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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required)
The fiscal year ended December 31, 1995
/ / Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (no fee required)
For the transition period from to
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Commission File No. 0-18438
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VITAFORT INTERNATIONAL CORPORATION
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(Name of Small Business Issuer in its Charter)
Delaware 68-0110509
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(State or Other Jurisdiction of (I.R.S.Employer
Incorporation or Organization) Identification No.)
1800 Avenue of the Stars, Los Angeles, California 90067
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(Address of Principal Executive Offices) (Zip Code)
(310) 552-6393
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
None
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Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.0001
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(TITLE OF CLASS)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 14(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /X/ No / /
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB.
/ /
State issuer's revenues for its most recent fiscal year: $2,434,811
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock on March 28, 1996
was $24,780,500
The number of shares outstanding of the issuer's common stock as of March 28,
1996 was 72,883,822
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
Certain Exhibits are incorporated by reference to the Registrant's Registration
Statement on Form S-18 No. 33-31833, to previous filings on Forms 10-K, 10-KSB,
10-Q, 10-QSB, 8-K, Form S-8 No. 33-76208 filed by the Registrant in 1994 and
Form S-8 No. 33-300435 filed by the Registrant in January 1996.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Vitafort International Corporation (the "Registrant",the "Company" or
"Vitafort") was formed as a California corporation in 1986 and reincorporated as
a Delaware corporation in 1989. Until May 1993, Vitafort was in the businesses
of formulating and developing value added foods and beverages for third parties
and marketing branded seafood. In May 1993, these businesses were discontinued
and, later in 1993, the Registrant disposed of these businesses. In September
1993, the Registrant installed new management and entered the business of
developing and marketing branded low fat and fat free foods using proprietary
formulations and processes. During 1994, Vitafort continued with the
development of the business it had entered in 1993 and, in June 1994,
commercially introduced a line of fat free brownies under the brand name
Fudgets-R-.
In 1995, the Company continued its development of its business of
developing, manufacturing and marketing low fat and fat free foods, that it
had entered in 1993 and 1994. In late 1995 and early 1996, Vitafort began
commercial production of Caketts-TM-, a line of fat free cakes, and
Juliettes-TM- a line of low fat chocolate candies. Vitafort also markets a
line of meatless cold cuts under the brand name Trim Slice/Vegicatessen-TM-,
a product line that it acquired in 1993. The Company's efforts during 1995
were hampered by a lack of operating capital primarily resulting from the
failure to complete a proposed private placement in the first part of 1995.
Management believes that the Company's product development, manufacturing and
marketing efforts will be enhanced in 1996 as a result of the completion of a
$4 million equity financing in January 1996 and other private placements of
its securities. The Company will seek to improve its sales and production of
existing products and to develop and market additional branded fat free
products during 1996. While management is encouraged by the performance of
the Company's products, the Company's business, which was hampered by severe
working capital shortages did not achieve profitability during 1995.
The Company is developing additional fat free and low fat foods which it
anticipates introducing during 1996 and beyond, including additional fat free
and low fat bakery items, and well as additional varieties of fat-free and low
fat candies. However, no assurance can be given that the Company will be able
to successfully complete the development of these products or that they will
prove to be commercially viable.
The Company's fat free brownies and cakes and low fat confectionery items
are based upon the Company's proprietary formulas, processes, procedures and
technologies, including proprietary technologies for bonding fat free
ingredients to improve taste and texture. The Company seeks to protect its
proprietary information through secrecy agreements with employees, suppliers and
manufacturers. If the Company is advised by counsel that any of its processes,
procedures or other techniques are patentable, then it may seek appropriate
patent protection.
The Company's products are made from generally available ingredients which
are then converted into the Company's unique products through the Company's
proprietary processes, procedures and technology.
Although management believes that the Company's products are unique and are
superior in taste to competitively available products, the food industry is
characterized by the continual development of new products employing various new
technologies and processes. Accordingly, no assurance can be given that new
products will not be developed and marketed which are superior to the Company's
products in taste, texture, feel and nutritional value or that the Company's
products will continue to maintain their market acceptance.
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PRODUCT MANUFACTURING
The Company manufactures its products by entering into agreements with
established food manufacturers ("co-packers") which have the facilities for the
production of its products ("co-pack agreements"). Co-pack agreements enable
the Company to achieve economies of scale and production flexibility and to
benefit from the production experience of these companies while avoiding the
capital outlays, staffing requirements and delays that would be encountered were
the Company to attempt to manufacture its products through its own facilities.
The Company seeks to monitor its co-packers for quality assurance and other
matters. Payment terms vary among the various co-packers utilized by the
Company, but generally, the timing of payments to the co-packer is shorter than
the time the Company must wait before the Company receives payment from its
customers. The timing of the Company's payments and payments to the Company are
based upon the established practices of the particular class of trade. The
difference in timing between the Company's payables and the Company's
receivables requires that the Company allocate its working capital to such use.
Vitafort believes consistent product quality is paramount to our success,
as is competitive pricing. The selection of a product co-packer by Vitafort is,
therefore, based primarily upon the ability of the manufacturer to consistently
produce quality product at a fair and competitive cost, and the perceived
ability of, and commitment by, the co-packer to meet Vitafort's growing volume
needs. The Company currently utilizes different co-packers for each of its
product lines (Fudgets-Registered Trademark-, Caketts-TM-, and Juliettes-TM-),
and is satisfied that each is capable of meeting or exceeding our quality,
consistency, pricing, and volume requirements. We will continue to evaluate
these relationships regularly, and have, and will, pursue alternatives when
appropriate.
The Company's current co-packers require payment for services within 10 to
30 days, while purchasers of Company products receive an average of 27 day
payment terms. The timing differences between payment to manufacturers and
receipt of payment from customers increases the Company's required working
capital.
The Company has used a co-packer, located on Long Island, New York,
as the primary supplier of Trim Slice and Vegicatessen-TM- brand products since
December 1992. This co-packer operates under strict kosher guidelines.
Management believes that this co-packer has the capacity to produce sufficient
quantities of Trim Slice and Vegicatessen-TM- product to supply the Company's
projected needs for these products at least through the end of 1996.
The Company is in the process of negotiating co-pack agreements with other
established firms to act as co-packer for various products that are under
development and anticipates that, if the research and development of these new
products is completed, it will be able to select co-packers and enter co-pack
agreements on terms that are acceptable to the Company.
DISTRIBUTION
The food distribution industry is highly specialized with numerous classes
of trade and channels of distribution. Vitafort utilizes its own sales staff
and also uses independent brokers and distributors to further its sales and
distribution efforts.
MARKETING
Management believes that product promotion is vital to Vitafort's effort
to improve brand recognition. Vitafort promotes its products via product
demonstrations, on-site promotions, point of purchase shipper displays,
retailer advertising allowances, trade advertising, and participation in
trade events.
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PRIOR OPERATIONS
The Registrant's prior (pre-May 1993) business did not generate sufficient
cash to fund operations. As a result the Registrant's activities during 1992
and the first half of 1993 principally consisted of efforts to raise capital
through the sale of equity and other efforts to acquire viable or potentially
viable operations. These efforts were not successful, and, in early 1993, the
Registrant was in a cash flow crisis. Its then revenues were derived from its
wholesale seafood marketing business and from product sales to Crystal Geyser in
connection with a now expired agreement (See "Business - Crystal Geyser"). The
Company's wholesale seafood distribution business was unable to generate cash
flow to support Company operations and required an infusion of capital, which
the Registrant did not have, to become viable. Net revenues from product sales
to Crystal Geyser were insufficient to meet the costs of Registrant's operations
even though, by early 1993, operations had been drastically reduced from prior
levels. Furthermore, the Registrant was unable to actively pursue the
development of its other proprietary technology related to its then business due
to its limited working capital position. In early 1993, the Registrant had
accumulated an aggregate of approximately $750,000 in debt and vendor payables.
On August 7, 1993, effective June 7, 1993, the Registrant and its wholly
owned subsidiary Salmon Distribution Subsidiary, Inc.(a Maine corporation which
was formerly called Crystal Clear Farms, Inc.("CCF")) entered into an Asset
Purchase and Sale Agreement, dated as of June 7, 1993, (the "PSA") with a newly
formed Maine corporation called Crystal Clear Farms, Inc.("Buyer"). Buyer's
principal owners are certain suppliers of CCF and a former employee of CCF. The
Registrant believes that Frank Corsini, former President of the Registrant, also
owns a minority interest in the Buyer. The PSA provided for the sale of the
goodwill, customer lists, trademarks and other operating assets of CCF to the
Buyer. The PSA also provided that the cash portion of the purchase price for
the sale, which was $320,000, be paid through Buyer's assumption of $160,000 of
trade payables and a current payment of $160,000 which was added to the working
capital of the Registrant. Under the PSA, the Registrant was required to
provide certain technical and marketing support to the Buyer and would receive
in return a fee of $0.015 for each pound of branded salmon sold by the Buyer.
The Registrant also entered into a non-competition agreement which restricts its
activities for a ten year period with respect to certain programs involving
salmon, trout, catfish and shrimp. The Registrant has retained marketing rights
with respect to the marketing of other categories of seafood. Upon the closing
of the PSA, the Buyer agreed to assume approximately $37,000 of additional CCF
payables which amount would be offset against Buyer's future obligation to pay
royalties to the Company. The Company has demanded an accounting from CCF as to
the status of its royalty payments and the assumed payables, but has not
received the same. However, the Company has been advised that the present state
of Buyer's operations does not make it likely that it will receive royalties
from the Buyer in the near future. Furthermore, disputes have developed between
the Company and the Buyer regarding the extent of the Company's technical and
marketing obligations to the Buyer and whether they have been fulfilled. The
Company believes that it has honored all of its obligations to the Buyer, but
has initiated discussions with the Buyer to amend the PSA to resolve the
disputes that have arisen.
Due to the Registrant's limited capital and other resources, and in
consideration of the mixed results relating to the Registrant's previous
attempts to apply its past technologies to consumer applications, on October
5 1993 the Company entered into an exclusive marketing agreement with Second
Nature Technologies, Inc ("SNT" or "Second Nature"). The Registrant
appointed and engaged SNT as its exclusive world wide marketing
representative for certain Vitafort products, technologies, ingredients and
processes which are not currently being exploited by the registrant. SNT
will attempt to market the Registrant's proprietary technologies relating to
its prior business operations to food manufactures and marketing companies
and will supply the necessary capital and other resources to apply the
Registrant's proprietary technologies to consumer products. Several food
manufacturers and marketing companies have expressed interest in a number of
the Registrant's proprietary technologies that are being marketed by SNT.
The marketing agreement calls for SNT to expend the necessary capital to
market these proprietary technologies and to share any income that results
equally with Vitafort. Dr. Barry Saltzman, a former director of the
Registrant, is an officer, director and principal owner of SNT.
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The technologies which are included in the Registrant's technology catalogue
to be marketed by SNT include technologies related to: (i) reduced fat
poultry and turkey; (ii) low cholesterol eggs; (iii) health conscious dog and
cat foods and a unique pet beverage; (iv) swine feeds; (v) a drinkable yogurt
and fruit fiber blend; (vi) various nutritional and performance sport
beverage formulas in liquid and powdered forms; (vii) salmon patties; (viii)
certain salmon, trout and shrimp propriety feed formulas; (ix) a toxin free
environmental seafood growing program; (x) nutritionally enhanced value added
surimi; (xi) and bread products. To date, the Company has not realized any
revenues from the efforts of SNT.
