December 31, 1997 and cumulative from inception. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of InnoPet Brands Corp. as of
December 31, 1997, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997 and cumulative from
inception in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully discussed in Note 2 to
the financial statements, the Company is in the development stage and has, among
other things, incurred net losses in 1997 and 1996 and reflects a deficit
accumulated during the development stage as of December 31, 1997. These
conditions raise substantial doubt as to the ability of the Company to continue
as a going concern. Management's plans with regard to this matter are also
described in Note 2 to the financial statements. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
RACHLIN COHEN & HOLTZ
Fort Lauderdale, Florida
March 23, 1998
F-9
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
ASSETS
Current Assets:
<S> <C>
Cash and cash equivalents .................................................... $ 378,528
Accounts receivable .......................................................... 1,160,610
Inventories .................................................................. 1,921,199
Prepaid expenses and other current assets .................................... 843,444
-----------
Total current assets ...................................................... 4,303,781
-----------
Property and Equipment .......................................................... 426,611
-----------
Intangible Assets:
Deferred slotting fees, net of accumulated amortization of $2,338,936 ........ 110,933
Product formulae acquisition costs, net of accumulated amortization of $54,116 223,871
Non-compete agreement, net of accumulated amortization of $195,363 ........... 110,423
-----------
445,227
-----------
Other Assets .................................................................... 10,000
-----------
Total assets .............................................................. $ 5,185,619
===========
</TABLE>
See notes to financial statements.
F-10
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities:
<S> <C>
Notes payable ......................................................................... $ 1,716,397
Accounts payable:
Slotting fees ...................................................................... 536,675
Trade .............................................................................. 2,729,400
Accrued expenses and other current liabilities ........................................ 568,861
Current maturities of obligations under capital leases ................................ 14,600
-------------
Total current liabilities .......................................................... 5,565,933
-------------
Long-Term Liabilities:
Capital lease obligations, net of current maturities .................................. 16,500
Note payable to InnoPet, Inc. ......................................................... 159,000
-------------
175,500
-------------
Commitments, Contingencies and Subsequent Events ......................................... --
Stockholders' Deficiency:
Series A 4% convertible preferred stock, $.01 par value; issued and outstanding 625,000
shares at liquidation value .......................................................... 2,500,000
Series B 8% convertible preferred stock, $100 par value; issued and outstanding 10,000
shares at liquidation value .......................................................... 1,000,000
Common stock, $.01 par value; authorized 25,000,000 shares; issued 4,928,725 shares.... 49,287
Additional paid-in capital ............................................................ 14,702,788
Deficit accumulated during the development stage ...................................... (16,530,047)
Notes and interest receivable on sale of common stock ................................. (2,274,606)
Treasury stock, 957 shares of common stock, at cost and 600,000
collateral common shares ............................................................. (3,236)
-------------
Total stockholders' deficiency ........................................................ (555,814)
-------------
Total liabilities and stockholders' deficiency ........................................ $ 5,185,619
=============
</TABLE>
See notes to financial statements.
F-11
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
Year (January 11,
Ended 1996) to Cumulative
December 31, December 31, from
1997 1996 Inception
----------------- ----------------- ----------------
<S> <C> <C> <C>
Net Sales .................................................. $ 3,066,489 $ 1,859,936 $ 4,926,425
Cost of Sales .............................................. 2,183,275 1,498,486 3,681,761
------------- ------------- -------------
Gross Profit ............................................... 883,214 361,450 1,244,664
------------- ------------- -------------
Other Operating Expenses:
Marketing and distribution .............................. 6,077,555 3,140,114 9,217,669
Product development ..................................... 434,334 584,976 1,019,310
General and administrative .............................. 3,751,917 1,782,796 5,534,713
------------- ------------- -------------
10,263,806 5,507,886 15,771,692
------------- ------------- -------------
Loss Before Other Expenses ................................. (9,380,592) (5,146,436) (14,527,028)
------------- ------------- -------------
Other Income (Expenses):
Interest income ......................................... 64,540 21,570 86,110
Interest expense, including amortization of discount of
$470,372 in 1997 and $250,000 in 1996 .................. (660,429) (408,901) (1,069,330)
Financing costs, including amortization of $424,329
in 1996 ................................................ (29,500) (773,772) (803,272)
Costs in connection with unsuccessful financing ......... -- (161,289) (161,289)
Other expenses .......................................... (5,762) (49,476) (55,238)
------------- ------------- -------------
(631,151) (1,371,868) (2,003,019)
------------- ------------- -------------
Net Loss ................................................... $ (10,011,743) $ (6,518,304) $ (16,530,047)
============= ============= =============
Net Loss per Common Share .................................. $ (2.24) $ (3.11)
============= =============
</TABLE>
See notes to financial statements.
F-12
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock Common Stock
------------------------- ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ------------- -------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Inception (January 11, 1996)
to December 31, 1996:
Capital contribution
represented by costs and
expenses paid on behalf of
the Company by Innopet,
Inc. ($1.88 per share) ........ -- $ -- -- $ -- 1,182,432 $ 11,824
Sale of common stock
($3.20 per share):
InnoPet, Inc. ................. -- -- -- -- 43,497 435
Officers and employees, in
exchange for notes
receivable ................... -- -- -- -- 652,449 6,524
Interest accrued on notes
receivable on sale of
common stock ................. -- -- -- -- -- --
Estimated fair value of
warrants issued in con-
nection with private
placement financing .......... -- -- -- -- -- --
Sale of units (common
stock and warrants) in
Initial Public Offering
($4.00 per unit), net of
related costs ................ -- -- -- -- 2,587,500 25,875
Sale of warrants to under-
writer ....................... -- -- -- -- -- --
Net loss ...................... -- -- -- -- -- --
-- ----------- -- ----------- --------- --------
Balance, December 31, 1996 -- -- -- -- 4,465,878 44,658
Year Ended December 31,
1997:
Sale of Series A preferred
stock $4.00 per share,
net of related costs ......... 625,000 2,500,000 -- -- -- --
Preferred stock warrants ...... -- -- -- -- -- --
Sale of Series B preferred
stock, $100 per share,
net of related costs ......... -- -- 10,000 1,000,000 -- --
Estimated fair value of
common stock warrants
issued in connection
with preferred stock and
notes payable ................ -- -- -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Notes and
Deficit Interest
Accumulated Receivable
Additional During the on Sale of Treasury Stock
Paid-In Development Common ------------------
Capital Stage Stock Shares Amount Total
-------------- --------------- --------------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Inception (January 11, 1996)
to December 31, 1996:
Capital contribution
represented by costs and
expenses paid on behalf of
the Company by Innopet,
Inc. ($1.88 per share) ........ $ 2,209,524 $ -- $ -- -- $ -- $ 2,221,348
Sale of common stock
($3.20 per share):
InnoPet, Inc. ................. 138,755 -- -- -- -- 139,190
Officers and employees, in
exchange for notes
receivable ................... 2,081,315 -- (2,087,839) -- -- --
Interest accrued on notes
receivable on sale of
common stock ................. 70,350 -- (70,350) -- -- --
Estimated fair value of
warrants issued in con-
nection with private
placement financing .......... 250,020 -- -- -- -- 250,020
Sale of units (common
stock and warrants) in
Initial Public Offering
($4.00 per unit), net of
related costs ................ 8,414,872 -- -- -- -- 8,440,747
Sale of warrants to under-
writer ....................... 23 -- -- -- -- 23
Net loss ...................... -- (6,518,304) -- -- -- (6,518,304)
----------- ------------- ------------- ---- ----- ------------
Balance, December 31, 1996 13,164,859 (6,518,304) (2,158,189) -- -- 4,533,024
Year Ended December 31,
1997:
Sale of Series A preferred
stock $4.00 per share,
net of related costs ......... (513,200) -- -- -- -- 1,986,800
Preferred stock warrants ...... 100 -- -- -- -- 100
Sale of Series B preferred
stock, $100 per share,
net of related costs ......... (188,489) -- -- -- -- 811,511
Estimated fair value of
common stock warrants
issued in connection
with preferred stock and
notes payable ................ 676,964 -- -- -- -- 676,964
</TABLE>
F-13
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
Class A Preferred Stock Class B Preferred Stock Common Stock
------------------------- ----------------------- ------------------------
Shares Amount Shares Amount Shares Amount
---------- ------------- -------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to
InnoPet, Inc. in satisfac-
tion of debt ($3.32 per
share) ......................... -- -- -- -- 396,847 3,969
Common stock issued for
services in connection
with issuance of common
shares, ($4.00 per share) ...... -- -- -- -- 40,000 400
Common stock issued in
settlement of dispute
($5.00 per share) .............. -- -- -- -- 26,000 260
Acquisition of treasury stock
($3.45 per share) .............. -- -- -- -- -- --
Collateral common shares
held in treasury ............... -- -- -- -- -- --
Interest accrued on notes
receivable on sale of com-
mon stock ...................... -- -- -- -- -- --
Net loss ........................ -- -- -- -- -- --
-- -- -- -- -- --
------- ---------- ------ ---------- --------- -------
Balance, December 31, 1997 625,000 $2,500,000 10,000 $1,000,000 4,928,725 $49,287
======= ========== ====== ========== ========= =======
<CAPTION>
Notes and
Deficit Interest
Accumulated Receivable
Additional During the on Sale of Treasury Stock
Paid-In Development Common -----------------------
Capital Stage Stock Shares Amount Total
--------------- ---------------- ---------------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Common stock issued to
InnoPet, Inc. in satisfac-
tion of debt ($3.32 per
share) ......................... 1,313,561 -- -- -- -- 1,317,530
Common stock issued for
services in connection
with issuance of common
shares, ($4.00 per share) ...... (400) -- -- -- -- --
Common stock issued in
settlement of dispute
($5.00 per share) .............. 129,740 -- -- -- -- 130,000
Acquisition of treasury stock
($3.45 per share) .............. -- -- 3,236 957 (3,236) --
Collateral common shares
held in treasury ............... -- -- -- 600,000 -- --
Interest accrued on notes
receivable on sale of com-
mon stock ...................... 119,653 -- (119,653) -- -- --
Net loss ........................ -- (10,011,743) -- -- -- (10,011,743)
----------- ------------- ------------ ------- -------- --------------
Balance, December 31, 1997 $14,702,788 $ (16,530,047) $ (2,274,606) 600,957 $ (3,236) $ (555,814)
=========== ============= ============ ======= ======== ==============
</TABLE>
See notes to financial statements.
F-14
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year
Ended
December 31,
1997
-----------------
<S> <C>
Cash Flows from Operating Activities:
Net loss ...................................................................... $ (10,011,743)
Adjustments to reconcile net loss to net cash used in operating activities:
Costs and expenses paid on behalf of Company by InnoPet, Inc. ................ --
Depreciation ................................................................. 114,933
Amortization:
Slotting fees ............................................................... 1,244,091
Financing costs ............................................................. --
Original issue discount ..................................................... 472,372
Other ....................................................................... 129,470
Provision for doubtful accounts .............................................. 574,181
Interest paid from proceeds of public offering ............................... --
Offsets against accounts receivable for slotting fees ........................ (395,402)
Loss on disposal of equipment ................................................ 341
Non-cash expense related to issuance of shares in settlement of dispute ...... 39,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ....................................................... (1,120,377)
Inventories ............................................................... (863,091)
Prepaid expenses and other current assets ................................. (1,255,148)
Deposits and other assets ................................................. 143,728
Increase (decrease) in:
Accounts payable, trade ................................................... 2,245,965
Accounts payable, slotting fees ........................................... (2,420)
Accounts payable, InnoPet Inc. ............................................ (158,373)
Accrued expenses and other current liabilities ............................ 162,096
-------------
Net cash used in operating activities .................................... (8,680,377)
-------------
Cash Flows from Investing Activities:
Acquisition of property and equipment ......................................... (379,907)
-------------
Cash Flows from Financing Activities:
Payments on capital lease obligation .......................................... (24,900)
Proceeds from initial public offering ......................................... --
Proceeds from issuance of preferred stock ..................................... 2,986,900
Proceeds of long-term financing from InnoPet Inc., net ........................ --
Proceeds from private placement financing ..................................... --
Proceeds from notes payable ................................................... 1,862,500
Offering costs ................................................................ --
Deferred financing costs ...................................................... --
-------------
Net cash provided by financing activities ................................ 4,824,500
-------------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... (4,235,784)
Cash and Cash Equivalents, Beginning ........................................... 4,614,312
-------------
Cash and Cash Equivalents, Ending .............................................. $ 378,528
=============
Supplemental Disclosures of Cash Flow Information:
Non-cash investing and financing activities:
Common stock issued to InnoPet, Inc. in satisfaction of debt ................. $ 1,317,530
=============
Common stock issued on behalf of InnoPet, Inc. as settlement of dispute ...... $ 91,000
=============
Capital lease obligation incurred for acquisition of equipment ............... $ 44,000
=============
Expenditures for various assets paid on behalf of Company by InnoPet Inc.:
Product formulae, non-compete agreement and inventory .......................
Deferred financing costs ....................................................
Deferred slotting fees ......................................................
Property and equipment and other assets .....................................
Deferred financing costs paid from proceeds of
private placement financing .................................................
Offering costs paid from proceeds of Initial Public Offering .................
Notes payable paid from the proceeds of Initial Public Offering ..............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Inception
(January 11,
1996) to Cumulative
December 31, from
1996 Inception
----------------- -----------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ...................................................................... $ (6,518,304) $ (16,530,047)
Adjustments to reconcile net loss to net cash used in operating activities:
Costs and expenses paid on behalf of Company by InnoPet, Inc. ................ 1,580,327 1,580,327
Depreciation ................................................................. 27,354 142,287
Amortization:
Slotting fees ............................................................... 1,094,845 2,338,936
Financing costs ............................................................. 872,759 872,759
Original issue discount ..................................................... -- 472,372
Other ....................................................................... 120,009 249,479
Provision for doubtful accounts .............................................. -- 574,181
Interest paid from proceeds of public offering ............................... 61,944 61,944
Offsets against accounts receivable for slotting fees ........................ (881,117) (881,117)
Loss on disposal of equipment ................................................ -- 341
Non-cash expense related to issuance of shares in settlement of dispute ...... 39,000
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable ....................................................... (219,011) (1,734,790)
Inventories ............................................................... (554,077) (1,417,168)
Prepaid expenses and other current assets ................................. (951,010) (2,206,158)
Deposits and other assets ................................................. (143,728) --
Increase (decrease) in:
Accounts payable, trade ................................................... 483,435 2,729,400
Accounts payable, slotting fees ........................................... 539,095 536,675
Accounts payable, InnoPet Inc. ............................................ 724,394 566,021
Accrued expenses and other current liabilities ............................ 276,765 438,861
------------- -------------
Net cash used in operating activities .................................... (3,486,320) (12,166,697)
------------- -------------
Cash Flows from Investing Activities:
Acquisition of property and equipment ......................................... (84,540) (464,447)
------------- -------------
Cash Flows from Financing Activities:
Payments on capital lease obligation .......................................... -- (24,900)
Proceeds from initial public offering ......................................... 6,851,487 6,851,487
Proceeds from issuance of preferred stock ..................................... -- 2,986,900
Proceeds of long-term financing from InnoPet Inc., net ........................ 202,014 202,014
Proceeds from private placement financing ..................................... 1,672,236 1,672,236
Proceeds from notes payable ................................................... -- 1,862,500
Offering costs ................................................................ (472,641) (472,641)
Deferred financing costs ...................................................... (67,924) (67,924)
------------- -------------
Net cash provided by financing activities ................................ 8,185,172 13,009,672
------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... 4,614,312 378,528
Cash and Cash Equivalents, Beginning ........................................... -- --
------------- -------------
Cash and Cash Equivalents, Ending .............................................. $ 4,614,312 $ 378,528
============= =============
Supplemental Disclosures of Cash Flow Information:
Non-cash investing and financing activities:
Common stock issued to InnoPet, Inc. in satisfaction of debt .................
Common stock issued on behalf of InnoPet, Inc. as settlement of dispute ......
Capital lease obligation incurred for acquisition of equipment ...............
Expenditures for various assets paid on behalf of Company by InnoPet Inc.:
Product formulae, non-compete agreement and inventory ....................... $ 1,072,772
=============
Deferred financing costs .................................................... $ 227,071
=============
Deferred slotting fees ...................................................... $ 291,957
=============
Property and equipment and other assets ..................................... $ 195,732
=============
Deferred financing costs paid from proceeds of
private placement financing ................................................. $ 327,764
=============
Offering costs paid from proceeds of Initial Public Offering ................. $ 1,436,611
=============
Notes payable paid from the proceeds of Initial Public Offering .............. $ 2,000,000
=============
</TABLE>
See notes to financial statements.
F-15
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Capitalization
InnoPet Brands Corp. (the "Company") was incorporated as InnoPet Products
Corp. under the laws of the state of Delaware on January 11, 1996.
On May 15, 1996, the Company amended its Certificate of Incorporation to
change its name to InnoPet Brands Corp., and to increase the Company's
authorized common stock to consist of 25,000,000 shares of common stock, with a
par value of $.01 per share, and 5,000,000 shares of undesignated preferred
stock. The Board of Directors has the authority to issue the undesignated
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions of designated preferred stock.
After having amended the Certificate of Incorporation, the Company issued
shares of common stock to InnoPet Inc. in consideration for the capital
contributions made by InnoPet Inc. (see Note 8), resulting in a total of
1,182,432 shares of common stock being issued and outstanding.
On June 1, 1996, the Company sold 652,449 shares of common stock to
officers and employees and 43,497 shares of common stock to InnoPet Inc. (see
Note 8). On December 10, 1996, the Company completed the Initial Public
Offering of its securities. The offering resulted in the issuance of 2,250,000
units, each unit consisting of one share of common stock and one redeemable
warrant. Shortly thereafter, an additional 337,500 units were sold upon the
exercise of an over-allotment option by the underwriter resulting in an
aggregate of 2,587,500 units sold at a price of $4.00 per unit. Subsequent to
the initial public offering, the Company ceased being a subsidiary of InnoPet
Inc.
During 1997, the Board of Directors authorized the issuance of two series
of preferred stock, Series A and Series B. Series A is a 4% cumulative
convertible preferred stock with a $.01 per share par value and a $4.00
liquidation value. Each share is convertible into one share of the Company's
common stock. The Series B is an 8% cumulative convertible preferred stock with
a $100 per share par value and a $100 per share liquidation value. Each share
is convertible into common shares at 80% of the average closing bid price for
five trading days prior to conversion, or a maximum of $6.00.
Business
The Company produces, markets and sells premium dog food through
supermarkets and grocery stores under the name InnoPet Veterinarian Formula Dog
Food.
Use of Estimates
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the financial
statements, management is required to make estimates and assumptions that
affect the reported amount of assets and liabilities as of the date of the
balance sheet and operations for the periods. Material estimates as to which it
is reasonably possible that a change in the estimate could occur in the near
term relate to the determination of the estimated allowance for doubtful
accounts receivable, the estimated net realizable value of certain elements of
inventories, the estimated amortization period of certain intangible assets and
the estimated liability for coupon redemptions. Although these estimates are
based on management's knowledge of current events and actions it may undertake
in the future, they may ultimately differ from actual results.
F-16
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Period of Operations
As described above, the Company was incorporated on January 11, 1996.
However, for financial reporting purposes, the accompanying financial
statements include all of the costs and expenses paid or incurred by InnoPet
Inc. on behalf of the Company, which have been recorded as capital
contributions by InnoPet Inc. (see Note 8).
Revenue Recognition
The Company recognizes revenue from product sales when products are
shipped to customers. The Company does not grant return privileges to
customers, but does recognize credits for damaged goods when such claims are
appropriately filed by customers.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash, money market funds
at broker/dealers and accounts receivable.
Cash and Money Market Funds
At various times during the year, the Company had deposits in financial
institutions in excess of federally insured limits. At December 31, 1997, the
Company had deposits in excess of federally insured limits of approximately
$445,000. The Company maintains its cash, which consists primarily of demand
deposits, with high quality financial institutions, which the Company believes
limits these risks.
Accounts Receivable
The Company sells products to grocery chain stores and supermarkets and
extends credit based on an evaluation of the customer's financial condition,
generally without requiring collateral. Exposure to losses on receivables is
expected to vary by customer due to the financial condition of each customer.
The Company monitors exposure to credit losses and maintains allowances for
anticipated losses considered necessary under the circumstances. Such
allowances represent the amounts which, in management's judgment, are
considered adequate to absorb charge-offs of accounts which may become
uncollectible. The adequacy of the allowances is determined by management's
continuing evaluation of the components of accounts receivable in light of
expected loss experience, present economic conditions, and other factors
considered relevant by management.
Cash Equivalents
For the purpose of the statement of cash flows, the Company classifies all
highly liquid investments with original maturities of three months or less as
cash equivalents. Such investments are comprised of money market funds
maintained with a financial institution.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
by the first-in, first-out method, and market by estimated net realizable
value.
Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
are stated at the present value of minimum lease payments or at cost, whichever
is less. Expenditures for major betterments and additions are charged to the
asset accounts, while replacements, maintenance and repairs which do not extend
the lives of the respective assets are charged to expense currently.
F-17
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Property and Equipment
Depreciation on property and equipment is calculated on the straight-line
method over the estimated useful lives of the assets. Equipment under capital
leases and leasehold improvements are amortized on the straight-line method
over the shorter of the lease term or estimated useful life of the asset. The
estimated useful lives of the furniture, fixtures and equipment range generally
from 1 to 10 years.
Product Formulae Acquisition Costs
Product formulae acquisition costs represent the cost of acquiring the
formulae to the pet food products that the Company produces and sells (see Note
6), together with the incremental costs incurred (primarily professional fees)
that were directly related to the acquisition of the formulae. These costs are
being amortized over an estimated useful life of 10 years. Amortization expense
totaled $27,542 for 1997 and $26,574 for 1996.
The Company evaluates the recoverability of the product formulae
acquisition costs on a regular periodic basis, based upon the projected future
amount of profits reasonably expected to be generated from sales of such
products. Any diminution in value of such costs will be charged to expense when
determined.
Deferred Slotting Fees
Slotting fees are fees charged manufacturers by retailers in order to
facilitate the introduction of new products. The fees represent charges for
warehouse space (slots) to be used to store a manufacturer's products, charges
for retail shelf space and related shelf sets to make room for the products and
reimbursement of retailer expenses (entering new items into their computer
systems and in some cases marketing support provided by the retailer). The
practice by retailers of charging slotting fees is a standard industry
practice.