As a result of these two transactions the Company disposed of its prior
operations, received an immediate cash inflow of $320,000 (of which $160,000 was
applied to trade payables of the wholesale seafood operation), and significantly
reduced its negative cash flow.
CRYSTAL GEYSER
The Registrant developed a vitamin pre-mix which was licensed to the
Crystal Geyser Water Company. The pre-mix was added to a fruit juice - sparkling
mineral water product distributed as "juice squeeze". The product is called
Crystal Geyser "Juice Squeeze" and is in distribution nationally. Crystal Geyser
produces and markets "Juice Squeeze" in eight (8) flavors, all of which contain
the Registrant's vitamin pre-mix and display the Registrants vitamin fortified
seal. Under the agreement, Crystal Geyser is obligated to purchase the
necessary pre-mix from the Registrant. There are no minimum purchase or royalty
requirements under the agreement. The licensing agreement expired in January,
1995, subject to the licensee's right to renew for an additional 20 years. The
licensee did not renew and the Registrant does not anticipate any further
revenues from the licensee. During 1995, 1994 and 1993 the Registrant realized
revenues from the sale of pre mix totaling $2,300, $103,000 and $99,200,
respectively.
FOREIGN LICENSE - MEXICO, CENTRAL & SOUTH AMERICA, AND THE CARIBBEAN
The Registrant has granted an exclusive license to its products and program
for Mexico, Central and South America and the Caribbean to Vitafort Latin
America, Inc. ("VLA"). VLA, a Puerto Rico corporation, became a successor to
VLA, a Delaware corporation. VLA is owned equally by the Registrant and Puerto
Rico Supplies Co., Inc., a corporation owned by members of the Pasarell family.
Stanley J. Pasarell is a director of the Registrant. This license is royalty
free and the Registrant will derive revenue and profit, if any, from its 50%
interest in the licensee.
Despite international interest in the Registrant's programs, new management
has determined that the Registrant is best served by focusing its efforts and
ensuring the success of its new products domestically before venturing across
borders.
INTELLECTUAL PROPERTY RIGHT PROTECTION AND TRADEMARKS
The Registrant relies upon non-disclosure, secrecy agreements and its
common law rights in order to protect its proprietary formulae, procedures,
processes and other information. No assurance can be given that such steps will
adequately protect the Registrant against competing products or that the
Registrant will adequately be able to enforce its rights against third parties
who may be utilizing the Registrant's proprietary formulae, procedures,
processes and other information. If the Company is advised by counsel that any
of its formulae, processes, procedures or other techniques are patentable, and
that the patent process will not compromise it current protections, then it may
seek appropriate patent protection.
The Registrant's trademarks "Vitafort-Registered Trademark-", "Fudgets-
Registered Trademark-", "Heart and Soul-Registered Trademark-", "Trim
Slice/Vegicatessen-TM-", "Caketts-TM-", "Truffettes-TM-", "Julliettes-TM-" and
"Just Like Peanut Butter-TM-" are registered in the United States. No
assurance can be given as to the breadth or degree of protection which such
registrations will afford the Registrant. The Registrants licensees use the
trademarks on their products. The Registrant is not aware of any infringing use
of its trademarks. From time to time the
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Registrant has registered additional trademarks, but these are not material
to its present business.
GOVERNMENTAL REGULATION
In general, production, packaging, processing and labeling of food and
beverage products are subject to various federal and state regulations,
including regulation by the Food and Drug Administration. The Company believes
that is in compliance with all applicable governmental regulations and that the
cost of maintaining such compliance has not had a material adverse effect on the
Company.
RESEARCH AND DEVELOPMENT
The Company spend $373,887 on research and development in 1994 and
$378,602 in 1995. The Company intends to maintain product research and
development as an integral part of the Company's search for new and improved
products, although the Company's financial condition and performance may
effect the timing and allocation of its efforts.
COMPETITION
The Registrant is engaged in the highly competitive healthy food
marketplace. There are numerous companies with financial and business resources
far greater than Vitafort's currently marketing healthy and fat free foods. The
Registrant seeks to compete based on the unique taste, texture and quality of
its products and by obtaining recognition for its brands.
ENVIRONMENTAL REGULATION AND SEASONALITY
Management believes that the costs associated with compliance with
environmental regulations do not impose a significant burden upon the Company's
operations. Management does not believe that the Company's business is seasonal
to any significant extent.
EMPLOYEES
As of December 31, 1995, the Registrant had 13 employees of whom one was an
executive officer, 4 were engaged in sales and marketing, 2 were in product
development and research and 6 were clerical and administrative.
POTENTIAL NEW PRODUCTS
The Company's research and development efforts have also resulted in the
development of prototypes of low-fat and fat-free peanut butter-style fruit and
grain spreads. If the development of either of these products is completed,
then the Company intends to market them under the "Just Like Peanut Butter"TM
label. However, the Company has experienced delays in the development phase of
these products which phase has not been completed and no assurance can be given
that either product will ever be commercially introduced. For the immediate
future, the Company intends to concentrate its efforts on introducing and
marketing completed products and to defer certain product development efforts
until it has sufficient resources for such projects.
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ITEM 2. DESCRIPTION OF PROPERTY
The Registrant's principal executive offices consist of 3,921 rentable
square feet at 1800 Avenue of the Stars, Los Angeles, California that are leased
pursuant to a three year lease expiring on August 31, 1997. The base rent under
the lease is $69,000 for the first year of the term, $72,000 for the second year
of the term and $75,000 for the third year of the term. The Registrant also
leases 381 square feet in an office building in Petaluma, California as a
general office at a rental of $460 per month. The Registrant believes that its
facilities are adequate for its present needs.
ITEM 3. LEGAL PROCEEDINGS
In 1992, Steven Clow, a former employee of the Registrant's Nutrifish
Corporation subsidiary, filed a claim with the California Division of Labor
relating to the Company's termination of his employment agreement "for cause".
No action has been taken on that claim since filing. In June 1995, Mr. Clow
initiated an action in Superior Court, Los Angeles County, California seeking
$350,000 and stock options. The Company denies any liability to Mr. Clow and
intends to vigorously defend this action.
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms and several companies in which he had invested and certain of those
company's officers. Included among the defendants was the Company and its then
Chief Executive Officer. The complaint seeks damages in an unspecified amount
in excess of $500,000 and punitive damages in an unspecified amount in excess of
$5,000,000. The Company filed a demurer to the complaint asserting that the
complaint did not state a cause of action against the Company or its former
Chief Executive Officer. On March 29, 1995 the court dismissed the complaint,
but the court's order allowed the plaintiff ten days to refile his claim. The
plaintiff filed an amended complaint on or about April 10, 1995. The Company
denies any liability to the plaintiff and intends to vigorously defend this
action. The Company notes that the plaintiff has sold a portion of the
securities he purchased from the Company for approximately $60,000 and realized
a profit thereon. The Company also notes that during April 1996, the balance of
the securities that the plaintiff purchased from the Company will become salable
under Rule 144 promulgated under the Securities Act of 1933, as amended, and, at
current market prices, the plaintiff could, if he chose to do so, readily recoup
his entire investment and realize a substantial profit on his $75,000
investment.
In February 1996, Cottage Bakery, Inc. a former co-packer of Fudgets,
initiated a lawsuit against the Company in Superior Court, San Joaquin County,
California. The Complaint alleges breach of contract and fraud against the
Company and seeks damages in an unspecified amount.
On January 4, 1996, Herman Jacobs, a former director of the Company sought
to partially exercise of a purported option to purchase the Company's common
stock (the "Option"). Within a week after the Company received Mr. Jacob's
exercise letter and prior to any response to Mr. Jacobs, Mr. Jacob's commenced a
lawsuit in Superior Court, Los Angeles County, California alleging unspecified
damages for breach of contract and seeking a declaratory judgement as to the
validity of the Option. The Company has filed a cross-complaint and intends to
vigorously defend it position, and to prosecute its cross-complaint.
In March 1995, the Company filed a litigation against Commonwealth
Associates Management Company, INc. and certain officers of Commonwealth in
the Superior Court of California, County of Los Angeles, alleging fraud and
breach of fiduciary responsibility, and declaratory relief. The Company
intends to vigorously prosecute this litigation.
As of December 31, 1995, Management does not believe that any liability
assigned as a result of any possible unfavorable outcome from the
aforementioned legal proceedings would materially affect the operations or
viability of the Company.
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ITEM 4 . SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
In September, 1995, the Registrant solicited consents of a majority of the
issued and outstanding shares of Common Stock for three proposals, as follows:
(i) A proposal to amend the Certificate of Incorporation of the Company to
increase the number of authorized shares of Common Stock from 40,000,000 to
180,000,000. This proposal received the written consents of the holders of
14,190,000 shares (58%) of the shares then outstanding; the holders of 416,000
shares (2%) were opposed and no holders of shares submitted consents indicating
their abstention on this issue;
(ii) A proposal to approve an amendment of the Certificate of Incorporation
of the Company to effect a reverse stock split of the Common Stock on a ratio of
not less than one for ten nor more than one for twenty five with the timing and
the ratio of the reverse split in the discretion of the Company's Board of
Directors. This proposal received the written consents of the holders of
14,170,000 shares (58%) of the shares then outstanding; the holders of 435,000
shares (2%) were opposed and the holders of no shares submitted consents
indicating their abstention on this issue; and
(iii) A proposal to approve the Vitafort International Corporation 1995
Stock Option Plan. This proposal received the written consents of the holders
of 13,670,000 shares (56%) of the shares then outstanding; the holders of
1,312,000 shares (5%) were opposed and the holders of 250,000 shares (1%)
submitted consents indicating their abstention on this issue.
Accordingly, all three proposals were adopted. In October 1995, the
Company distributed an Information Statement to the holders of its Common Stock
advising them of the actions taken by written consent of the holders of a
majority of the issued and outstanding shares of Common Stock.
The Registrant did not convene an annual shareholders meeting during 1995
due to the costs involved with such a meeting and its extreme working capital
shortages. The Registrant intends to convene an annual meeting during 1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Registrant's common stock, redeemable warrants (each of which entitles
the holder to purchase one share of common stock at a price of $2.375 through
the close of business on April 30, 1996 or an earlier redemption date) and units
(each of which is comprised of three shares of common stock and two redeemable
warrants) traded on the National Association of Securities Dealers, Inc.
Automatic Quotation System ("NASDAQ") from December 19, 1989, the effective date
of the Registrant's Registration Statement on Form S-18, until August 27, 1992.
Since such date, the Registrant's securities have traded on the Electronic
Bulletin Board maintained by NASDAQ. Prior to December 19, 1989, there was no
market for the Registrant's securities. The table below sets forth the high and
low closing bid prices for the common stock, redeemable warrants and units
during the period January 1, 1994 to December 31, 1996, as reported on the
Electronic Bulletin Board. Except for the first quarter of 1994, where the
quotations represent inter-dealer transactions, the quotations represent inter
dealer quotations without adjustment for retail mark-ups, mark-downs or
commissions and may not represent actual transactions:
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS UNITS
----------------- ---------------- ----------------
PERIOD HIGH LOW HIGH LOW HIGH LOW
------ ----- ------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 1994 1-7/8 1-3/32 35/64 1/4 6 3
2nd Quarter 1994 1-5/8 7/8 11/32 1/8 4 1/2 2
3rd Quarter 1994 1-1/2 5/8 1/8 1/16 2 2
4th Quarter 1994 29/32 5/8 1/16 1/16 2-1/2 1-3/4
1st Quarter 1995 27/32 9/16 3/16 1/16 4 1-1/2
2nd Quarter 1995 11/16 9/32 1/8 1/64 4 1/4
3rd Quarter 1995 13/32 3/16 3/64 3/64 1-1/4 1/4
4th Quarter 1995 27/64 3/32 3/64 3/64 1-1/8 1/4
</TABLE>
On March 27, 1996, the closing bid prices for the common stock, redeemable
warrants and units, as reported by the NASDAQ Electronic Bulletin Board, were
$.34, $.01 and $1.00, respectively.