Many retailers, rather than remitting payment for amounts due for the
purchase of product to the Company and receiving payment of slotting fees from
the Company, choose to offset slotting fees against amounts due for product and
pay only the balance. During the periods ended December 31, 1997 and 1996,
$395,400 and $881,000, respectively, of accounts receivable were settled by
offsetting slotting fees due to the retailer.
It is the expectation of the Company that all slots acquired will be
available for the Company's products indefinitely. At a minimum, however,
retailers allow new products six to twelve months to demonstrate that they can
contribute to profitability. Retailers will continue to carry products which
are profitable; products which do not provide an adequate return may be
discontinued. The Company has created a formal policy with regard to slotting,
whereby the Company requires that retailers confirm that the product will be
carried for a minimum of six months. In September 1997, the Company began to
require that the retailers comply with the specifications of the slotting
agreement for at least twelve months in order to remain eligible for slotting
allowances. Slots will be made available to the Company for a period of time
ranging from six months to indefinitely. Slotting fees are recorded by the
Company upon agreement by the retailer to carry the Company's product and
execution of the slotting agreement.
The benefits to be derived from slotting fees extend for a period of time
estimated to range from six months to indefinitely. The period of benefit
begins when the retailer receives its first delivery of product. Accordingly,
the Company capitalizes these costs, and amortizes them over a period of six or
twelve months, beginning when the retailer accepts delivery of the first
shipment of product.
Estimated Liability for Coupon Redemptions
The Company utilizes promotional coupons as a component of its marketing
strategy. The financial statements include an accrual for the estimated
liability for coupons which are circulated, but not redeemed as of the
F-18
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
balance sheet date. This estimated liability is net of an estimate of the
percentage of coupons which the Company believes will not be redeemed based
upon industry practice and the Company's limited experience to date. As of
December 31, 1997, the estimated liability for promotional coupon redemptions
was approximately $27,000.
Offering Costs
Costs incurred in connection with the initial public offering of
securities and the subsequent private placements of convertible preferred
stock, consisting of professional fees directly associated with the sale of
those securities, have been charged to additional paid in capital in December
1997 and 1996, respectively.
Certain other professional fees which were incurred in connection with
other financings, but only indirectly associated with the initial public
offering, aggregated $161,289, and have been charged to expense during the
period from inception (January 11, 1996) to December 31, 1996.
Financing Costs
Financing costs represent the costs incurred by InnoPet Inc. to raise
certain debt financing, the proceeds of which were used for the developmental
activities of the Company. Those costs incurred relating to debt obligations of
InnoPet Inc. have been assigned to the Company and recorded as a capital
contribution by InnoPet Inc. These costs were amortized over the term of the
related debt (six to twelve months) and at December 31, 1996 were fully
amortized.
In addition, the Company has incurred costs in connection with the private
placement financing which was consummated in August 1996. These costs were
amortized over the outstanding four-month term of the private placement
financing debt, as measured by the date of repayment of this debt from the
proceeds of the initial public offering in December, 1996 (see Note 11).
Non-Compete Agreement
The allocated costs attributable to the non-compete agreement, included as
part of the Asset Purchase Agreement (see Note 6) have been deferred and are
being amortized over the three-year term of the covenant.
Income Taxes
The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which
requires recognition of deferred tax liabilities and assets for expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred tax liabilities and assets are
determined based on the differences between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the differences are expected to reverse.
Advertising Costs
Advertising costs, included in marketing and distribution costs, are
charged to expense as incurred. Advertising costs incurred for 1997 amounted to
approximately $140,000; advertising costs for 1996 were not material.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation," which is effective for the accompanying financial
statements of the Company. SFAS 123 requires extended disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured
F-19
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
based on the fair value of the equity instrument awarded. Companies are
permitted, however, to apply Accounting Principles Board Opinion No. 25 (APB
25), which recognizes compensation cost based on the intrinsic value of the
equity instrument awarded. The Company accounts for its stock-based
compensation awards to employees under the provisions of APB 25, and will
disclose the required pro forma effect on net income and earnings per share at
such time as a material number of options are granted.
Net Loss Per Common Share
Net loss per common share has been computed based on the weighted average
number of shares of common stock outstanding during the period. In addition,
all the common shares sold during the period prior to the initial public
offering have been treated as outstanding during the entire period in
contemplation of the initial public offering (see Note 11), pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins. Diluted earnings
per share, assuming exercising of the options, warrants granted, convertible
preferred stock, and convertible debt is not presented as the effect of
conversion is antidilutive. The number of shares used in the computation was as
follows:
1997 .............. 4,474,000 shares
1996 .............. 2,094,000 shares
NOTE 2. BASIS OF PRESENTATION
As described above, the Company was incorporated on January 11, 1996, and,
since that time, together with InnoPet Inc., has been primarily involved in
organizational activities, developing a strategic plan for the marketing and
distribution of its pet food products, and raising capital. Planned operations,
as described above, have commenced, but revenue therefrom generated to date is
not considered significant in relation to the Company's strategic plan.
Accordingly, the Company is considered to be in the development stage, and the
accompanying financial statements represent those of a development stage
enterprise.
The accompanying financial statements have been presented in accordance
with generally accepted accounting principles, which assume the continuity of
the Company as a going concern. However, as discussed above, the Company is in
the development stage and, therefore has generated little revenue to date. As
reflected in the accompanying financial statements, the Company has incurred
net losses of approximately $10,012,000 in 1997 and $6,518,000 in 1996, and
reflects a deficit accumulated during the development stage of approximately
$16,530,000 as of December 31, 1997. Additionally, from time to time the
Company has been unable to make principal and interest payments on debt
instruments on a timely basis and, consequently, has been in default of those
agreements (see Note 14). Further, on March 20, 1998 the Company was delisted
by the NASDAQ Small Cap market for failing to meet the current net tangible
asset requirement of NASDAQ, which is $2,000,000 (see Note 14). These
conditions raise substantial doubt as to the ability of the Company to continue
as a going concern.
F-20
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 2. BASIS OF PRESENTATION -- (Continued)
Management's plans with regard to this matter encompass the following
actions:
Business Plan
The Company has adopted, and is in the process of implementing, a business
plan intended to define the Company's strategy for growth. In June 1996,
the Company commenced sales of its formula dog food to supermarkets in the
Greater Metropolitan New York area. As of December 31, 1997, the Company
has sold product in the following markets: the Greater Metropolitan New
York area; Philadelphia and other areas of Pennsylvania; the
Baltimore/Washington, DC area; Virginia; North Carolina; South Carolina;
Georgia; Alabama; Tennessee; Texas; and Florida.
As of August, 1997, the Company has increased its distribution in existing
markets through initial deliveries to the Stop & Shop, Price Chopper, Winn
Dixie/Atlanta Division, and BiLo chains. In 1998, the Company anticipates
it will continue implementation of its national distribution rollout, with
an emphasis on expanding into the western states.
In 1997, the Company began expansion of its line of dog foods with the
introduction of Lamb and Rice with Barley formula in its existing markets.
Additionally, the Company plans to introduce a line of dry cat foods within
the next twelve months.
Marketing Plan
The Company is in the process of implementing an overall marketing strategy
which commenced in February, 1997. Programs include: radio and newspaper
advertising; free-standing inserts; in-store couponing, shopping cart
signage and floorminders; trial size displays; store feature ads and
circulars; direct mail sampling programs to targeted consumers,
veterinarians and breeders; newspaper sample pouches; and extensive
in-store demonstrations with sampling.
In June 1997, the Company entered into long-term agreements with North
Shore Animal League and the Pet Savers Foundation, whereby InnoPet
Veterinarian Formula pet foods will be exclusively fed to in-house animals
and recommend to adopters by both of these not-for-profit humane
organizations which adopt out more than one million animals per year. In
addition, adopters will be provided with product samples, literature and
coupons, and will be able to purchase the products exclusively in retail
stores of participating adoption centers.
In connection with the above ventures, the Company is currently
participating in a cross-promotion program with Warner Home Video that
includes a consumer cash rebate and donation to the Pet Savers Foundation
for the combined purchase of InnoPet products and the "Shiloh" home video
cassette.
Subsequent Financing
On March 23, 1998 the Company entered into a Subscription Agreement whereby
the Company will issue a total of $3,600,000 of common stock over a
twenty-four month period based upon the payment of $150,000 each month and
a per share purchase price equal to 80% of the lowest closing bid price for
the Common Stock for the twenty trading days preceding each investment
date; and the grant by the Company of an option to purchase up to a total
of $50,000,000 of common stock over a twenty-four month period based upon a
per share purchase price equal to 85% of the lowest closing bid price for
the Common Stock for the five trading days preceding each investment date.
The Subscription Agreement provides however that the investor will forego
funding the monthly investment in the event that the average closing bid
price for a share of commmon stock as quoted on the OTC Bulletin Board for
the five trading days preceding any monthly investment falls below $2.00
per share. On March 23, 1998 the closing bid price was $1.125.
F-21
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 2. BASIS OF PRESENTATION -- (Continued)
There can be no assurances that the closing bid price for a share of common
stock will equal or exceed $2.00. Additionally, the Company does not
presently have a sufficient number of authorized and unissued shares to
issue should the investors choose to exercise the option. The Company plans
to seek stockholder approval to amend its certificate of incorporation
accordingly.
In February 1998, the Company issued units consisting of a 10% promissory
note in the principal amount of $25,000 and a warrant to purchase 25,000
shares of the Company's common stock. The note has a stated interest rate
of 10% per annum and a maturity date 90 days after the date of execution.
The warrant is exercisable as of the closing and expires on December 5,
2001 at an exercise price of $6.00 per share. Proceeds from the sale of the
units approximated $200,000.
In order to achieve its financial plan, the Company is seeking additional
funding, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional funding, the Company will be
required to modify its current business plan. There can be no assurance
that the Company will be able to obtain such additional funding. The
Company has discussed working capital financing with banks and factors.
There can be no assurance that any credit facility will be available to the
Company, or if available, that it will be available on acceptable terms.
The eventual outcome of the success of management's plans cannot be ascertained
with any degree of certainty. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
NOTE 3. ACCOUNTS RECEIVABLE
Trade ........................................ $ 739,298
Slotting fee chargebacks ..................... 369,529
Reclamation and other chargebacks ............ 626,783
----------
1,735,610
Less allowance for doubtful accounts ......... 575,000
----------
$1,160,610
==========
The Company, in the ordinary course of business, has three components of
accounts receivable; trade, slotting fee chargebacks and reclamation and other
chargebacks. Slotting fee chargebacks result from customer non-compliance with
the slotting agreements. If the Company determines that a customer is not in
compliance with the slotting agreement, it is Company policy to bill the
customer for slotting credits previously taken against the purchase of
merchandise.
Reclamation and other chargebacks result from billing the customer for
credits taken for returned product or other items which the Company determines
are outside the parameters allowed by the Company's policies relating to these
items.
NOTE 4. INVENTORIES
Raw materials ............ $1,177,771
Work in process .......... 101,625
Finished product ......... 641,803
----------
$1,921,199
==========
F-22
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 5. PROPERTY AND EQUIPMENT
Die plates ....................................... $104,221
Computers, office equipment and software ......... 395,522
Furniture and fixtures ........................... 59,555
Leasehold improvements ........................... 9,146
--------
568,444
Less accumulated depreciation .................... 141,833
--------
$426,611
========
The Company is obligated under a capital lease that expires in January,
2000. At December 31, 1997, the gross amount of property and equipment and
related accumulated amortization relating to the capital lease was as follows:
Computers, office equipment and software ......... $ 56,000
Less accumulated amortization .................... 9,333
--------
$ 46,667
========
Amortization of the asset held under the capital lease is included with
depreciation expense. Depreciation expense for 1997 and 1996 was $114,933 and
$27,354, respectively.
NOTE 6. ACQUISITION OF PRODUCT FORMULAE AND INVENTORY AND NON-COMPETE AGREEMENT
In accordance with the terms of an Asset Purchase Agreement dated January
16, 1996 among the Company, InnoPet Inc. and a subsidiary of ConAgra, Inc., on
the Initial Closing Date, as defined (January 16, 1996), the Company acquired
all of the right, title and interest in and to the formulae which were used in
connection with the pet food business that had been known as KenVet Nutritional
Care. On the Final Closing Date, as defined (on or before February 15, 1996),
the Company acquired all of the right, title and interest in and to certain
other assets, as defined, comprised primarily of the current inventory existing
as of the Final Closing Date. The Company did not assume any liabilities,
obligations or commitments relating to the business. In addition, in order to
induce the Company to purchase the assets pursuant to the agreement, ConAgra
agreed that for a three year period following the Initial Closing Date, it will
not manufacture or sell certain nutritional finished pet food products.
Additionally, the Company agreed to purchase and ConAgra agreed to supply
certain products at stipulated prices for the next three years, subject to
cancellation by either party without penalty upon sixty days notice.
The purchase price for the assets, as finally negotiated, was a total of
$641,021. Of this total amount, $250,000 was paid on the Initial Closing Date
in exchange for the formulae, and the balance of $391,021 was to be paid on the
Final Closing Date in exchange for the remaining assets. The $250,000 was paid
by InnoPet Inc. on the Initial Closing Date, and has been recorded as a capital
contribution by InnoPet Inc.. The $391,021 was paid by InnoPet Inc. in April
and May 1996 and has been reflected as a capital contribution by InnoPet Inc.
in the accompanying financial statements.
The Company has allocated the various rights and resources inherent in the
agreement as follows: $250,000 as product formulae acquisition costs, based on
the negotiated amount contained in the agreement; $116,021 as inventory, based
upon management's estimate of the liquidation value of the inventory; and
$275,000 as a non-compete agreement, based upon management's evaluation of the
estimated economic benefit expected to be derived from this right. The Company
believes that the allocation made to the tangible and intangible assets set
forth above is a reasonable measurement of the rights and resources inherent in
the agreement.
F-23
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
In connection with the acquisition of the formulae, non-compete agreement
and inventory pursuant to the Asset Purchase Agreement, it was intended by the
Company that the substance of the transaction was to acquire the formulae to
the pet food products in order to gain entrance into this line of business and
augment InnoPet Inc.'s pet food business.
However, in order to effect the acquisition of the formulae, it was
necessary to purchase the inventory as part of the acquisition transaction. The
Company considered the purchase of the inventory as incidental to the
acquisition of the formulae, and utilized the raw material portion of the
inventory in the production of the Company's pet food products when possible,
recouped its investment in the remainder of the inventory wherever possible and
disposed of the portion which was neither useable or salable prior to December
31, 1996. Additionally, the Company's business plan for the pet food business
contemplates operation of this business in a manner significantly different
from that employed by ConAgra, including such attributes as trade name, market
distribution system, employee base, physical facilities, production techniques
and sales force.
NOTE 7. NOTES PAYABLE
EIL (a) ........................... $1,500,000
IBF (b) ........................... 262,500
Other (c) ......................... 100,000
1,862,500
Less unamortized discount ......... 146,103
----------
$1,716,397
==========
(a) On July 9, 1997, the Company secured short-term financing in the form
of a senior convertible note of $1,500,000 from Entrepreneurial Investors, Ltd.
("EIL"), a Bahamas corporation and principal stockholder of the Company. The
note has a stated interest rate of 14%, matures on January 15, 1998 and is
collateralized with 600,000 shares of the Company's common stock, held in
escrow at December 31, 1997. The terms of the senior convertible note provide,
among other things, that the note shall be a general obligation of the Company
and senior and not subordinated to any and all obligations of the Company
regardless of whether such obligations are presently existing or subsequently
incurred. The principal and interest may be converted into common stock of the
Company at $4.50 per share at the option of the holder. Additionally, the
agreement provides that the Company shall issue 225,000 warrants to purchase
shares of the Company's common stock at $6.00 per share to the holder. These
warrants are subject to the same terms and conditions as the warrants currently
publicly traded. The fair value of these warrants was estimated to be $415,575,
based on the market value of the warrants currently traded. This amount has
been recorded in these financial statements as a discount on notes payable with
a corresponding credit to additional paid-in capital and is being amortized
over the term of the note. The Company has failed to make any interest or
principal payments of the senior notes and, consequently, EIL is seeking
release of the collateral shares as satisfaction of the debt.
(b) On December 3, 1997, the Company borrowed $262,500 from a financial
institution, Interbank Special Purpose Corporation II ("IBF"). The note matures
90 days from issuance, has a stated interest rate of 18% and is collateralized
by the Company's receivables at the issuance date. Subsequently, on January 28,
1998, the loan was extended and increased to $762,500; the net proceeds
amounted to approximately $350,000. The new note matures April 27, 1998, has a
stated interest rate of 18% and is collateralized by, among other things, all
inventory, equipment, vehicles, accounts receivable, trade names and trademarks
of the Company (see Note 14).
(c) In December 1997, the Company completed a private placement consisting
of promissory notes in the principal amount of $125,000 including $100,000
payable to a company in which a director of the Company holds a membership
interest. The notes have stated interest rates of 10% and mature 90 days from
issuance. Additionally, the loan agreements provide that the Company issue a
total of 145,000 warrants to purchase shares of the Company's common stock at
$6.00 per share. These warrants are subject to the same terms and conditions as
the warrants currently publicly traded. The fair value of these warrants was
estimated to be $172,900 based on the market value of the warrants as currently
traded. This amount has been reflected in these financial statements as a
discount on notes payable with a corresponding credit to additional paid-in
capital, and is being amortized over the term of the notes.
F-24
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 8. RELATED PARTY TRANSACTIONS
Transactions with InnoPet Inc.
As discussed above, the Company was incorporated on January 11, 1996 as a
wholly-owned subsidiary of InnoPet Inc. During the period inception through
approximately June 30, 1996, substantially all of the Company's costs and
expenses, and the acquisition of the Company's assets, were paid or incurred on
behalf of the Company by InnoPet Inc. Such amounts have been accounted for as
capital contributions by InnoPet Inc. to the Company, and are analyzed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Costs and expenses charged to operations ............................................... $1,323,125
Initial purchase price for the acquisition of product formulae, covenant not to compete
and inventory, including $58,773 of directly associated costs.......................... 699,794
Deferred financing costs ............................................................... 198,429
----------
$2,221,348
==========
</TABLE>
The costs and expenses expended on behalf of the Company by InnoPet Inc.
were determined based upon an analysis of those costs directly associated with
or reasonably allocated to the Company's operational activities related to the
premium pet food business. Personnel costs were allocated based upon estimates
of the actual time devoted by individual employees to the Company's activities
on a monthly basis. General and administrative expenses were allocated based on
the overall average percentage derived from the personnel allocation described
above on a monthly basis. Marketing and distribution and product development
costs were primarily allocated on a direct basis. In the opinion of management,
the method used to allocate costs to the Company was considered to be fair and
reasonable under the circumstances.
See Note 12 regarding a facilities agreement with InnoPet Inc.
Debt Financing by InnoPet Inc.
On June 5, 1996, InnoPet Inc. provided debt financing to the Company in
the amount of $1,000,000. The note is a five-year unsecured note, providing for
annual principal payments of $200,000 and interest at 1% over prime (8.5% at
12/31/97) payable quarterly commencing September 1, 1996, and contains no
prepayment penalty. This note was substantially satisfied in an Exchange
Agreement dated December 23, 1997 (see below).
Accounts Payable, InnoPet Inc.
In addition to the debt financing described above, InnoPet Inc. has also
provided working capital financing to the Company on open account. Such funds
were used primarily for inventories, operating costs and expenses, and deferred
offering costs and financing costs. These working capital advances were paid in
full with the Exchange Agreement dated December 23, 1997 (see below).
Exchange Agreement With InnoPet, Inc.
On December 23, 1997, the Company entered into an Exchange Agreement with
InnoPet, Inc. Pursuant to the terms of the Exchange Agreement, the Company
satisfied $641,000 of the remaining unpaid principal of the note payable to
InnoPet, Inc., accrued interest in the amount of $132,703, and full payment of
the intercompany payable of $543,828 by the issuance of common stock shares.
The number of common shares issued in this transaction was 396,847, which was
determined by dividing the sum of the debt to be satisfied by eighty percent of
the average closing bid price for a share of common stock as reported by the
NASDAQ Small Cap Market for the five trading days preceding the closing date.
These shares will remain restricted for a period of one year.
F-25
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 8. RELATED PARTY TRANSACTIONS -- (Continued)
Note Payable InnoPet, Inc.
Subsequent to the conversion of the InnoPet, Inc. debt to common shares of
the Company, the remaining outstanding debt of $159,000 was renegotiated to
come due in June 2001. This loan will bear interest at 1% over prime (9.5% at
December 31, 1997) with interest payable quarterly.
Sale of Common Stock to Officers and Employees and InnoPet Inc.
On June 1, 1996, the Company sold an aggregate of 652,449 shares of common
stock to certain officers and employees of the Company, including the chairman
of the board and chief executive officer, for a total amount of $2,087,839, and
43,497 shares to InnoPet Inc. for $139,190 ($3.20 per share). The officers and
employees purchased their shares by means of three-year notes which bear
interest at 5.75% annually. The notes are of full recourse to the officers and
employees during the first two years of the term of the notes, and are secured
by the shares owned by the officers and employees. The purchase price of the
shares purchased by InnoPet Inc. was applied against the then outstanding
balance due to InnoPet Inc. arising from costs and expenses expended on behalf
of the Company by InnoPet Inc. In 1997, one ex-employee relinquished his right
to an aggregate of 957 shares of common stock as satisfaction of his
indebtedness to the Company. At December 31, 1997, the relinquished shares were
held in treasury at the cost of $3,236. On February 6, 1998, a former officer
assigned his 86,993 shares of common stock from this transaction and all rights
and obligations of the note serving such shares to two present officers.
In August 1997, InnoPet, Inc. canceled $91,000 of debt owed to it as
consideration for the issuance of 26,000 shares of common stock by the Company
in settlement of claims brought against InnoPet, Inc. and the Company by
certain investors.
Other
In 1997, the Company paid a director of the Company approximately $96,000
for various legal and other services which he has provided to the Company.
NOTE 9. INCOME TAXES
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
SFAS No. 109 is an asset and liability approach for computing deferred income
taxes.
The provision for income taxes has been computed on a separate return
basis. The Company does not plan to file a consolidated income tax return with
InnoPet Inc. The successful completion of the initial public offering (see Note
11) and the sale of common stock to certain officers and employees of the
Company (see Note 8), had the effect of disqualifying the Company as a member
of the consolidated group with InnoPet Inc.
As of December 31, 1997, on a separate return basis, the Company had a net
operating loss carryforward for Federal income tax reporting purposes amounting
to approximately $16,500,000, of which approximately $6,500,000 expires in 2011
and the remaining $10,000,000 expires in 2012.