At the close of business on March 26, 1996, there were approximately 1,800
holders of record of the common stock and approximately 50 holders of record of
the redeemable warrants.
The Registrant has not paid any dividends on the common stock since
inception and intends to retain any future earnings for the development of its
business. Future dividends on the common stock, if any, will be dependent upon
the Registrant's earnings, financial condition, the dividend priority of any
preferred shares and other relevant factors as determined by its Board of
Directors.
No dividends were paid on Series B Convertible Preferred Stock during
1995. Cumulative unpaid dividends on the Series B Convertible Preferred Stock
as of December 31, 1995 totaled $37,500. In December, 1995, the holder of
500 of the 2,000 issued and outstanding shares of Series B Convertible
Preferred Stock converted his shares and all accrued dividends thereon into
64,284 shares
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of Common Stock. The conversion of the Series B Preferred Shares was in
accordance with the formula set forth in the Certificate of Designation for
such security and the accrued dividends were converted at the market price
for the Common Stock at the date of the conversion. In November 1993, all
Series A Convertible Preferred stock was converted into common stock. In
December 1995, the Company agreed to convert 672.5 shares of Series D
Convertible Preferred Stock and all accrued dividends thereon to Common Stock
at $.375 per share, with actual conversion completed between December 1995
and March 1996. All unpaid dividends on the preferred stock must be paid
before dividends can be paid on the common stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1994
The Company's revenues in 1995 were from substantially different product
mix and organization than in 1994. A comparison of net sales, gross
profits, and operating expenses during the two periods provides little
meaningful information and is in no way indicative of any trends or
relevant in anticipating future results. In the year ended December 31,
1995, the company dealt with the ongoing operating stress of insufficient
working capital, the costs of maintaining existing distribution of its
primary product, "Fudgets", in the mass market (e.g.; supermarkets), and
the launch of new products ("Caketts-TM-" and confectionery items).
Net sales:
The net sales for the year ended December 31, 1995 were $2,315,151
compared to the prior year's net sales of $1,146,114, an increase of
$1,169,037 or 102%. This comparison is not meaningful as the Company
has only had significant operations since May of 1994
when it started shipping the Fudget-Registered Trademark-, and 1995 sales
were depressed by working capital shortages (as the Company pursued
appropriate financing) which made it impossible to service or support
full sales potential, or to leverage earlier distribution successes.
Gross profit:
The gross profit for the year ended December 30, 1995 was $832,825 or 36%
of net sales as compared to $391,650 (34% of net sales) for the prior
year, an increase of $441,175 (113% increase) and 2 percentage points..
In 1994 Fudgets were 71% of sales and Crystal Geyser was 9% of sales. In
1995 Fudgets were over 97% of sales, and the meatless cold cuts comprised
most of the balance. The comparison of gross profit is not meaningful
since the product mix is not comparable. The working capital shortages
of 1995 limited the Company's ability to significantly improve the gross
margin for the Fudgets-Registered Trademark- via cost reductions.
Operating expenses:
Operating expenses for the year ended December 31, 1995 were $3,537,671
compared to $2,973,427 for the previous year, an increase of $564,244 or
19% due primarily to the fixed costs of expanding distribution of the
Company's products in new retail markets in the early part of the year,
without the working capital to leverage the distribution in the latter
half of the year. Specifically, the Fudget-Registered Trademark-
line was marketed to new customers in 1995. As is customary in
the wholesale food industry, marketing and promotional expenses
run high as a
9
<PAGE>
percentage to sales in the first months of distribution. Product
development expenses are nominally comparable to last year, but reflect
improved efficiencies as the Company prepared to produce and market
several product lines in 1995, compared to only one in 1994. 1995
operating expenses also reflect the significant cost of securing short
and long term financing , measured primarily in brokerage, finder, and
legal fees.
Interest expense:
Interest expenses were $126,290 for the year ended December 31, 1995 as
compared to $32,532 for the same period last year, an increase of
$93,758. The increase in interest expenses was due to the increased loan
balances as a result of the $500,000 loan taken in the first quarter of
1995, and higher interest rates on existing loans as a result of
deferring repayment until alternative equity financing could be arranged.
YEARS ENDED DECEMBER 31, 1994 AND 1993
During 1993 the Registrant sold the assets related to its value added
branded seafood distribution business and entered into a marketing
agreement whereunder another entity acquired the rights to market certain
of the Registrant's technology in exchange for a royalty agreement. (See
Item 1-Description of Business-General). During 1994 the Registrant
marketed two product lines. One is a line of fat free brownies, introduced
in 1994 and marketed under the name "Fudgets" which represented 71% of net
sales. The other is a line of meatless cold cuts, acquired in 1993, and
marketed under the brand name "Trim Slice/Vegicatessen-TM-" which accounted
for approximately 20% of sales. Sales of vitamin pre-mix to Crystal Geyser
amounted to approximately 9% of net sales. Since the Company's revenues in
1994 were from substantially different activities than in 1993, a
comparison of net sales, gross profits, and operating expenses during the
two periods provides no meaningful information and is in no way indicative
of any trends or relevant in anticipating future results.
Net sales:
Net sales for 1994 were $1,146,114 compared to $141,334 in 1993.
During 1994 the Company launched new product lines while in 1993 it
disposed of its previous principal product lines.
Gross Profit:
Gross profit for 1994 was $391,650 or 34% of net sales compared to
$37,949, or 27% of net sales in 1993. This comparison is not meaningful
as the Registrant was engaged in different lines of business during the
two years.
Operating Expenses:
Operating Expenses increased from $930,078 in 1993 to $2,973,427 in
1994, an increase of $2,043,349. The increase was comprised of a
$757,572 increase in product development and marketing expense (from
$172,745 to $930,317) and a $1,285,777 increase in general and
administrative expense (from $757,333 to $2,043,110). The increase in
product development and marketing expense was due to the development of
new product lines, and the Registrant's greater emphasis on its marketing
effort. The increase in general administrative expense resulted in
principally from costs and charges associated with financing
transactions, from costs associated with discontinuing certain operations
and increased levels of staffing associated with higher operating levels.
Interest Expense:
Net Interest Expense increased from $12,057 in 1993 to $32,532 in
1994, an increase of $20,475, primarily as a result of the issuance
of $500,000 in notes payable in August 1994 to provide working capital.
Other Income:
Other income was $82,772 in 1994 an increase of $70,652 over 1993.
Other income was principally comprised of gains of approximately $70,000
10
<PAGE>
in connection with the resolution of certain disputes net of write offs
in certain product investments.
Income Tax Benefits:
Income tax benefit of $128,000 in 1993 and the loss from discontinued
operations and gain on sale net of taxes of $67,448 and $192,000
respectively, were the result of the disposition of certain product lines
in 1993.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
Net cash used for operations ($2,264,440) ($2,403,404)
Net cash used for investing activities ($92,767) ($133,163)
Net cash provided by financing activities $3,342,636 $2,363,063
Working capital (deficit) $1,296,769 ($651,789)
</TABLE>
Trends:
The Company's net cash used for operations for the year ended December
31, 1995 was $2,264,440 compared to $2,403,404 for the previous year,
an improvmement of $138,964 or approximately 6%.
The Company continued to use strategic capital exchanges to reduce its
cash needs, especially in the second half of 1995. This included
exchanging debt for equity with several service providers, employees,
and consultants, saving precious cash assets. The Company also
negotiated the conversion of $550,000 in notes payable, plus accrued
interest, directly into equity, effective in early November 1995.
Finally, the company obtained agreement to convert $1,110,000 of
bridge loans directly into equity based upon the success of the
private placement in progress at year end. The Company intends to
enter into similar transactions in the future where practicable,
and where the Board of Directors deems them to be in the best interest
of the Company.
The CEO elected to defer his $12,500 monthly compensation from May 1,1995
through January 1996, and agreed to convert $68,041 directly to equity.
Other key executives deferred a portion of their salaries, agreeing to
convert all deferred salary (totaling $53,200) directly into equity
(in October 1995, and again in January of 1996) in the interest of
conserving current working capital.
In January 1996, the Company completed a private placement totaling $4.2
million, consummating the capital financing process of direct private
placements of equity and debt conversions begun in February of 1995.
This has allowed the Company to pursue the expanded distribution on
existing products, and complete the launch of several new products. A
small portion of the financing proceeds were used to retire notes payable
whose holders decided to forego the opportunity (or option) to convert to
equity.
General:
During calendar 1995, the continuing existence of the Registrant as a
going concern was dependent upon its receipt of additional financing and
its achieving profitable sales. It has achieved the first goal, and has
begun pursuit of the second goal. February 1995, the Registrant received
proceeds of approximately $443,000 net of commissions and expenses, from
the sale of $500,000 principal amount of 15% secured notes and warrants
through a brokerage firm. The maturity date of these notes was November
9, 1995. During the period September 1995 to February 1996, the
Registrant received: (i) $1,110,000 in debt financing that was later
converted to
11
<PAGE>
equity; (ii) $5,052,000 in equity financing net of expenses;
(iii) an aggregate of $925,000 of other indebtedness, including notes
payable to investors and amounts due to employees and consultants were
converted to equity; (iv) $500,000 principal amount of secured notes and
the accrued interest thereon were repaid. The cumulative effect of these
events was to increase working capital by $4.5 million. The Registrant
estimates that it will spend approximately $750,000 on research and
development in 1996, and approximately $250,000 on production machinery
and sales support systems in the same period.
The Registrant estimates that gross revenues for product shipments for the
first quarter of fiscal 1996 were approximately $820,000. The Registrant
is utilizing a new co-packer for Fudgets-Registration Mark-, as well as
launching the first sales of Caketts-TM- and Juliettes-TM-. The
initialization of production will occur at significantly reduced gross
margins, primarily due to the setup costs for raw materials, packaging
and production, as well as the smaller (relative) size of production
runs in order to match inventory to sales in the early stages. The
Registrant expects to achieve gross margins of approximately 45%-55%
(varies by product line/flavor) once full regular production efficiencies
are achieved. Although no assurance can be given as to actual results of
operations, and unforeseen difficulties may arise with respect to the
introduction of new products or the distribution of existing products,
management believes that the trends of the first quarter will continue and
should result in substantially improved results for the 1996 fiscal year.
Management believes the cash on hand from the capital financing described
above, as well as resulting from operations, are adequate to meet the
Company's planned capital needs of the current fiscal year.
ITEM 7. FINANCIAL STATEMENTS
SEE "INDEX TO FINANCIAL STATEMENTS" ON PAGE F-1
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Registrant are as follows:
NAME AGE POSITIONS HELD
---- --- --------------
Sheldon Schrager 64 Chairman of the Board and a
Director
Mark Beychok 38 President, CEO and a
Director
Stanley J. Pasarell 48 Director
Donald Wohl 60 Director
Kenneth Berg 69 Director
12
<PAGE>
SHELDON SCHRAGER was elected a director of the Company in September of 1993 and
has been Chairman of the Board since February 1995. Mr. Schrager was the
executive vice president of Columbia Pictures Corp. from 1979 to 1986. Mr.