F-26
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 9. INCOME TAXES -- (Continued)
The Company presently has no significant temporary differences between
financial reporting and income tax reporting. The components of the deferred
tax asset as of December 31, 1997 were as follows:
Benefit of net operating loss carryforwards ......... $6,100,000
Less valuation allowance ............................ 6,100,000
----------
Net deferred tax asset .............................. $ --
==========
As of December 31, 1997, sufficient uncertainty exists regarding the
realizability of these operating loss carryforwards and, accordingly, a
valuation allowance of $6,100,000, which related to the net operating losses,
has been established.
In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three year
period will place an annual limitation on the corporation's ability to utilize
its existing tax benefit carryforwards. Such a change in ownership occurred in
1996, based upon the sale of common stock to certain officers and employees of
the Company in June 1996 (see Note 6), and the successful completion of the
Company's initial public offering prior to December 31, 1996 (the end of the
Company's taxable year). As a result, based upon the amount of the taxable loss
incurred to December 31, 1996, the Company estimates that an annual limitation
of approximately $990,000 will apply to the net operating loss carryforward
existing as of that date ($6,500,000). The Company's utilization of its tax
benefit carryforwards may be further restricted in the event of subsequent
changes in the ownership of the Company.
NOTE 10. PRIVATE PLACEMENT FINANCING
Debt
In August 1996, the Company completed certain private placement financing
involving a total of $2,000,000 of promissory notes and 1,000,000 common stock
purchase warrants (private placement warrants). Related costs amounted to
approximately $424,000 resulting in net proceeds to the Company of
approximately $1,576,000. The promissory notes bear interest at 10% per annum.
Principal and accrued interest are payable upon the earlier of the closing of
the sale of securities or other financing yielding gross proceeds of $4,000,000
to the Company, or twelve months from date of issue. The terms of the note
contain, among other things, certain restrictions on the payment of dividends
by the Company or incurring any liability for borrowed money, except in the
ordinary course of business. Each private placement redeemable warrant entitled
the holder to purchase one share of common stock at a price equal to 150% of
the initial public offering price per unit, subject to adjustment, during the
36-month period commencing one year from the date the warrants are issued. Upon
consummation of the initial public offering, each private placement warrant was
automatically converted into a redeemable warrant having terms identical to
that of the redeemable warrants underlying the units of the initial public
offering (see Note 11).
The fair value of these warrants was estimated to be $250,000 ($.25 per
warrant) based, among other things, upon a financial analysis of the term of
the warrants. This amount has been reflected in the accompanying financial
statements as a discount on the notes payable, with a corresponding credit to
additional paid-in capital, and was amortized over the term of the notes
(four months).
In connection with the private placement financing, the Company issued to
the placement agent 200,000 placement agent warrants to purchase 200,000 shares
of common stock at an exercise price of $2 per share. These placement agent
warrants were canceled upon the consummation of the initial public offering.
F-27
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 10. PRIVATE PLACEMENT FINANCING -- (Continued)
Simultaneously with the closing of the initial public offering, these
notes, together with accrued interest, were paid in full from the proceeds. The
total amount paid aggregated $2,061,944, which included $61,944 of accrued
interest.
Equity
On April 29, 1997, the Company completed a $2,500,000 private placement of
625,000 shares of Series A 4% cumulative preferred stock, par value of $.01 per
share, at $4.00 per share. The Series A Preferred Stock is convertible at the
holder's option, into common stock, on a one share for one share basis, and
bears a cumulative dividend of 4% per annum, payable quarterly by the issuance
of additional common stock. The number of shares of common stock to be issued
as a dividend shall be determined based on the average closing bid price for
shares of the common stock for the twenty trading days preceding the record
date for the declaration of the dividend. The placement agent for this private
placement received an option to purchase 62,500 shares of Series A Preferred
Stock, which has a term of five years commencing on April 29, 1998.
On December 18, 1997, the Company entered into a private placement of up
to $4,000,000, consisting of the sale of shares of 8% Series B Cumulative
Convertible Preferred Stock of the Company at $100 per share, to Explorer
Partners LLC ("Explorer"). Explorer purchased 10,000 shares of the Series B
Preferred on December 18, 1997, for gross proceeds of $1,000,000. In accordance
with the Company's December 17, 1997 Certificate of Designation, each share of
Series B Preferred Stock is convertible at any time, at the option of the
holder thereof, into that number of shares of Common Stock which is equal to
$100 divided by 80% of the average closing bid price for a share of Common
Stock for the five trading days preceding the conversion date, provided that
such conversion price shall not exceed $6.00 per share of Common Stock. The
Series B Preferred Stock pays a quarterly dividend of 8% per annum, and is
payable, at the Company's sole option, in cash or by the issuance of shares of
Common Stock. The number of shares of Common Stock to be issued as a dividend
shall be determined based upon the average closing bid price for a share of
Common Stock for the five trading days preceding the last day of the calendar
quarter for the applicable dividend period. In connection with the private
placement, the Company issued 40,000 Redeemable Warrants to Explorer Fund
Management, LLC on December 18, 1997.
In February and March 1998, the Company sold a total of an additional
10,000 shares of the Series B Preferred Stock for gross proceeds of $1,000,000.
In connection with this sale, the Company issued a total of 40,000 Redeemable
Warrants.
NOTE 11. INITIAL PUBLIC OFFERING
In December 1996, the Company raised additional capital through an initial
public offering of its securities. The public offering consisted of 2,250,000
units, each unit consisting of one share of common stock and one redeemable
warrant. Each redeemable warrant entitles the holder to purchase one share of
common stock at 150% of the initial public offering price per unit, subject to
adjustment. In addition, there was an over-allotment option which was exercised
by the underwriter resulting in a total of 2,587,500 units being sold. Gross
proceeds totaled $10,350,000 and offering expenses aggregated $1,909,253,
resulting in net proceeds of $8,440,747.
In addition, the underwriter purchased warrants to purchase from the
Company 225,000 units for nominal consideration, which may be exercised anytime
in the four year period commencing at the beginning of the second year
following issuance, at an exercise price of 165% of the initial public offering
price.
At the time the initial public offering was completed, the Company ceased
being a subsidiary of InnoPet Inc. inasmuch as InnoPet Inc.'s ownership of the
Company's common stock amounted to only approximately 27.5% following the
completion of the public offering.
F-28
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES
Employment Agreements
The Company entered into an employment agreement with the chief executive
officer dated as of June 1, 1996 which expires on May 31, 2000. The agreement
provides, among other things, for an annual salary of $200,000 to December 31,
1997 and $250,000 thereafter; a discretionary bonus up to 25% of the annual
salary to be determined by the board of directors; and a performance bonus to
be determined by the compensation committee of the board of directors, based
upon the net earnings of the Company in any given year. The agreement also
provides for life insurance, auto and office expense reimbursements and a stock
option plan. If this agreement is terminated by the Company without cause, the
officer will be entitled to a severance payment equal to three times his
average annual salary, as defined.
The Company has also entered into employment agreements with several other
executive officers, which terminate from May, 1999 to December, 2000, contain a
one-year renewal option, generally provide for a severance payment equal to six
months of annual salary payable over six months following termination, contain
certain restrictions on competition, and provide for aggregate annual salaries
of approximately $373,000.
In June 1997, the Company and substantially all executive officers agreed
to reduce immediately each executive's salary by 25%. As of March 23, 1998 this
reduction in base salary was still in place.
Incentive Stock Plan
The Company has reserved a total of 400,000 shares of common stock for
issuance under the 1996 Stock Option Plan. The Plan provides for the award of
options, which may be either incentive stock options (ISO's) within the meaning
of the Internal Revenue Code or non-qualified options (NQO's) which are not
subject to special tax treatment. The Plan is administered by the board of
directors or a committee appointed by the board (the Administrator). Subject to
certain restrictions, the Administrator is authorized to designate the number
of shares to be covered by each award, the terms of the award, the dates on
which and the rates at which options or other awards may be exercised, the
method of payment and other terms.
The exercise price for ISO's cannot be less than the fair market value of
the stock subject to the option on the grant date. The exercise price of a NQO
shall be fixed by the Administrator at whatever price the Administrator may
determine in good faith. Unless the Administrator determines otherwise, options
generally have a 10-year term. Unless the Administrator provides otherwise,
options terminate upon the termination of a participant's employment, except
that a participant may exercise an option to the extent that it was exercisable
on the date of termination for a period of time after termination.
During 1997, 67,500 incentive stock options were granted under the Plan.
These options have an exercise price equal to the market price on January 2,
1997, which is considered to be a price at least equal to market value.
In the first quarter of 1998, 101,000 incentive stock options were granted
under the Plan, at an exercise price equal to market value.
F-29
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES -- (Continued)
Capital Leases
The Company is obligated under a lease for certain office equipment
expiring January, 2000. Future minimum capital lease payments and the net
present value of the future minimum lease payments at December 31, 1997 are as
follows:
Year Ending December 31,
1998 ................................................ $ 15,600
1999 ................................................ 15,600
2000 ................................................ 1,300
--------
Total minimum lease payments ............. ......... 32,500
Less amount representing interest ................... 1,400
--------
Present value of net minimum lease payments ......... 31,100
Current maturities .................................. 14,600
--------
$ 16,500
========
Facilities Agreement
The Company has entered into a facilities agreement with InnoPet Inc.
whereby it has agreed to lease its premises, furnishings and equipment from
InnoPet Inc. until April 30, 2001. The future minimum lease payments due under
this agreement are as follows:
Year ending December 31,
1998 ................................................ $ 310,000
1999 ................................................ 325,000
2000 ................................................ 341,000
2001 ................................................ 114,000
----------
$1,090,000
==========
Financing Consulting Agreement
On December 5, 1996, the Company entered into a financial advisory and
consulting agreement with Joseph Stevens & Company, L.P. the underwriter
involved in the initial public offering (the "Consultant"). The agreement
outlines the Consultant's duties to include, but not be limited to, rendering
advice with regards to financial reports, press releases, meetings with
securities analysts, and internal operations of the Company. The term of the
agreement is twenty-four months commencing on December 5, 1996, with
compensation of $48,000 due at commencement.
Litigation
On March 16, 1998, Entrepreneurial Investors, Ltd., a Bahamas company
("EIL"), commenced an action against the Company seeking specific performance
of the Company's obligations under a registration rights agreement dated April
28, 1997 and a bridge loan agreement, dated July 9, 1997. The complaint alleges
that the Company had an obligation to register shares of common stock
underlying 625,000 shares of the Company's Series A Convertible Preferred Stock
purchased by EIL pursuant to a subscription agreement dated as of April 28,
1997, in exchange for $2,500,000. The complaint further alleges that the
Company is obligated to register certain securities, including shares of common
stock relating to warrants acquired by EIL.
The action is currently in its preliminary stages. Although the Company
denies liability, it is contemplated that a contemplated registration
statement, when it becomes effective, will satisfy all of EIL's claims as
asserted, thereby rendering that action moot.
F-30
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 12. COMMITMENTS AND CONTINGENCIES -- (Continued)
On December 22, 1997, a vendor commenced an action against the Company for
alleged non-payment for packaging services. Plaintiff seeks money damages of
approximately $119,000, plus interest. Plaintiff filed a motion for summary
judgment on the ground of account stated. The Company filed a cross-motion for
lack of personal jurisdiction and opposed the motion by plaintiff for summary
judgment. The Company answered the complaint denying all liability and asserted
counter-claims.