Schrager is currently a private investor.
MARK BEYCHOK was elected President and a director of the Company in September of
1993 and has been Chief Executive Officer since February 1995. Mr. Beychok is a
private investor with seventeen years of experience in the food industry as an
owner and operator of various food manufacturing marketing and distribution
companies.
STANLEY J. PASARELL was elected a director of the Company in November, 1989.
Since September, 1990 he has been Chairman of the Board of Directors of Puerto
Rico Supplies Co., a consumer and institutional products distributor in Puerto
Rico. From 1986 through August of 1990, Mr. Pasarell was president and Chief
Executive Officer of both Puerto Rico Supplies Co. and Apelco del Caribe, Inc.
Apelco del Caribe acts as the exclusive Puerto Rican and Caribbean distributor
of all food and related products to McDonald's restaurants.
DONALD WOHL was elected a director of the Company in November of 1993. Mr. Wohl
is a private investor and financial consultant that has been advising small
growth companies for over 30 years. Mr. Wohl is also on the board of Koo Koo
Roo, Inc.
KENNETH BERG was elected a director in December 1995. Since August 1990, Mr.
Berg has been the Chairman of the Board and Chief Executive Officer of Koo Koo
Roo, Inc., a NASDAQ listed company which operates a chain of restaurants.
KEY EMPLOYEES
Management relies on certain key employees to carry forward the business,
including the following:
LAWRENCE BRUCIA is responsible for product development and marketing. Mr.
Brucia has more than 20 years experience in the food industry, in the areas of
manufacturing, distribution and marketing. Mr. Brucia founded and served as
president of Marin Specialty Foods and of Legend Food Products, Inc. Prior to
joining Vitafort, Mr. Brucia served as president of Focus Sales Group, working
to develop new products with companies, such as Spring Water Cookie Company and
International Trade and Marketing.
DR. SCOTT SANDERS, the head of research and development, has 25 years of
experience in the field of baking technologies and bakery products and has been
employed by or been a consultant to such firms as R.J.R. Nabisco, Goodman
Feildler Limited, Genencor, Inc., Maraini Packing Company, Pacific Grain
Products, Oregon Hazelnut Board, California Prune Board, Sunmaid Growers,
McCormick Company, California Date Advisory Board, and Mothers Cake and Cookie
Company. During the years 1978 to 1988, Dr. Sanders was head of research and
development and quality assurance for California based Safeway Supermarket
chain. In that position, Dr. Sanders was responsible for research and
development, new product development and refining existing products, and
ingredient appraisal operations at all Safeway's 16 commercial bakeries. Dr.
Sanders holds a B.A. (Biology), M.S. (Biology), and a Ph.D. (Food Science and
Technology) including Sigma Xi Science Honoree, Gamma Sigma Delta Agricultural
Honoree, and Phi Tau Sigma Food Science Honoree.
JOHN COPPOLINO manages the sales efforts of the company. Mr. Coppolino
brings with him to the Vitafort Management team over 10 years of experience in
the food industry. His sales and marketing background crosses over into every
major class of trade. As a Food Broker prior to joining Vitafort, Mr.
Coppolino represented some of the leading innovative healthy food manufactures
13
<PAGE>
in the industry (including Con Agra/the makers of Healthy Choice, and Health
Valley/manufacturer and marketer of healthy snacks). In addition, Mr.
Coppolino's manufacturing experience includes over 3 years as National Sales
Manager of Blue Ridge Farms ( $80 million). Mr. Coppolino graduated from the
Pennsylvania State University School of Business in 1983 with a degree in
Business Logistics.
Eloy Ellis manages the Finance and Administration efforts of the Company.
He has more than 15 years' experience in management, specifically in the
finance, accounting and operations areas. His resume includes eleven years as
the Regional Controller & Sales Administrator for Dreyer's Grand Ice Cream,
where, in addition to financial reporting and support, he was responsible for
the design and implementation of regional trade marketing and promotion
programs, and leading the conversion of merger/acquisition targets into
profitable operating divisions. Mr. Ellis is a Certified Public Accountant
(CPA) in California, having practiced accounting publicly for three years at
PriceWaterhouse (in Los Angeles, California). He received his B.A. in
Economics in 1978, and his Master of Business Administration in 1980, both from
the University of Southern California.
The Registrant intends to hold a shareholder meeting during 1996 at
which the entire Board of Directors will be chosen. Pursuant to the
Certificate of Incorporation of the Registrant, the Board of Directors is
divided into three classes as nearly equal in number as possible, with the
term of each class to expire every three years. There are no family
relationships among any officers and directors. Directors did not receive
any cash compensation for their services as directors in 1994 or 1995.
Section 16(a) compliance
No disclosures are required by the Company in response to this item.
ITEM 10. EXECUTIVE COMPENSATION
Mr. Westlund, a former officer and director of the Company, signed an
employment agreement with the Registrant on December 1, 1993. The terms of that
employment agreement are described below. Such employment agreement was
terminated upon Mr. Westlund's resignation as an officer of the Company in March
1995. Mr. Westlund and the Company entered into a consulting agreement, dated
as of March 1, 1995, whereunder Mr. Westlund was engaged as a consultant to the
Company through November 30, 1995 with monthly fees of $12,500 and provided for
offsets against such consulting fees equal to Mr. Westlund's outstanding
obligations to the Company. Among other things, the consulting agreement
provided that, if the new Chief Executive Officer of the Company deferred a
portion of his compensation under his employment agreement, then Mr. Westlund
would also defer the same portion of his consulting fees under the agreement.
On November 30, 1995, the Company and Mr. Westlund executed a letter agreement
settling their respective obligations under Mr. Westlund's consulting agreement,
modifying Mr. Westlund's remaining stock options to delete certain anti-dilution
provisions and releasing each other from all prior obligations. The Company has
fulfilled all of its obligations to Mr. Westlund under such letter agreement.
Mr. Benz, a former officer and director of the Company, signed an
employment agreement with the Registrant on December 1, 1993. The terms of that
employment agreement are described below. Effective April 1, 1994, Mr. Benz
resigned as an officer and a director of the Company and during 1994 the Company
and Mr. Benz executed a Separation and Release Agreement, dated as of December
1, 1994 (the "Separation Agreement"). The Separation Agreement provided that
the remaining 1,600,000 options at $.25 granted to Mr. Benz under his employment
agreement would immediately vest and the exercise price of 500,000 of such
options would be reduced from $.25 to $.10. The revision to the exercise price
was reflected as expense in the Company's financial statements for the year
ended December 31, 1994. In addition, the 500,000 options granted to Mr. Benz
in September 1993 were amended to provide that the inherent value of the option,
based on the then market price of the common stock, could be utilized to
exercise such options. Mr. Benz was to receive a lump sum of $15,000 in
14
<PAGE>
settlement of his employment agreement and was retained as a consultant at the
rate of $3,500 per month for a period of seven months. During 1995, the Company
and Mr. Benz executed a letter agreement whereunder the monies owed to the
Company by Mr. Benz were offset against amounts owed to Mr. Benz under the
consulting arrangement and the balance was applied to the exercise of certain
options held by Mr. Benz.
On December 1, 1993, the Registrant entered into a three year employment
agreement with each of Steven Westlund, Peter Benz and Mark Beychok. The
aggregate total of these agreements provides for an annual base salary of
$150,000 in the case of each of Mr. Westlund and Mr. Beychok and $120,000 in
the case of Mr. Benz plus a bonus in an amount equal to 25% of the
Registrant's pre-tax profits, but not more than 20% of the base salary. The
agreements provide that they shall automatically renew for successive three
year terms unless terminated by either party six months prior to the
expiration of their term. Except for cause, as defined in the agreements, the
registrant may not terminate the agreements during the first eighteen months
of their initial term and, upon any termination after the initial eighteen
months, must pay the employee six months salary. Each agreement provides for
the grant to the employee of an option to purchase two million shares of
common stock at $0.25 per share. The option was vested as to one million
shares upon grant and will vest as to an additional 500,000 shares on
December 31, 1994 and as to the final 500,000 shares on June 30,1995,
conditioned only on continued employment by the Registrant. Each agreement
provides that the Registrant will obtain $1,000,000 of life insurance on the
employee, the proceeds of which will be split equally between the employee's
beneficiary and the Registrant.
In December, 1995, in recognition of Mr. Beychok's deferral of his
compensation during 1995 and his assuming additional responsibilities within the
company, Mr. Beychok's employment agreement was amended to grant him an
additional 1,250,000 five year options with an exercise price of $.15, a price
equal to the offering price in the Company's then ongoing private placement. In
November, 1995, certain employees and consultant's to the Company, including Mr.
Beychok, agreed to convert their accrued salary, accrued consulting fees and
accrued expense reimbursements to stock and options on the same terms as the
Company's ongoing equity bridge financing. The Company's Board of Directors
approved this transaction in December 1995. In such connection, Mr. Beychok
converted $45,821 of accrued salary into 381,842 shares, 190,921 options with an
exercise price of $.225 and 190,921 options with an exercise price of $.30.
In September of 1993, options to purchase 500,000 shares of The
registrant's common stock was issued to Messrs. Westlund, Beychok and Benz for
their work as consultants to the Registrant.
The following table sets forth certain information with respect to the
compensation paid by the Company to Messrs. Westlund and Beychok (the "named
individuals") during 1995:
<TABLE>
<CAPTION>
NAME &
PRINCIPAL RESTRICTED OPTIONS/ LTIP ALL OTHER
POSITION YEAR SALARY OTHER STOCK SARS PAYOUTS COMPENSATION
- --------- ---- ------ ----- ----- ---- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
CEO
(Steven (1)
Westlund) 1995 $25,000 $95,775
President,
CEO
(Mark (2) (3)
Beychok) 1995 $40,000 $110,000 $14,212
</TABLE>
(1) Represents Mr. Westlund's consulting fees per his separation agreement,
most of which was used to retire loans from the Company and to exercise
existing stock purchase options.
15
<PAGE>
(2) A portion of Mr. Beychok's salary was deferred during 1994 and applied as
an offset against a note payable in 1995. A portion of Mr. Beychok's salary was
deferred in 1995 and the majority converted to common stock and options during
1995 and early 1996.
(3) Comprised of $10,912 car allowance and $3,300 in medical insurance
benefits.
Stock Option Plan
The Registrant adopted its 1989 Stock Option Plan (the "1989 Plan")
pursuant to which 250,000 shares of common stock were reserved for issuance upon
the exercise of options. Options granted under the 1989 Plan may at the
discretion of the Board be incentive stock options ("ISOs") within the meaning
of Section 422A of the Internal Revenue Code of 1986, as amended ("Code"), or
non-incentive stock options. In June 1991, the Board of Directors approved an
increase in the number of options available for grant under the 1989 Plan to
1,000,000. No options are outstanding under this plan.
In 1995, the Registrant adopted a the 1995 Stock Option Plan pursuant to
which 40,000,000 shares of Common Stock were reserved for issuance upon the
exercise of options (the "1995 Plan"). The 1995 Plan is similar to the 1989
Plan in many respects and in the discussion below, each is referred to as a
"Plan" and they are collectively referred to as the "Plans".