NOTE 13. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The information set forth below provides disclosure of the estimated fair
value of the Company's financial instruments presented in accordance with the
requirements of Statement of Financial Accounting Standards (SFAS) No. 107.
Fair value estimates discussed herein are based upon certain market assumptions
and pertinent information available to management as of December 31, 1997.
Since the reported fair values of financial instruments are based upon a
variety of factors, they may not represent actual values that could have been
realized as of December 31, 1997 or that will be realized in the future.
The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments include
cash, accounts receivable, accounts payable and debt maturing within one year.
Fair values were assumed to approximate carrying values for these financial
instruments since they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand.
The fair value of non-current debt instruments and notes receivable have
been estimated using discounted cash flow models incorporating discount rates
based on current market interest rates for similar types of instruments or
quoted market prices, when applicable. At December 31, 1997, the differences
between the estimated fair value and the carrying value of non-current debt
instruments and notes receivable were considered immaterial in relation to the
Company's financial position.
NOTE 14. SUBSEQUENT EVENTS
Debt Financing
In January 1998, the Company increased its borrowings from IBF from
$262,500 to $762,500 (see Note 7). The net proceeds from the increase amounted
to approximately $350,000. The new note matures April 27, 1998, has a stated
interest rate of 18% payable monthly and is collateralized by the Company's
receivables, inventories, and property and equipment. In March 1998, the
Company was notified by IBF that it had failed to make interest payments in the
amount of $12,200 and, therefore, was in default under the terms of the loan.
As a result, on March 17, 1998 IBF made a written demand requesting that the
Company immediately deliver to IBF collateral.
Subscription Agreement for Sale of Common Shares
On March 23, 1998 the Company entered into a Subscription Agreement
whereby the Company will issue a total of $3,600,000 of common stock over a
twenty-four month period based upon the payment of $150,000 each month and a
per share purchase price equal to 80% of the lowest closing bid price for the
Common Stock for the twenty trading days preceding each investment date; and
the grant by the Company of an option to purchase up to a total of $50,000,000
of common stock over a twenty-four month period based upon a per share purchase
price equal to 85% of the lowest closing bid price for the Common Stock for the
five trading days preceding each investment date. The Subscription Agreement
provides however that the investor will forego funding the monthly investment
in the event that the average closing bid price for a share of commmon stock as
quoted on the OCT Bulletin Board for the five trading days preceding any
monthly investment falls below $2.00
F-31
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 14. SUBSEQUENT EVENTS -- (Continued)
per share. On March 23, 1998 the closing bid price was $1.125. There can be no
assurances that the closing bid price for a share of common stock will equal or
exceed $2.00. Additionally, the Company does not presently have a sufficient
number of authorized and unissued shares to issue should the investor choose to
exercise the option. The Company plans to seek stockholder approval to amend
its certificate of incorporation accordingly.
NASDAQ Listing Qualifications
On March 20, 1998, the Company was delisted by the NASDAQ Small-Cap Market
for failing to meet the current net tangible asset requirement of NASDAQ, which
is $2,000,000. There can be no assurances that the Company will in the future
satisfy the net tangible assets requirement of NASDAQ. The Company's securities
as of March 23, 1998 are quoted on the OTC Electronic Bulletin Board, an
inter-dealer automated quotation system sponsored and operated by the National
Association of Securities Dealers.
NOTE 15. EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS (UNAUDITED)
As discussed in Note 7, the Company has issued a senior convertible note
(the "Note") to Entrepreneurial Investors, Ltd. ("EIL"), a Bahamas corporation
and principal stockholder of the Company, in the principal amount of
$1,500,000. EIL has taken possession of the collateral and commenced an action
for specific performance demanding, among other items, that such collateral be
registered. As a consequence of the Registration Statement filed by the Company
with the SEC having gone effective on April 6, 1998, the EIL action was
rendered moot and has been voluntarily withdrawn. EIL claims that (i) the
entire principal amount of the note plus interest is due and owing to EIL (ii)
EIL has not agreed to convert the note into equity of the Company (iii) if EIL
were to convert the note into equity of the Company the shares of Common Stock
issued to EIL as collateral and in EIL's possession would be insufficient to
satisfy the amounts due under such note and (iv) the Senior Note has priority
over all other obligations of the Company, whether in existence on the date of
issuance of the Senior Note or subsequently incurred. The Company is currently
in settlement negotiations with EIL and believes that it will reach an amicable
agreement with EIL.
As disclosed in Notes 7 and 14, the Company has outstanding a secured
promissory note issued to Interbank Special Purpose Corporation II ("IBF"). On
April 27, 1998, IBF commenced an action against the Company in the Circuit
Court of the 17th Judicial Circuit of the State of Florida in and for Broward
County seeking, among other things, (i) full payment of principal and interest
on the IBF Note (ii) an accounting of all the Collateral, (iii) a judgement
foreclosing the Collateral and a deficiency judgement if the proceeds from the
sale of the Collateral are insufficient to pay any judgement obtained in the
action, and (iv) appointment of a receiver for the Company. The Company is
currently in settlement negotiations with IBF and believes that it will reach
an amicable agreement with IBF. Although the Company denies liability it is
contemplated that the Registration Statement filed in connection with this
Prospectus, in the form that it becomes effective will satisfy the Company's
obligations under a proposed settlement with IBF. If the action is not settled
the Company intends to vigorously defend this suit and to file a counterclaim
against IBF. In the event that the IBF action results in monetary damages in a
material amount in favor of IBF or the appointment of a receiver for the
Company, such event could have a material adverse effect on the Company, its
financial condition, business and operations.
As disclosed in Note 7, in December 1997, the Company completed a private
placement of 4 units (the "Units") to Curi Oil Co. LLC ("Curi"), each Unit
consisting of a promissory note of the Company in the principal amount of
$25,000, bearing interest at the rate of 10% per annum and maturing 90 days from
the issuance thereof, and Redeemable Warrants to purchase 25,000 shares of
Common Stock, expiring on December 9, 2001, at an exercise price of $6.00 per
share. The Company extended the maturity date of the promissory notes to May 30,
1998. As of the date hereof the Company has failed to make any principal or
interest payments to Curi. Any payments made by the Company to Curi may be
subject to EIL's claim of priority. A director of the Company holds a 40%
membership interest in Curi, and was issued 10,000 Redeemable Warrants in
connection with this transaction.
F-32
<PAGE>
================================================================================
No underwriter, dealer, salesperson or other person has been authorized
to give any information or to make any representations other than those
contained in this Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any date subsequent to the date hereof. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making the offer is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation. Neither the delivery of this Prospectus nor any offer or sale
made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company since the date hereof or
that the information contained in this Prospectus is correct as of any date
subsequent to the date hereof.
TABLE OF CONTENTS
Section Page
- ------- ----
Available Information ............................ 2
Summary .......................................... 3
The Company ...................................... 3
The Offering ..................................... 4
Summary Financial Information .................... 6
Risk Factors ..................................... 7
The Company ...................................... 13
Use of Proceeds .................................. 13
Price Range of Common Stock and
Redeemable Warrants ........................... 13
Dividend Policy .................................. 14
Capitalization ................................... 15
Selected Financial Data .......................... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .................................... 17
Business ......................................... 22
Management ....................................... 28
Executive Compensation and Other
Information ................................... 29
Disclosure of Commission Position on
Indemnification for Securities Act Liabilities 31
Stock Option Plan ................................ 32
Certain Transactions ............................. 33
Principal Stockholders ........................... 36
Selling Securityholders .......................... 38
Plan of Distribution ............................. 41
Description of the Company's Securities .......... 42
Shares Eligible for Future Sale .................. 43
Legal Matters .................................... 44
Experts .......................................... 44
================================================================================
================================================================================
INNOPET BRANDS
CORP.
Shares of Common Stock
and Redeemable Warrants
-----------------------------------
PROSPECTUS
-----------------------------------
June __, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Section 102(b) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the Certificate of Incorporation of each corporation
organized thereunder eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director. The
Certificate of Incorporation of the Registrant eliminates the personal
liability of directors to the fullest extent permitted by the DGCL.
Section 145 of the DGCL ("Section 145"), in summary, empowers a Delaware
corporation, within certain limitations, to indemnify its officers, directors,
employees and agents against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement, actually and reasonably incurred by them
in connection with any nonderivative suit or proceeding, if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interest of the corporation, and, with respect to a criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to derivative actions, Section 145 permits a corporation to
indemnify its officers, directors, employees and agents against expenses
(including attorneys' fees) actually and reasonably incurred in connection with
the defense or settlement of such action or suit, provided such person meets
the standard of conduct described in the preceding paragraph, except that no
indemnification is permitted in respect of any claim where such person has been
found liable to the corporation, unless the Court of Chancery or the court in
which such action or suit was brought approves such indemnification and
determines that such person is fairly and reasonably entitled to be
indemnified.
Reference is made to Article Eight of the Certificate of Incorporation of
the Registrant for the provisions which the Registrant has adopted relating to
the indemnification of officers, directors, employees and agents.
The Registrant has purchased directors' and officers liability insurance.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, payable in
connection with the sale of the Common Stock and Redeemable Warrants
(collectively the "Securities") being registered hereby. Except for the SEC
registration fee, all expenses are estimated.
Item Amount
- ---- -------
SEC registration fee ............................ $ 1,368
Printing and engraving expenses ................. 10,000
Legal fees and expenses ......................... 20,000
Auditors' accounting fees and expenses .......... 10,000
-------
TOTAL ........................................... $41,368
=======
In addition, the holders of the Securities being registered hereby will be
responsible for all selling commissions, transfer taxes and related charges in
connection with the offer and sale of the Securities offered hereby.
Item 26. Recent Sales of Unregistered Securities.
From January through August 1996, IPI contributed capital of $2,221,348 in
exchange for 1,182,432 shares of Common Stock. In June 1996, IPI also purchased
43,497 shares of Common Stock in exchange for $139,190 in financing. In August,
1997, IPI cancelled $91,000 of debt owed to it by the Company as consideration
for the issuance of 26,000 shares of Common Stock by the Company in settlement
of claims brought against IPI and the Company by certain investors.
On December 31, 1997, IPI exchanged (i) principal and accrued interest in
the aggregate amount of $773,702.97, payable pursuant to a five year note dated
June 5, 1996 from the Company to IPI, in the principal amount of $1.0 million,
which bears interest at one percent above the prime rate, and (ii) accounts
payable in
II-1
<PAGE>
the amount of $543,828.42, pursuant to a facilities agreement with the Company
(collectively, the "Debt"), for 396,847 shares of Common Stock of the Company,
which represents a number equal to the Debt divided by a number equal to eighty
percent of the average closing bid price for a share of Common Stock as then
reported by Nasdaq for the five trading days immediately preceding the closing
date (the "Exchange Rate"). The shares of Common Stock issued to IPI are not
transferable for a period of twelve months from the closing date without the
prior written consent of the Company. Pursuant to the Exchange Agreement, the
Exchange Rate shall be adjusted such that if, at any time during the one year
period following the closing date, the average closing bid price for a share of
the Company's Common Stock is less than or equal to $2.50 per share of Common
Stock for forty-five (45) consecutive days, the Company shall issue to IPI
additional shares of Common Stock equal to the difference between (a) the
number of shares of Common Stock which would have resulted if the Debt had been
exchanged at an Exchange Rate of $2.50 and (b) 396,847. In accordance with this
provision, on May 13, 1998, the Company issued to IPI an additional 130,166
shares of Common Stock.
On June 1, 1996, the Company sold a total of 652,449 shares of Common
Stock to Messrs. Duke and Masters, Ms. Duke and to 14 other employees of the
Company at that time, in exchange for three-year notes to the Company bearing
interest at 5.75% annually, in the aggregate principal amount of $2,087,839.
The notes are secured by the shares owned by the employees. Listed below are
the names of the employees who purchased the shares of Common Stock, the number
of shares purchased and the consideration paid.
Shares Consideration
---------- --------------
Linda Duke 34,797 $ 111,350
Marc Duke 417,566 $1,336,213
Robin Hunter (1) 43,497 $ 139,190
Albert A. Masters 43,497 $ 139,190
Dana Vaughn (2) 86,993 $ 278,378
Eric Zurbuchen 17,399 $ 55,677
Susan Leonhardt 1,740 $ 5,568
John Jablonski 1,305 $ 4,176
Francis Daily (1) 435 $ 1,392
Tara Slack 783 $ 2,506
Deardra Thompson 783 $ 2,506
Henry Ford 783 $ 2,506
Debra Iannaci (1) 522 $ 1,670
Michael Zealy 522 $ 1,670
Mary Lou Bole 348 $ 1,114
Pamela Medlin 261 $ 835
David Santos 435 $ 3,392
James Kane 261 $ 835
Mary Huff 174 $ 557
Eve Uydess 174 $ 557
Michelle Raglind 174 $ 557
------- ----------
TOTAL 652,449 $2,098,839
- ------------
(1) These shares have been repurchased by the Company for the value of the
underlying loan plus accrued interest.
(2) On February 6, 1998, Dana Vaughn, a former vice president of the Company,
assigned his shares of Common Stock (86,993 issued in connection with the
delivery of a promissory note) and all the rights and obligations of the
note secured by such shares, to Michael Winer and John Bieber.
In June, 1998, the Company released its security interest in 600,000
shares of Common Stock issued to certain employees of the Company and canceled
the outstanding principal and interest due on the notes issued as payment for
such shares to the extent that (i) the principal and interest due on the notes
exceeded the proceeds of the sales of the shares of Common Stock by the
respective employees and (ii) the proceeds of the sales of the shares of Common
Stock were paid to the Company. Subsequently, in June, 1998, Messrs. Bieber and
Masters,
II-2
<PAGE>
vice presidents of marketing and private label sales, respectively each sold
43,497 shares of Common Stock to certain purchasers, at a purchase price of
$0.309575 per share. The proceeds from the sales of these shares of Common
Stock were paid to the Company in full payment of principal and interest
accrued on the notes issued as payment for such shares. In addition, Mr. Duke
sold 13,006 and 300,000 shares of Common Stock at a purchase price of $0.309576
and $0.309377 per share, respectively. The proceeds from the sales of these
shares of Common Stock were paid to the Company as payment of 71.845% of the
principal of the note issued as payment for such shares, plus interest accrued
thereon, in accordance with the portion of the shares of Common Stock sold by
Mr. Duke vis-a-vis the total amount purchased under the note. The Company paid
commissions in the aggregate amounts of $8,663.94 and $11,250.00 to The Malachi
Group, Inc. and Pegasus Capital, Inc., respectively, in connection with these
transactions.
Pursuant to a private placement of units, each unit consisting of a
$50,000 10% promissory note and warrants to purchase 25,000 shares of Common
Stock, the following persons purchased from the Company the number of Private
Placement Warrants set forth next to each of their names during August 1996:
NAME WARRANTS
- ---- --------
Daniel R. Lee 250,000
Jerry Finkelstein 50,000
Laurence Heller 50,000
Ralph K. Kato IRA 50,000
Barry J. Lind, Neil G. Blum (2) 50,000
Barry J. Lind, Revocable Trust 50,000
Peter Maher and Patricia Maher (1) 50,000
Alfred S. Palagonia 50,000
Nancy A. Roehl 50,000
Peter G. Roehl 50,000
Francine Urdang 50,000
Joseph V. DiMauro 25,000
Joseph V. DiMauro, as Custodian for Joseph Robert DiMauro 25,000
Jack Kaster 25,000
Steven H. Kessler 25,000
Frank C. Rathge Trust 25,000
M. Jerome Rieger 25,000
---------
TOTAL 1,000,000
- ------------
(1) Joint tenants with rights of survivorship.
(2) Tenants-in-Common.
On April 29, 1997, the Company completed a $2.5 million private placement
(the "Private Placement") of 625,000 shares of Series A 4% Cumulative
Convertible Preferred Stock, par value $.01 per share (the "Series A Preferred
Stock"), at $4.00 per share, to Entrepreneurial Investors, Ltd., a Bahamas
company ("EIL"). The Series A Preferred Stock is convertible, at the holder's
option, into Common Stock, on a one share for one share basis, and bears a
cumulative dividend of four percent (4%) per annum, payable quarterly by the
issuance of additional Common Stock. The number of shares of Common Stock to be
issued as a dividend shall be determined based upon the average closing bid
price for shares of the Common Stock as quoted on the OTC Bulletin Board for
the twenty trading days preceding the record date for the declaration of the
dividend. The placement agent for this Private Placement, Equity Services,
Ltd., a Bahamas company, received an option to purchase 62,500 shares of Series
A Preferred Stock, which has a term of five years commencing on April 29, 1998.
On July 9, 1997, the Company issued a senior convertible note (the "Senior
Note") to EIL, in the principal amount of $1.5 million, with a stated interest
rate of 14% per annum and a maturity date of January 15, 1998. Any interest
under the Senior Note may be paid, at the option of the holder, in Common Stock
valued at $4.50 per share. The Senior Note is collateralized by 600,000 shares
of Common Stock being registered in this offering and may be converted, at the
option of EIL, into Common Stock at a conversion price of $4.50 per share. EIL
has taken possession of the collateral and commenced an action for specific
performance demanding, among
II-3
<PAGE>
EIL has taken possession of the 600,000 shares of Common Stock issued as
collateral for the Senior Note and claims that the Senior Note has priority over
all other obligations of the Company, whether in existence on the date of
issuance of the Senior Note or subsequently incurred. EIL has not converted the
Senior Note into equity of the Company. If EIL were to convert the Senior Note
into equity of the Company, the shares of Common Stock previously issued as
collateral and currently in EIL's possession would be insufficient to satisfy
the amounts due under the Senior Note based upon the current market price of the
Common Stock. The Company is currently in preliminary settlement negotiations
with EIL and believes that it will reach an amicable agreement with EIL. See
"Business -- Litigation". Additionally, in connection with the loan, the Company
issued 225,000 Redeemable Warrants to Equity Services Ltd., an affiliate of EIL.
Pursuant to a Settlement Agreement dated August 29, 1997 among the Company
and Charles Johnston, the Company issued, on behalf of IPI, 13,000 shares of
Common Stock, which shares are not transferable for a period of twelve months
from their date of issuance.
Pursuant to a Settlement Agreement dated August 5, 1997 among the Company,
IPI and Ronald H. and Margaret T. Rust, the Company issued 13,000 shares of
Common Stock, which shares are not transferable for a period of twelve months
from their date of issuance.
On December 18, 1997 the Company entered into a private placement of up to
$4.0 million, consisting of the sale of shares of Series B Preferred Stock of
the Company at $100 per share, to Explorer Partners LLC ("Explorer"). Explorer
purchased 10,000, 2,000 and 8,000 shares of the Series B Preferred on December
18, 1997, February 20, 1998 and March 18, 1998, respectively. Net proceeds to
the Company to date from such private placement are approximately $2.0 million.
Each share of Series B Preferred Stock is convertible at any time, at the
option of the holder thereof, into that number of shares of Common Stock which
is equal to $100 divided by 80% of the average closing bid price for a share of
Common Stock as quoted on the OTC Electronic Bulletin Board for the five
trading days preceding the conversion date, provided, that such conversion
price shall not exceed $6.00 per share of Common Stock. The Series B Preferred
Stock pays a quarterly dividend of 8% per annum, and is payable, at the
Company's option, in cash or by the issuance of shares of Common Stock. The
number of shares of Common Stock to be issued as a dividend, if applicable,
shall be determined based on the average closing bid price for a share of
Common Stock as quoted on the OTC Electronic Bulletin Board for the five
trading days preceding the last day of the calendar quarter for the applicable
dividend period. In connection with the private placement, the Company issued
40,000, 8,000 and 32,000 Redeemable Warrants to Explorer Fund Management,
L.L.C. on December 18, 1997, February 20, 1998 and March 18, 1998,
respectively. In addition, the Company issued 100,000 Redeemable Warrants to
Coleman and Coleman Securities, Inc.
In December 1997, the Company completed a private placement of 4 units
(the "Units") to Curi Oil Co. LLC, each Unit consisting of a promissory note of
the Company in the principal amount of $25,000, bearing interest at the rate of
10% per annum and maturing 90 days after the date of issuance, and redeemable
warrants to purchase 30,000 shares of Common Stock expiring on December 5,
2001, at an exercise price of $6.00 per share. The Company has extended the
maturity date of the promissory notes to May 30, 1998. As of the date hereof,
the Company has failed to make any principal or interest payment to Curi Oil
Co. LLC. Any payments made by the Company to Curi Oil Co. LLC may be subject to
EIL's claim of priority. Curtis Granet, a director of the Company holds a 40%
membership interest in Curi Oil Co. LLC, and was issued 10,000 Redeemable
Warrants in connection with this transaction.
In December, 1997, the Company completed a private placement of 1 unit,
each unit consisting of a promissory note in the principal amount of $25,000,
bearing interest at the rate of 10% per annum and maturing 90 days from the
issuance thereof, and Redeemable Warrants to purchase 25,000 shares of Common
Stock, expiring on December 5, 2001, at an exercise price of $6.00 per share.
On December 3, 1997, the Company issued to Interbank Special Purpose
Corporation II ("IBF"), a wholly- owned special purpose subsidiary of Coleman
and Coleman Securities, Inc. ("Coleman"), a secured promissory note in the
principal amount of $262,500 (the "IBF Note"). Subsequently on January 28,
1998, the loan was increased to $762,500. The IBF Note has a stated interest
rate of 1.5% per month (18% per annum) and matured on April 28, 1998. The IBF
Note is secured by, among other things, all inventory, equipment, vehicles,
accounts receivables, trade names and trademarks of the Company (the
"Collateral"). On April 27, 1998, IBF commenced
II-4
<PAGE>
an action against the Company in the Circuit Court of the 17th Judicial Circuit
of the State of Florida in and for Broward County, seeking, among other things,
(i) full payment of principal and interest on the IBF Note, (ii) an accounting
of all the Collateral, (iii) a judgment foreclosing the Collateral and a
deficiency judgement if the proceeds from the sale of the Collateral are
insufficient to pay any judgment obtained in the action, and (iv) appointment
of a receiver for the Company. The Company is currently in settlement
negotiations with IBF and believes that it will reach an amicable agreement
with IBF. Although the Company denies liability, it is contemplated that the
Registration Statement filed in connection with this Prospectus, in the form
that it becomes effective, will satisfy the Company's obligations under a
proposed settlement with IBF. Any payments made by the Company to IBF may be
subject to EIL's claim of priority. If the action is not settled, the Company
intends to vigorously defend this suit and to file a counter-claim against IBF.