Under the terms of the Plans, all directors, officers and key employees of,
and consultants to, the Registrant and all its subsidiaries are eligible for
option grants. The Board determines in its discretion which persons will
receive option grants, the number of shares subject to each option, the exercise
price, which may not be less than the par value of the shares subject to the
option, except that in the case of ISOs, the exercise price must be at least one
hundred percent (100%) of the fair market value of the optioned shares on the
date of grant, or one hundred and ten percent (110%) of such fair market value
if the optionee is the owner of more than ten percent (10%) of the total
combined voting power of all classes of voting stock of the Registrant (a "10%
Holder"), and the term (which may not be more than ten (10) years from the date
of grant, or five (5) years in the case of an ISO granted to a 10% holder)
thereof. The Plans permit options granted thereunder to be exercised by the
tender of shares of common stock having a fair market value equal to the
exercise price of such option.
Options granted under the Plans may, at the discretion of the Board, be
exercisable upon the tender of cash equal in amount to the aggregate par value
of the shares covered by such options, together with a one-year note bearing
interest at the "applicable federal rate" (as defined in the Code) and providing
for a required prepayment upon any disposition of the acquired shares.
Presently, the Board does not have a stock option committee.
In connection with his settlement with the Registrant in 1993,
Mr. Corsini's options for the purchase of 400,000 shares at exercise prices
ranging from $0.50 to $0.80 were exchanged for three-year vested options with
the same stated exercise prices, all of which will expire in May, 1996.
During 1995 Mr. Beychok was granted an aggregate of 13,750,000 options
under the 1995 Plan.
The following chart sets certain information with respect to option
exercises during 1995 by the named individuals:
<TABLE>
<CAPTION>
Name Shares Value Number of Value of
Acquired Realized Securities Unexercised
on Underlying in-the-money
Exercise Unexercise Options/SAR
Options/SARs at s at FY end
FY-End Exercisable
Exercisable/ Unexercisable
Unexercisable
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Steven Westlund 356,300 $98,445 1,443,700 $216,555
- ------------------------------------------------------------------------------------
Mark Beychok -0- -$0- 7,619,342/ $1,676,878/
10,062,500 $4,192,503
</TABLE>
16
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the common stock by each
director and by entities or persons known to the Registrant to own beneficially
in excess of 5% of such stock and by all officers and directors as a group, as
of April 3, 1995. Except as otherwise indicated, all stockholders have sole
voting and investment power with respect to the shares listed as beneficially
owned by them, subject to the rights of spouses under applicable community
property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES
OF BENEFICIAL OWNER OF COMMON STOCK PERCENTAGE OF
IDENTITY OF GROUP BENEFICIALLY OWNED BENEFICIAL OWNERSHIP
------------------- ------------------ --------------------
<S> <C> <C>
Sheldon Schrager(1) 1,723,333 (2) 2.7%
Mark Beychok (1) 8,397,184 (3) 11.9%
Donald Wohl(1) 1,400,000 (4) 2.2%
Stanley J. Pasarell 1,260,805 (5) 2.0%
5 Lindview
San Rafael, California 94901
Kenneth Berg 608,333 (6) 1.0%
ALL DIRECTORS AND 14,650,460 19.8%
OFFICERS AS A GROUP
(5 PERSONS) (2)(3)(4) (5) and (6)
</TABLE>
(1) The Address of these persons is Suite 480, 1800 Avenue of the Stars, Los
Angeles, California 90067, except for Donald Wohl who is in Suite 1114 in such
building.
(2) Includes (i) 370,000 shares which are held jointly with Mr. Schrager's
wife; (ii) 20,000 shares which are owned by Mr. Schrager's individual retirement
account; and (iii) 1,333,333 shares underlying the currently exercisable portion
of a stock option, expiring December 16, 2000, which has an exercise price of
$.15 per share (but does not include 2,666,667 shares underlying such option
which are not currently exercisable).
(3) Includes (i) 1,250,000 shares underlying a currently exercisable option
with an exercise price of $.15 per share which expires on December 16, 2000;
(ii) 300,000 shares underlying a currently exercisable option with an exercise
price of $.10 per share which expires on September 29, 1998; (iii) 2,000,000
shares underlying a currently exercisable option with an exercise price of $.25
per share which expires on November 15, 1998; (iv) 1,000,000 shares underlying
the currently exercisable portion of a stock option, expiring December 16, 2000,
which has an exercise price of $.15 per share (but does not include 2,000,000
shares underlying such option which are not currently exercisable); (v)
2,687,500 shares underlying the currently exercisable portion of a stock option,
expiring December 16, 2000, which has an exercise price of $.15 per share (but
does not include 8,062,500 shares underlying
17
<PAGE>
such option which are not currently exercisable), (vi) 190,921 shares
underlying a currently exercisable option with an exercise price of $.225 per
share which expires 15 months after the effective date of a registration
statement relating to options granted in a private placement transaction and
(vii) 190,921 shares underlying a currently exercisable option with an
exercise price of $.30 per share which expires 21 months after the effective
date of a registration statement relating to options granted in a private
placement transaction.
(4) Includes (i) 400,000 currently exercisable options owned by Mr. Wohl,
which has an exercise price of $.22 per share and expires on November 20, 1996
and (ii) 1,000,000 shares underlying the currently exercisable portion a stock
option, expiring December 16, 2000, which has an exercise price of $.15 per
share (but does not include 2,000,000 shares underlying such stock option which
are not currently exercisable). Does not include 3,750,000 shares owned by
V.F.R.T. Partners, L.P., a California limited partnership in which Mr. Wohl is
the general partner.
(5) Includes 3,340 Redeemable Warrants owned by Mr. Pasarell. The Redeemable
Warrants expire April 30, 1996 and have an exercise price of $2.37 per share.
Includes 1,000,000 shares underlying the currently exercisable portion of a
stock option, expiring December 16, 2000, which has an exercise price of $.15
per share (but does not include 2,000,000 shares underlying such stock option
which are not currently exercisable).
(6) Includes (i) 25,000 shares underlying a presently exercisable option which
has an exercise price of $.20 per share and expires on September 16, 1998 and
(ii) 333,333 underlying the currently exercisable portion of a stock option,
expiring December 18, 2000, which has an exercise price of $.15 per share (but
does not include 666,667 shares underlying such option which are not currently
exercisable.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1987, Joseph R. Daly, a director and principal stockholder, loaned the
Registrant $320,000 which was evidenced by a demand promissory note which bore
interest at the Bank of New York's prime rate. Subsequently, Mr. Daly agreed
that interest on such note would accrue until the consummation of a public
offering of the Registrant's securities and thereafter, interest and principal
would be paid in four quarterly installments commencing 14 months from the
closing of such offering (February 19, 1991). As of February 19, 1991, the total
accrued interest due amounted to $109,390.
During November 1989, Mr. Daly made a $50,000 loan to Nutrifish Corporation
which is evidenced by a promissory note bearing interest at 10% per annum. Such
interest was prepaid by issuing to Mr. Daly one and two thirds percent (1-2/3%)
of the outstanding common stock of Nutrifish Corporation. Mr. Daly was also
granted the right to purchase additional shares to preserve his percentage
interest in Nutrifish Corporation. The principal of such notes was to be repaid
on January 20, 1991, or prepaid out of the gross revenues of Nutrifish
Corporation. At the time Mr. Daly made his loan, an unaffiliated party loaned
Nutrifish $100,000 on the same terms, which was repaid in January, 1991. The
total principal amount due to Mr. Daly on January 20, 1991 was $44,121.
In March 1991, Mr. Daly agreed to exchange a portion of the outstanding
balance of the aforementioned $320,000 note (plus accrued interest of $109,390),
and of the $19,121 remaining balance due on the Nutrifish note for (i) a one-
year $100,000 promissory note from the Registrant bearing interest at ten
percent (10%) per annum, and (ii) 10,000 shares of the Registrant's Series A
Convertible Preferred Stock which were issued to him at a price of $34.85 per
share. Each such share of Preferred Stock is convertible into 24 shares of the
Registrant's common stock. The $100,000 promissory note provided for 12 equal
monthly payments of principal and interest due Mr. Daly in the amount of $9,167
each. In September 1991, Mr. Daly exchanged the $50,000 principal balance
remaining on the $100,000 note for an additional 1,435 shares of Series A
Convertible Preferred Stock. Mr. Daly received one share of the Registrant's
Series A Preferred Stock for each $34.85 owed him.
18
<PAGE>
Total dividend and interest payments made to Mr. Daly in 1991 were $13,963 and
$5,002, respectively. Total dividend and interest payments made to Mr. Daly in
1992 were $24,000 and $0, respectively.
In November of 1993, Mr. Daly agreed to convert his 11,435 shares of Series
A preferred Stock into 520,000 shares of common stock. The Registrant made no
dividend or interest payments to Mr. Daly in 1993.
In April of 1993 Stanley Pasarell, a member of the Board of Directors
loaned the Registrant $11,000 for the purposes of preparing the Registrant's
1992 10-KSB. This loan was repaid on July 11, 1993.
In March 1993, Mr. Frank Corsini, then President and a director, was repaid
his loan of $3791 as part of his Settlement Agreement and Full Release. In
September 1993, Mr. Stanley Pasarell and Mr. Barry Loughrane, members of the
Board of Directors, converted their loans of $8800 and $8891 respectively to the
Registrant into 44,455 and 44,000 shares respectively of common stock of the
Registrant. In September of 1993, Dr. Barry Saltzman, a member of the Board of
Directors was repaid his loan of $8,891 in full by the Registrant. In October
1993, Mr. Steven Westlund, CEO and Chairman of the Board was repaid his loan of
$500 in full by the Registrant.
In September 1993, Mr. Barry Loughrane, then a member of the Board of
Directors purchased 250,000 shares of the Registrant's common stock at $0.10 per
share as part of a private placement of the Registrant's common stock. In
September of 1993, Mr. Sheldon Schrager, prior to becoming a member of the Board
of Directors, purchased 370,000 shares of the Registrant's common stock at $0.10
per share as part of a private placement of the Registrant's common stock. In
December 1993, Mr. Herman Jacobs, who served as a member of the Board of
Directors from December 1993 to December 1994, purchased 750,000 shares of the
Registrant's common stock at $0.20 per share as part of a private placement of
the Registrant's common stock.
In September of 1993, Mr. Westlund, Mr. Beychok and Mr. Benz (who was then
an officer and a director) each purchased 250,000 shares of the Registrant's
common stock at $.10. Payment for such shares was made by each of Messrs.
Westlund, Beychok and Benz delivering a promissory note in the amount of $24,975
and paying $25 in cash. The notes bore interest at 8% per annum and were
callable at the option of the Company during the period August 15 to September
15 in each year. Such notes were offset against moneys due to Messrs. Benz and
Westlund under their settlement agreements with the Registrant. Mr. Beychok's
note was offset against deferred salary at approximately the same time. The
Registrant also entered into employment agreements with Messrs. Westlund,
Beychok and Benz. See, "Item 10. Executive Compensation".
In November 1993, the Registrant entered into a consulting agreement with
Herman Jacobs, a director of the Registrant. Mr. Jacobs compensation under such
agreement, which was further conditioned on his investing $150,000 in the
Registrant, was the grant of 2,000,000 options at $.25. The Company, in making
this filing does not waive the right to challenge Mr. Jacob's entitlement to
these options. The Company and Mr. Jacobs are currently in litigation. See
"Item 2. - Legal Proceedings".
In October 1993, the Registrant entered into a Marketing Agreement with
Second Nature Technologies, Inc., a Delaware corporation of which Dr. Barry
Saltzman, a director of the Company, is an officer, director and principal
shareholder. (See "Item 1. Business of the Registrant")
In December 1993, the Registrant entered into a Subscription-Commitment
Agreement with V.F.R.T. Partners, L.P. of which, Mr. Donald Wohl, a director of
the Registrant, is the general partner.V.F.R.T. Partners, L.P. purchased
3,750,000 shares of common stock at $.20 per share under such agreement.