In the event that the IBF action results in monetary damages in a material
amount in favor of IBF, or the appointment of a receiver for the Company, such
event could have a material adverse effect on the Company, its financial
condition, business and operations.
In February 1998, the Company completed a private placement of units, each
unit consisting of a promissory note in the principal amount of $25,000,
bearing interest at the rate of 10% per annum and maturing 90 days from the
issuance thereof, and Redeemable Warrants to purchase 25,000 shares of Common
Stock, expiring on December 5, 2001, at an exercise price of $6.00 per share.
The Company has exercised its right under the promissory notes to extend the
maturity date thereof an additional 90 days to August 24, 1998. The following
persons purchased from the Company the number of Redeemable Warrants set forth
next to each of their names:
NAME WARRANTS
- ------------------------------ ---------
Manuel Arvesu 50,000
SFG Financial Services, Inc. 50,000
Rafael Pratts, Jr. 50,000
Southlake Trading Corp. 25,000
Lynn M. Esco 25,000
On February 20, 1998, the Company issued 4,444 shares to M.W. Houck as
payment in full for broker fees outstanding.
Pursuant to a Settlement Agreement dated March 9, 1998 among the Company,
the predecessor to IPI, Beverage Canners International Corporation ("BCIC"),
and others, on March 25, 1998, IPI transferred 10,877 shares of Common Stock of
the Company to BCIC.
The sales of the aforementioned securities were made in reliance upon the
exemption from the registration provisions of the Act afforded by section 4(2)
thereof and /or Regulation D promulgated thereunder, as transactions by an
issuer not involving a public offering. To the best of Registrant's knowledge,
the purchase of the securities described above acquired them for their own
account, and with the view to any distribution thereof to the public.
Item 27. Exhibits.
The following exhibits are filed as part of this Registration Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- ----------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation, as amended*
3.2 Certificate of Designation of Series A Preferred Stock*
3.3 By-Laws of the Registrant*
3.4 Certificate of Designation of Series B Preferred Stock*
4.1 Redeemable Warrant Agreement entered into between Registrant and Continental Stock
Transfer & Trust Co., including form of Redeemable Warrant Certificate*
4.2 Form of Representative's Warrant Agreement including Form of Representative's Warrant*
4.3 Specimens of Registrant's Common Stock, and Redeemable Warrant Certificate*
4.4 Investor Subscription Agreement between Registrant and Entrepreneurial Investors, Ltd.*
4.5 Registration Rights Agreement between Registrant and Entrepreneurial Investors, Ltd.*
4.6 Loan Agreement between Registrant and Entrepreneurial Investors, Ltd. with exhibits*
4.7 Exchange Agreement between Registrant and InnoPet Inc., with exhibits*
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------------------------------
<S> <C>
4.8 Form of Investor Subscription Agreement and Investment Representation between Registrant
and Explorer Partners LLC*
4.9 Form of Subscription Agreement between Registrant and Explorer Fund Management,
L.L.C.*
4.10 Form of Registration Rights Agreement between Registrant and Explorer Partners LLC*
4.11 Form of Subscription Agreement and Investment Representation between Registrant and
December, 1997 and February, 1998 private placement investors*
4.12 Form of Promissory Note between Registrant and December, 1997 and February, 1998 pri-
vate placement investors*
4.13 Amended Secured Promissory Note from Registrant in favor of Interbank Special Purpose
Corporation II*
4.14 Subscription Agreement and Investment Representation between Registrant and HSBC James
Capel Canada, Inc.*
5.1 Opinion of Camhy Karlinsky & Stein LLP+
10.1 1996 Stock Option Plan*
10.2 Employment Agreement between Registrant and Marc Duke with exhibits*
10.3 Employment Agreement between Registrant and John Bieber*
10.4 Employment Agreement between Registrant and Linda Duke with exhibits*
10.5 Employment Agreement between Registrant and Albert Masters with exhibits*
10.6 Facilities Agreement between Registrant and InnoPet Inc.*
10.7 Supply Agreement between Registrant and Monfort, Inc.*
10.8 Employment Agreement between Registrant and Michael L. Winer*
11.1 Statement re: Computation of Earnings per Share++
23.1 Consent of Camhy Karlinsky & Stein LLP++
23.2 Consent of Rachlin Cohen & Holtz++
24 Power of Attorney (contained on page II-7 of this Registration Statement)*
</TABLE>
- ------------
* Filed as an exhibit to the Company's Registration Statement on Form SB-2
(Registration No. 333-36755) and hereby incorporated by reference thereto.
+ To be filed by amendment.
++ Filed herewith.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales of the Securities
are being made, a post-effective amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b) if, in
aggregate, the changes in the volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any additional or changed material information on the
plan of distribution.
2. That, for the purpose of determining liability under the Securities
Act, it shall treat each post-effective amendment as a new registration
statement of the securities offered, and treat the offering of the securities
at that time as an initial bona fide offering.
II-6
<PAGE>
3. To remove from registration by means of a post-effective amendment any
of the securities being registered which remains unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the provisions described in Item 15, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
officer of controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the Shares being registered hereby, the
Company will, unless, in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question as to whether such indemnification by the Company against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Registration
Statement on its behalf by the undersigned, thereunto duly authorized, in the
City of Fort Lauderdale, State of Florida, on the 22nd day of June, 1998.
INNOPET BRANDS CORP.
By: /s/ Marc Duke
-----------------------------------
Marc Duke
Chief Executive Officer and
Chairman of the Board
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Marc Duke, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities to sign any
and all amendments, including post-effective amendments and related
registration statements, to this Registration Statement, and to file same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do separately and perform each and every act
and thing requisite and necessary to be done, as fully to all intents and
purposes as he might or could so in person, hereby ratifying and confirming all
that said attorney-in-fact and agent, or his substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------------- -------------
<S> <C> <C>
/s/ Marc Duke Chairman of the Board and Chief June 22, 1998
- ----------------------------- Executive Officer (Principal Executive
Marc Duke Officer)
/s/ Michael L. Winer Vice-President, Chief Financial Oficer June 22, 1998
- ----------------------------- and Secretary (Principal Financial and
Michael L. Winer Accounting Officer)
/s/ Albert A. Masters Vice President, Private Label Sales June 22, 1998
- ----------------------------- and Director
Albert A. Masters
/s/ Richard P. Greene Director June 22, 1998
- -----------------------------
Richard P. Greene
/s/ Curtis Granet Director June 22, 1998
- -----------------------------
Curtis Granet
/s/ John Bieber Vice President of Marketing and June 22, 1998
----------------------------- Director
John Bieber
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation, as amended*
3.2 Certificate of Designation of Series A Preferred Stock*
3.3 By-Laws of the Registrant*
3.4 Certificate of Designation of Series B Preferred Stock*
4.1 Redeemable Warrant Agreement entered into between Registrant and Continental Stock
Transfer & Trust Co., including form of Redeemable Warrant Certificate*
4.2 Form of Representative's Warrant Agreement including Form of Representative's Warrant*
4.3 Specimens of Registrant's Common Stock, and Redeemable Warrant Certificate*
4.4 Investor Subscription Agreement between Registrant and Entrepreneurial Investors, Ltd.*
4.5 Registration Rights Agreement between Registrant and Entrepreneurial Investors, Ltd.*
4.6 Loan Agreement between Registrant and Entrepreneurial Investors, Ltd. with exhibits*
4.7 Exchange Agreement between Registrant and InnoPet Inc., with exhibits*
4.8 Form of Investor Subscription Agreement and Investment Representation between Registrant
and Explorer Partners LLC*
4.9 Form of Subscription Agreement between Registrant and Explorer Fund Management,
L.L.C.*
4.10 Form of Registration Rights Agreement between Registrant and Explorer Partners LLC*
4.11 Form of Subscription Agreement and Investment Representation between Registrant and
December, 1997 and February, 1998 private placement investors*
4.12 Form of Promissory Note between Registrant and December, 1997 and February, 1998 pri-
vate placement investors*
4.13 Amended Secured Promissory Note from Registrant in favor of Interbank Special Purpose
Corporation II*
4.14 Subscription Agreement and Investment Representation between Registrant and HSBC James
Capel Canada, Inc.*
5.1 Opinion of Camhy Karlinsky & Stein LLP+
10.1 1996 Stock Option Plan*
10.2 Employment Agreement between Registrant and Marc Duke with exhibits*
10.3 Employment Agreement between Registrant and John Bieber*
10.4 Employment Agreement between Registrant and Linda Duke with exhibits*
10.5 Employment Agreement between Registrant and Albert Masters with exhibits*
10.6 Facilities Agreement between Registrant and InnoPet Inc.*
10.7 Supply Agreement between Registrant and Monfort, Inc.*
10.8 Employment Agreement between Registrant and Michael L. Winer*
11.1 Statement re: Computation of Earnings per Share++
23.1 Consent of Camhy Karlinsky & Stein LLP++
23.2 Consent of Rachlin Cohen & Holtz++
24 Power of Attorney (contained on page II-7 of this Registration Statement)
</TABLE>
- ------------
* Filed as an exhibit to the Company's Registration Statement on Form SB-2
(Registration No. 333-36755) and hereby incorporated by reference thereto.
+ To be filed by amendment.
++ Filed herewith.
<PAGE>
EXHIBIT 11.1
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENT RE: COMPUTATION OF NET LOSS PER COMMON SHARE
<TABLE>
<CAPTION>
Inception
Year (January 11,
Ended 1996) to
Three Months Ended
----------------------------------- December 31, December 31,
March 31, 1998 March 31, 1997 1997 1996
---------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Net Loss $2,589,087 $2,199,908 $10,011,743 $6,518,304
Preferred stock dividends 49,000 -- 20,000 --
---------- ---------- ----------- ----------
Loss applicable to common stockholders $2,638,087 2,199,908 $10,031,743 $6,518,304
========== ========== =========== ==========
Weighted average common shares outstanding 4,935,916 4,465,878 4,474,000 1,705,490
Adjustments to reflect requirements of the
Securities and Exchange Commission SAB 83:
Common stock issued to Parent and offic-
ers and employees within the period -- -- -- 388,510
---------- ---------- ----------- ----------
Total weighted average number of common
shares and equivalents 4,935,916 4,465,878 4,474,000 2,094,000
========== ========== =========== ==========
Net loss per common share $ (0.52) $ (0.49) $ (2.24) $ (3.11)
</TABLE>
<PAGE>
Exhibit 23.1
[LETTERHEAD OF CAMHY KARLINSKY & STEIN LLP]
June 22, 1998
Board of Directors
InnoPet Brands Corp.
One East Broward Blvd., Suite 1100
Fort Lauderdale, Florida 33301
Re: InnoPet Brands Corp.
Registration Statement on Form SB-2
Dear Sirs:
We hereby consent to the filing of our legal opinion as an exhibit to the
Registration Statement and the reference to us under the heading "Legal
Matters." In giving this consent, we do not thereby admit that we are in the
category of persons whose consent is required pursuant to Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Very truly yours,
/s/ Camhy Karlinsky & Stein LLP
--------------------------------
CAMHY KARLINSKY & STEIN LLP
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated March 23, 1998 (which
report contains an explanatory paragraph that describes a condition that raises
substantial doubt as to the ability of the Company to continue as a going
concern) relating to the financial statements of InnoPet Brands Corp. appearing
in such Prospectus. We also concent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus.
RACHLIN COHEN & H0LTZ
Fort Lauderdale, Florida
June 18, 1998