19
<PAGE>
In July 1990, the Registrant and Vitafort Latin America, a Delaware
corporation ("VLA") and an affiliate of both the Registrant and Mr. Pasarell,
entered into a royalty-free license agreement (See "Item 1. Business-Licenses")
granting to VLA exclusive rights to use, develop, sell and sub-license the
Registrant's programs, products and technology in Latin America, including the
Caribbean Basin, Central and South America, and Mexico. In exchange for the
grant of license, the Registrant received a 50% ownership interest in VLA.
Mr. Pasarell and his affiliates own the remaining 50% interest in VLA and manage
the corporation from its offices in Puerto Rico. The VLA License Agreement is
for a term of ten (10) years and is thereafter automatically renewed for
successive five-year periods upon the prior written consent of the parties. The
Registrant is obligated to support the license in the territory by providing VLA
with the use of its trademarks and with its methodology, existing documentation,
copies of all existing advertising and promotional material for Vitafort
products and programs and updates thereto, and by assisting VLA in the
development of its business procedures in the territory. VLA has been dormant
since its incorporation.
In October 1995, Mark Beychok, then President and director, agreed to
convert the balance of his deferred salary into equity at the Bridge Equity
financing rate. This transaction resulted in the issuance of 381,842 shares
of common stock. 190,921 warrants at $.225 each and 190,921 warrants at $.30
each (see further definition under ITEM 11; Security Ownership of Certain
Beneficial Owners and Management).
In June 1995, Ken Berg was granted 25,000 stock purchase options with an
exercise price of $.20 as an incentive to loan the company $25,000 for six
months. In January 1996, Mr. Berg joined the Board of Directors, and the
Company repaid his loan in full.
20
<PAGE>
PART IV
ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K.
(a) EXHIBITS LIST
3.l Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
3.3 Agreement and Plan of Merger between the Registrant and Vitafort
International Corporation, a California corporation*
3.4 Certificate of Designation - Series A Preferred Stock*****
3.5 Certificate of Designation - Series B Preferred Stock*****
3.6 Certificate of Amendment to the Certificate of Incorporation,
November 1991*****
3.7 Certificate of Designation - Series C Preferred Stock*****
3.8 Certificate of Amendment to the Certificate of Incorporation, filed
February 8, 1994 ******
3.9 Certificate of Designation - Series D Preferred Stock******
3.10 Certificate of Amendment to the Certificate of Incorporation, filed
November, 1995. Incorporated by reference to Exhibit 4.10 filed with
the Registrant's Registration Statement on Form S-8 filed January 25,
1996 File Number 33-300435 (the "1996 S-8").
4.1 Specimen Stock Certificate*
4.2 Specimen Redeemable Common Stock Purchase Warrant*
4.3 Form of Warrant Agreement*
4.4 Proposed form of Underwriters Warrant Agreement*
4.6 Warrant Extension Agreement, December 18, 1992*****
4.7 Warrant Extension Agreement, December 18, 1994******
4.8 Warrant Extension Agreement, January 18, 1995******
4.9 Warrant Extension Agreement, April 3, 1995******
4.10 Warrant Extension Agreement, May 3, 1995. Incorporated by reference
to Exhibit 4.18 to the 1996 S-8.
4.11 Warrant Extension Agreement, June 15, 1995. Incorporated by reference
to Exhibit 4.19 to the 1996 S-8.
4.12 Warrant Extension Agreement, July 17, 1995. Incorporated by reference
to Exhibit 4.20 to the 1996 S-8.
4.13 Warrant Extension Agreement, August 16, 1995. Incorporated by
reference to Exhibit 4.21 to the 1996 S-8.
4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by
reference to Exhibit 4.21 to the 1996
S-8.
10.1 Loan Agreement, dated August 19, 1988, between the Registrant
and Bishop Capital, L.P. and promissory note in the principal amount
of $150,000*
10.2 License Agreement, dated April 25, 1986, between the Registrant and
Crystal Geyser Water Registrant and amendment, dated January 7, 1988*
10.3 Demand Promissory Note, dated July 10, 1987, from Registrant to Joseph
R. Daly in the principal amount of $300,000 and Modification, dated
October 11, 1989*
10.4 License Agreement, dated as of October 9, 1987, between the Registrant
and Good Health Beverage, Inc. and amendment, dated November 23, 1988*
10.5 Product Development Agreement, dated as of January 21, 1988, between
the Registrant and International Multifoods, Inc.*
10.6 Beverage Agreement, dated as of October 31, 1988, between the
Registrant and
21
<PAGE>
PowerBurst Corporation*
10.7 Amended and Restated Agreement, dated August 2, 1989, between the
Registrant and Vitafort Far East Co., Ltd.*
10.8 Agreement, dated August 11, 1989, between Barry Saltzman, M.D. and
Yoshio Tanaka*
10.9 Lease, dated June 13, 1988, between Registrant and Shelterpoint
Equities, Ltd. for offices at 591 Redwood Highway, Mill Valley,
California*
10.10 Agreement, dated July 25, 1989, between Nutrifish Corporation and Mt.
Lassen Trout Farms*
10.11 Salmon Rondelles Joint Development and Marketing Agreement, dated as
of September 18, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.*
10.12 Whole Salmon Joint Development and Marketing Agreement, dated as of
September 26, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.*
10.13 Employment Agreement, dated September 13, between the Registrant and
Barry K. Saltzman*
10.14 Employment Agreement, dated September 13, between the Registrant and
Jeffrey Lewenthal*
10.15 The Registrant's 1989 Stock Option Plan*
10.16 Stock Option Agreement, dated as of July 17, 1989 between the
Registrant and Jeffrey Lewenthal*
10.17 Secrecy Agreement, dated as of May 2, 1986, between the Registrant and
Hoffman-LaRoche, Inc.*
10.18 Joint Venture Agreement, dated September 29, 1989, between the
Registrant and Agrolife Technologies, Inc.*
10.19 Consulting Agreement, dated September 13, 1989, between the Registrant
and Randall S. Reis*
10.20 Loan Agreement, dated June 15, 1989, between Union Bank and Joseph R.
Daly*
10.21 Form of Employee Confidentiality Agreement.**
10.23 Form of Escrow Agreement by and among the Registrant, Gilford
Securities Corp., and certain stockholders of Registrant*
10.24 Promissory Note, made November 21, 1989, by Nutrifish Corporation and
payable to Joseph R. Daly*
10.25 Right of First Refusal Agreement, dated November 21, 1989, between
Nutrifish Corporation and Joseph R. Daly*
10.26 Production License Agreement for Nutrifish Norwegian Salmon,dated
February 2, 1990, between Nutrifish Corporation and Norwegian
Seafoods, Inc.**
10.27 Test Market Agreement, dated December 19, 1989, between International
Multifoods Corporation and the Registrant.**
10.28 Amendment, dated as of December 19, 1989, to the Product Development
Agreement between International Multifoods Corporation and the
Registrant.**
10.29 Consulting Agreement, dated February 21, 1990, between the Registrant
and Joseph R. Daly.**
10.30 License Agreement between the Registrant and Nulaid Foods, Inc., dated
April 30, 1990.**
10.31 License Agreement between the Registrant and Vitafort Latin America,
dated July 30, 1990.**
10.32 Termination Agreement between the Registrant and Jeffrey D. Lewenthal,
dated September 12, 1990.**
10.33 Settlement Agreement and Full Release between Nicholas J. Caputo and
Registrant, dated October 4, 1990.**
22
<PAGE>
10.34 Employment Agreement between the Registrant and Stephen D. Clow, dated
December 1, 1990.**
10.35 Employment Agreement between the Registrant and Frank A. Corsini,
dated January 2, 1991.**
10.36 Stock Option Agreement between the Registrant and Stephen D. Clow,
dated January 2, 1991.**
10.37 Stock Option Agreement between the Registrant and Frank A. Corsini,
dated January 2, 1991.**
10.38 Letter Agreement, dated February 1, 1991, amending Consulting
Agreement between the Registrant and Joseph R. Daly.**
10.39 Letter Agreement, dated March 12, 1991, between the Registrant and
Joseph R. Daly regarding debt reorganization.**
10.40 Consulting Agreement between Norman Kretchmer, M.D., Ph.D., and the
Registrant, dated December 20, 1988.**
10.41 Settlement Agreement between the Registrant and PowerBurst
Corporation, dated September 23, 1991.**
10.42 Subscription Agreement between the Registrant and Societe Anonyme
Financier Industrielle et Garantie, dated November 1, 1991.
Incorporated by reference to Exhibit 1 to the Registrant's Report on
Form 8-K dated November 1, 1991.
10.43 Exclusive Distribution Agreement between Registrant and Chicago Fish
House, dated June 13, 1991.**
10.44 Larry Lucas Settlement Agreement, dated March 25, 1993.*****
10.45 Frank Corsini, Separation Agreement, dated May 18, 1993.*****
10.46 Agreement dated October 5, 1993 between the Registrant and Second
Nature Technologies, Inc.***
10.47 Food and Beverage Technology Agreement***
10.48 Asset Purchase and Sale Agreement, dated as of June 7, 1993 by and
among Crystal Clear Farms, Inc., a Maine corporation, the Registrant
and Salmon Distribution Subsidiary, Inc. a Maine corporation which was
formerly known as Crystal Clear Farms, Inc.****
10.49 Temporary Operating Agreement dated June 7, 1993 by and among Samuel
L. Thompson & Associates, Inc., a Maine corporation, the Registrant
and Crystal Clear Farms, Inc. a Maine corporation (now known as Salmon
distribution Subsidiary, Inc.)****
10.50 Non-Competition Agreement dated July 27, 1993 by and between the
Registrant and Crystal clear farms, Inc., a Maine corporation.****
10.51 Employment Agreement dated as of November 29, 1993, between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.01 to Form S-8 filed by the Registrant on March 4, 1994 ("The S-8
filling").
10.52 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.02 to the S-8 filing.
10.53 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.03 to the S-8 filing.
10.54 Employment Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit 99.04
to the S-8 filing.
10.55 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit 99.05
to the S-8 filing.
10.56 Employment Agreement dated as of November 29, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.06 to the S-8 filing.
10.57 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.07 to the S-8 filing
23
<PAGE>
10.58 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.08 to the S-8 filing.
10.59 Consulting Agreement dated as of November 29, 1993 between the
Registrant and Herman Jacobs. Incorporated by reference to exhibit
99.09 to the S-8 filing.
10.60 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Herman Jacobs. Incorporated by reference to exhibit
99.10 to S-8 filing.
10.61 Vitafort International Corporation 90 Day Operating Plan.
Incorporated by reference to exhibit 99.21 to the S-8 filing.
10.62 Stock Option Agreement, dated September 15, 1993, between the
Registrant and Stanley J. Pasarell. Incorporated by reference to
exhibit 99.22 to the S-8 filing.
10.63 Separation and Release Agreement, dated as of December 1, 1994,
between the Registrant and Peter Benz. ******
10.64 Letter Agreement, dated September 14, 1995, between the Registrant and
Peter T. Benz. Filed Herewith.
10.65 Consulting Agreement and Mutual Release, dated as of March 1, 1995,
between the Registrant and Steven R. Westlund. Filed Herewith.
10.66 Letter Agreement, dated November 30, 1995, between the Registrant and
Steven Westlund. Filed Herewith.
10.67 The Vitafort International Corporation 1995 Stock Option Plan.
Incorporated by reference to exhibit 99.01 to the 1996 S-8.
10.68 Form of Option granted to directors under The Vitafort International
Corporation 1995 Stock Option Plan and schedule of grants to
directors. Incorporated by reference to exhibit 99.02 to the
1996 S-8.
10.69 Employee Option granted to Mark Beychok under The Vitafort
International Corporation 1995 Stock Option Plan. Incorporated by
reference to exhibit 99.03 to the 1996 S-8.
10.70 Amendment, dated December 16, 1995, to the Employment Agreement
between the Registrant and Mark Beychok. Incorporated by reference to
exhibit 99.10 to the 1996 S-8.
10.71 Option Agreement, dated December 16, 1995, between the Registrant and
Mark Beychok. Incorporated by reference to exhibit 99.11 to the 1996
S-8.
10.72 Conversion Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.20 to the 1996 S-8.
10.73 Class A Option Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.21 to the 1996 S-8.
10.74 Class B Option Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.22 to the 1996 S-8.
22. Subsidiaries of the Registrant:
(a)Nutrifish Corporation, a 90.5% owned
California corporation**
(b)Salmon Distribution Subsidiary Inc., a 100% owned
Maine corporation
(c)Vitafort Latin America, a 50% owned
Delaware Corporation
23. Consent of KPMG Peat Marwick LLP Independent Certified Public
Accountants (Filed Herewith)
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form S-18, file number 33-31883.
24
<PAGE>
** Incorporated by reference to the same numbered exhibit to the Registrant's
December 31, 1990 and 1989 Form 10-K's .
*** Incorporated by reference to exhibits 1 & 2 to the Registrant's September
30, 1993 Form 10-QSB.
**** Incorporated by reference to exhibits 1 through 4 to the Registrant's
August 7, 1993 Form 8-K.
***** Incorporated by reference to the same numbered exhibit to the Registrant's
December 31, 1993 Form 10-KSB.
****** Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1994 Form 10-KSB.
(b) REPORTS ON FORM 8-K None
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
VITAFORT INTERNATIONAL
CORPORATION
By:/S/MARK BEYCHOK
-----------------------
Mark Beychok, President
LOS ANGELES, California
Date: March 31, 1996
Pursuant to the requirements of the Exchange Act, this report has been duly
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
NAME TITLE(S) DATE
- ---- -------- ----
/S/MARK BEYCHOK President and CEO March 31, 1996
- --------------------- (Principal Executive,
Mark Beychok Accounting and Financial
Officer)
/S/SHELDON SCHRAGER Chairman of the March 31, 1996
- ---------------------- Board and a Director
Sheldon Schrager
March , 1996
- ----------------------
Stanley J. Pasarell
/S/DONALD WOHL Director March 31, 1996
- ----------------------
Donald Wohl
/S/KENNETH BERG Director March 31, 1996
- ----------------------
Kenneth Berg
26
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Balance Sheets - December 31, 1995 and 1994 F-3
Consolidated Statements of Operations - Years ended
December 31, 1995, 1994 and 1993 F-4
Consolidated Statements of Stockholders'
Equity (Deficit) - Years ended December 31, 1995, 1994 and 1993 F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993 F-6
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vitafort International Corporation:
We have audited the accompanying consolidated balance sheets of Vitafort
International Corporation and subsidiaries as of December 31, 1995 and 1994 and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Vitafort International Corporation and subsidiaries as of December 31, 1995 and
1994 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick
February 16, 1996
F-2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------------ ------------
Current assets:
Cash and cash equivalents $1,316,406 330,977
Accounts receivable - trade, net of allowance for doubtful accounts of
$45,650 and $35,456 in 1995 and 1994, respectively 39,423 150,937
Notes receivable 19,778 ---
Other receivables 147,974 ---
Inventory 680,876 190,750
Prepaids and other current assets 365,117 62,433
------------ ------------
Total current assets 2,569,574 735,097
------------ ------------
Fixed assets:
Manufacturing equipment 165,931 94,216
Furniture and office equipment 82,465 77,888
Computer equipment 148,074 131,599
------------ ------------
396,470 303,703
Less accumulated depreciation (139,991) (78,551)
------------ ------------
Net fixed assets 256,479 225,152
------------ ------------
Intangible assets 70,000 90,000
Other assets 355,494 ---
Less accumulated amortization (67,703) (53,758)
------------ ------------
Net intangible and other assets 357,791 36,242
------------ ------------
$3,183,844 996,491
------------ -----------
------------ -----------
Liabilities and Stockholders' Equity (Deficit) 1995 1994
------------ ------------
<S> <C> <C>
Current liabilities:
Accounts payable - trade $ 236,927 279,864
Accrued expenses (note 4) 636,514 443,665
Notes payable (note 5) 75,000 500,000
Current maturities of long-term debt (note 6) 174,364 163,357
Other current liabilities 150,000 ---
------------ ------------
Total current liabilities 1,272,805 1,386,886
Long-term debt, exclusive of current maturities (note 6) 34,548 ---
------------ ------------
Total liabilities 1,307,353 1,386,886
------------ ------------
Stockholders' equity (deficit) (note 8):
Series B, 10% Cumulative Convertible Preferred stock, $.01 par value.
Authorized 110,000 shares; issued and outstanding 1,500 and 2,000
shares at December 31, 1995 and 1994, respectively; aggregate
liquidation preference of $75,000 and $100,000 at December 31, 1995 and
1994, respectively. 15 20
Series C, Convertible Preferred stock, $.01 par value. Authorized 450
shares; issued and outstanding 50 shares at December 31, 1995 and
1994; aggregate liquidation preference of $1 at December 31, 1995 and 1994 1 1
Series D, 8% Convertible Preferred stock, $.01 par value. Authorized 2,000
shares; issued and outstanding 0 shares at December 31, 1995 and 673
shares at December 31, 1994; aggregate liquidation preference of
$673,000 at December 31, 1994 --- 7
Subscribed stock, 24,589,484 shares at December 31, 1995 and 750,000
shares at December 31, 1994 3,418,196 74,925
Notes receivable on subscribed common stock --- (74,925)
Common stock, $.0001 par value. Authorized 180,000,000 and 40,000,000
shares at December 31, 1995 and 1994, respectively; issued and
outstanding 38,223,704 and 24,026,107 shares at December 31, 1995 and
1994, respectively 3,823 2,403
Additional paid-in capital 11,382,120 9,722,557
Accumulated deficit (12,927,664) (10,115,383)
------------ ------------
Total stockholders' equity (deficit) 1,376,491 (390,395)
Commitments and contingencies
------------ ------------
$ 3,183,844 996,491
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Product sales $ 2,434,811 1,242,814 141,334
Sales discounts and allowances (119,660) (96,700) --
-------------- -------------- --------------
Net revenues 2,315,151 1,146,114 141,334
Cost of sales 1,482,326 754,464 103,385
-------------- -------------- --------------
Gross profit 832,825 391,650 37,949
-------------- -------------- --------------
Operating expenses:
Research and development 378,602 373,887 120,059
Marketing 1,417,645 556,430 52,686
Selling, general and administrative 1,741,424 2,043,110 757,333
-------------- -------------- --------------
Total operating expenses 3,537,671 2,973,427 930,078
-------------- -------------- --------------
Loss from operations (2,704,846) (2,581,777) (892,129)
Interest income 19,778 2,573 3,415
Interest expense (126,290) (32,532) (12,057)
Other income 677 82,772 12,120
-------------- -------------- --------------
Loss from continuing operations
before income taxes (benefit) (2,810,681) (2,528,964) (888,651)
Income taxes (benefit) (note 7) 1,600 1,600 (128,000)
-------------- -------------- --------------
Loss from continuing operations (2,812,281) (2,530,564) (760,651)
Discontinued operations (note 3):
Loss from discontinued operations -- -- (67,448)
Gain on disposal of Crystal Clear
Farms (net of income tax
expense of $128,000) -- -- 192,000
-------------- -------------- --------------
Net loss $ (2,812,281) (2,530,564) (636,099)
-------------- -------------- --------------
-------------- -------------- --------------
Earnings (loss) per common share
(note 2): Continuing operations $ (.10) (.12) (.07)
Discontinued operations -- -- (.01)
Gain on disposal -- -- .02
-------------- -------------- --------------
Net loss $ (.10) (.12) (.06)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years ended December, 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Series A Cumulative Series B Cumulative
Convertible Preferred stock Convertible Preferred stock
---------------------------- ---------------------------
Shares Amount Shares Amount
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 11,435 $ 114 2,000 $ 20
Common stock issued for cash in private placement 0 0 0 0
Settlements made for common stock 0 0 0 0
Stock subscribed 0 0 0 0
Note receivable on subscribed common stock 0 0 0 0
Conversion of preferred stock to common (11,435) (114) 0 0
Dividends on convertible preferred stock 0 0 0 0
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1993 0 0 2,000 20
Common stock issued for cash in private placement 0 0 0 0
Conversion of debt to equity 0 0 0 0
Cancelation of subscribed stock 0 0 0 0
Conversion of preferred stock to common stock 0 0 0 0
Exercise of stock options 0 0 0 0
Preferred stock issued for cash in private placement,
net of commissions and offering costs 0 0 0 0
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1994 0 0 2,000 20
Common stock issued for cash in bridge offering,
net of commissions and offering costs 0 0 0 0
Common stock subscribed in private placement,
net of commissions and offering costs 0 0 0 0
Conversion of debt to equity 0 0 0 0
Conversion of preferred stock to common stock 0 0 (500) (5)
Exercise of stock options 0 0 0 0
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1995 0 $ 0 1,500 $ 15
----------- ----------- --------- ----------
----------- ----------- --------- ----------
<CAPTION>
Series C Series D
Convertible Preferred stock Convertible Preferred stock
---------------------------- ---------------------------
Shares Amount Shares Amount
----------- ----------- --------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 80 $ 1 0 $ 0
Common stock issued for cash in private placement 0 0 0 0
Settlements made for common stock 0 0 0 0
Stock subscribed 0 0 0 0
Note receivable on subscribed common stock 0 0 0 0
Conversion of preferred stock to common 0 0 0 0
Dividends on convertible preferred stock 0 0 0 0
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1993 80 1 0 0
Common stock issued for cash in private placement 0 0 0 0
Conversion of debt to equity 0 0 0 0
Cancelation of subscribed stock 0 0 0 0
Conversion of preferred stock to common stock (30) 0 0 0
Exercise of stock options 0 0 0 0
Preferred stock issued for cash in private placement,
net of commissions and offering costs 0 0 673 7
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1994 50 1 673 7
Common stock issued for cash in bridge offering,
net of commissions and offering costs 0 0 0 0
Common stock subscribed in private placement,
net of commissions and offering costs 0 0 0 0
Conversion of debt to equity 0 0 0 0
Conversion of preferred stock to common stock 0 0 (673) (7)
Exercise of stock options 0 0 0 0
Net loss 0 0 0 0
----------- ----------- --------- ----------
Balances at December 31, 1995 50 $ 1 0 $ 0
----------- ----------- --------- ----------
----------- ----------- --------- ----------
<CAPTION>
Notes
receivable on Common stock
Subscribed subscribed -------------------------
stock common stock Shares Amount
----------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Balances at December 31, 1992 150,000 0 6,502,726 $ 651
Common stock issued for cash in private placement 0 0 8,213,333 821
Settlements made for common stock 0 0 1,012,428 101
Stock subscribed 74,925 0 750,000 75
Note receivable on subscribed common stock 0 (74,925) 0 0
Conversion of preferred stock to common 0 0 520,000 52
Dividends on convertible preferred stock 0 0 0 0
Net loss 0 0 0 0
----------- ----------- ---------- ----------
Balances at December 31, 1993 224,925 (74,925) 16,998,487 1,700
Common stock issued for cash in private placement 0 0 3,750,000 376
Conversion of debt to equity 0 0 456,640 45
Cancelation of subscribed stock (150,000) 0 0 0
Conversion of preferred stock to common stock 0 0 99,480 10
Exercise of stock options 0 0 2,721,500 272
Preferred stock issued for cash in private placement,
net of commissions and offering costs 0 0 0 0
Net loss 0 0 0 0
----------- ----------- ---------- ----------
Balances at December 31, 1994 74,925 (74,925) 24,026,107 2,403
Common stock issued for cash in bridge offering,
net of commissions and offering costs 0 0 5,208,333 521
Common stock subscribed in private placement,
net of commissions and offering costs 1,530,249 0 0 0
Conversion of debt to equity 1,416,447 74,925 7,620,280 762
Conversion of preferred stock to common stock 372,500 0 960,284 96
Exercise of stock options 24,075 0 408,700 41
Net loss 0 0 0 0
----------- ----------- ---------- ----------
Balances at December 31, 1995 3,418,196 0 38,223,704 $ 3,823
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
<CAPTION>
Additional
paid-in Accumulated
capital deficit Total
-------------- ------------- -------------
<S> <C> <C> <C>
Balances at December 31, 1992 6,187,659 (6,948,720) (610,275)
Common stock issued for cash in private placement 1,185,696 0 1,186,517
Settlements made for common stock 211,518 0 211,619
Stock subscribed 0 0 75,000
Note receivable on subscribed common stock 0 0 (74,925)
Conversion of preferred stock to common 0 0 (62)
Dividends on convertible preferred stock (35,731) 0 (35,731)
Net loss 0 (636,099) (636,099)
-------------- ----------- -----------
Balances at December 31, 1993 7,549,142 (7,584,819) 116,044
Common stock issued for cash in private placement 751,189 0 751,565
Conversion of debt to equity 199,955 0 200,000
Cancelation of subscribed stock 0 0 (150,000)
Conversion of preferred stock to common stock 0 0 10
Exercise of stock options 549,778 0 550,050
Preferred stock issued for cash in private placement,
net of commissions and offering costs 672,493 0 672,500
Net loss 0 (2,530,564) (2,530,564)
-------------- ------------ -----------
Balances at December 31, 1994 9,722,557 (10,115,383) (390,395)
Common stock issued for cash in bridge offering,
net of commissions and offering costs 563,439 0 563,960
Common stock subscribed in private placement,
net of commissions and offering costs 0 0 1,530,249
Conversion of debt to equity 1,418,399 0 2,910,533
Conversion of preferred stock to common stock (372,584) 0 0
Exercise of stock options 50,309 0 74,425
Net loss 0 (2,812,281) (2,812,281)
-------------- ------------ -----------
Balances at December 31, 1995 11,382,120 (12,927,664) 1,876,491
-------------- ------------ -----------
-------------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (2,812,281) (2,530,564) (636,099)
Adjustments to reconcile net loss to net cash and cash
equivalents used in operating activities:
Depreciation and amortization 75,385 159,349 21,263
Gain on sale of property and equipment -- (24,452) 60
Write-off of Solonae and Future Foods assets -- 97,821 --
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade, net 111,514 (124,227) 12,327
Inventory (490,126) (190,750) --
Intangible assets -- (70,000) (24,347)
Prepaids and other assets 52,125 85,525 (112,565)
Other notes receivable (19,778) -- --
Other receivables (147,974) -- --
Increase (decrease) in:
Accounts payable - trade (42,937) (25,874) (76,973)
Accrued expenses 859,632 219,768 (22,801)
Other 150,000 -- (14,365)
-------------- -------------- --------------
Cash and cash equivalents used in
operating activities (2,264,440) (2,403,404) (853,500)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of fixed assets (92,767) (133,163) (211,896)
Proceeds from sale of equipment -- -- 9,901
Proceeds from sale of Crystal Clear Farms -- -- 160,000
-------------- -------------- --------------
Cash and cash equivalents used in
investing activities (92,767) (133,163) (41,995)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 1,818,911 500,000 225,000
Repayment of notes payable -- -- (11,737)
Repayment of long-term debt (644,909) (161,052) (10,608)
Payments to Future Foods -- -- (20,000)
Proceeds from issuance of convertible preferred
stock, net of commissions and offering costs -- 672,500 --
Proceeds from stock subscription 1,530,249 -- 75
Proceeds from issuance of common stock 563,960 751,565 1,186,517
Exercise of stock options 74,425 550,050 --
Payments of expenses in common stock -- 50,000 --
Other -- -- (717)
-------------- -------------- --------------
Cash and cash equivalents provided by
financing activities 3,342,636 2,363,063 1,368,530
-------------- -------------- --------------
Increase (decrease) in cash and cash
equivalents 985,429 (173,504) 473,035
Cash and cash equivalents at beginning of year 330,977 504,481 31,446
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 1,316,406 330,977 504,481
-------------- -------------- --------------
-------------- -------------- --------------
(Continued)
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 128,978 22,188 5,117
Income taxes 1,600 1,600 800
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosure of noncash investing and
financing activities:
Issuance of common stock for:
Conversion of debt to equity $ 1,790,476 200,000 30,000
Conversion of accrued interest 29,427 -- 11,131
Common stock subscribed -- (150,000) 170,488
Conversion of preferred stock to common stock 372,488 10 62
Payment of expenses 490,630 -- --
Payment of consulting contract 600,000 -- --
Note receivable on subscribed stock -- -- 74,925
Purchase of Future Foods assets for note -- -- 200,000
Purchase of Future Foods assets for assumption of
liabilities -- -- 40,000
Accrued and unpaid dividends -- -- 35,731
Prepayment of insurance with note payable 90,303 44,267 --
Unwinding of acquisition - Future Foods:
Forgiveness of note -- 220,000 --
Write-off of assets -- (195,548) --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) THE COMPANY
Vitafort International Corporation (the Company) was incorporated on
September 28, 1990 in the state of Delaware to succeed to the business of a
California corporation of the same name which was organized on February 7,
1986.
ORGANIZATION AND OPERATIONS
Until May 1, 1993, the Company was engaged in the design, formulation and
development of value-added food and beverages for third parties. The
Company also engaged in marketing wholesale value-added seafood, primarily
salmon.
The Company disposed of these operations in 1993, but retained a royalty
interest.
On December 9, 1993, the Company acquired certain fixed assets and other
intangibles (patents, trademarks, agreements) from Future Foods
Corporation. The acquisition was accounted for as a purchase. In
consideration for these assets, the Company paid $20,000 in cash, assumed a
$40,000 note and agreed to pay Future Foods $180,000 payable ratably
through April 1995. The entire payable amount was classified as a current
liability.
During 1994, the assets acquired from Future Foods Corporation were
determined technologically deficient. The two parties to the transaction
agreed to dissolve the agreement, and the Company was relieved of its
obligations. The related assets and liabilities were written off with a
gain on disposal of approximately $24,000.
The Company is presently engaged in formulating and marketing fat-free
foods.
LIQUIDITY AND GOING CONCERN
The Company has suffered recurring losses from operations and has an
accumulated deficit as of December 31, 1995 of $12,927,664. While the
Company has raised additional capital after year-end 1995 (see note 14), it
has not generated sufficient revenue-producing activity to sustain its
operations. The Company believes that the financial resources available to
the Company, including the additional capital, should be sufficient to
finance its operating costs for the next 12 months. However, there is no
assurance that the Company will be able to generate revenue in amounts
sufficient to cover its operating and finance costs.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, Nutrifish Corporation (90.5% owned as of December 31, 1995 and
1994) and Crystal Clear Farms. All material intercompany accounts and
transactions have been eliminated. Both Nutrifish Corporation and Crystal
Clear Farms had no operations during 1994.
Vitafort Latin America, a 50%-owned subsidiary, has had no operations since
its incorporation.
F-8
<PAGE>
Crystal Clear Farms, Inc., a wholly owned subsidiary of the Company, was
incorporated on June 8, 1992 and its assets were subsequently sold for
$160,000 on August 7, 1993. Crystal Clear Farms has been presented in the
December 31, 1993 consolidated financial statements as a discontinued
operation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, including litigation
claims, at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
INVENTORIES
Inventories are stated at lower of cost (first-in, first-out) or market.
FIXED ASSETS
Fixed assets are comprised of manufacturing equipment, furniture, office
equipment and computer equipment and are recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful life of five
years.
INTANGIBLE AND OTHER ASSETS
Intangible assets are comprised of debt issuance costs and customer lists
and are recorded at cost. The intangible assets are being amortized on a
straight-line basis over periods not exceeding five years. All intangible
assets associated with Future Foods were written off during 1994.
Other assets consist of long-term consulting contracts with individuals for
which the Company has paid cash up front, or has issued common stock up
front.
REVENUE
Product sales and related costs are recognized when the Company's products
are shipped from the contract manufacturer to the customer.
Royalty revenue is recognized as earned upon the sale of the end product to
which the royalty relates.
LOSS PER SHARE
Loss per share of common stock is computed based on the weighted average
number of shares of common stock outstanding of 29,352,955, 21,301,340 and
10,140,725 in 1995, 1994 and 1993, respectively.
During the years ended December 31, 1995 and 1994, the Company satisfied
certain obligations by issuing 17,883,788 and 456,640 shares of common and
subscribed stock, respectively. In addition, during 1995, 500 shares of
Series B Preferred stock were converted to 64,284 shares of common stock
and the 673 shares of Series D Preferred stock were converted to 896,000
shares of common stock in negotiated conversions. In 1993, the 11,435
shares of Series A Preferred stock were converted to 520,000 shares of
common stock in a negotiated settlement.
F-9
<PAGE>
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under FAS
109, the effect on deferred tax assets and liabilities of a change in the
rates is recognized in income in the period that includes the enactment
date.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers cash
and cash equivalents to include cash on hand and cash equivalents with
original maturities of three months or less.
RECLASSIFICATION
Certain 1994 amounts have been reclassified to conform with the 1995
presentation.
DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's debt instruments is based on the quoted
market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), issued in October 1995 and effective for
fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair-value-based method of accounting for employee stock options
or similar equity instruments. FAS 123 allows an entity to elect to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25),
but requires pro forma disclosures of net earnings and earnings per share
as if the fair-value-based method of accounting had been applied. While
the Company is still evaluating FAS 123, it currently expects to elect to
continue to measure compensation cost under APBO No. 25, "Accounting for
Stock Issued to Employees," and comply with the pro forma disclosure
requirements. If the Company makes this election, FAS 123 will have no
impact on the Company's financial position or results of operations.
(3) DISCONTINUED OPERATIONS
On August 7, 1993, the Company sold the assets of its Crystal Clear Farms
subsidiary to its operating management for $160,000 in cash plus the
assumption of $160,000 in Crystal Clear Farms' liabilities by the acquirer.
The Company retained certain royalty arrangements relative to future
Crystal Clear Farms' sales. Royalty income for 1995 and 1994 was $0 and
$25,000, respectively.
In connection with the sale, the Company recognized a $192,000 gain (net of
$128,000 of tax expense) or $.02 per share. No tangible assets were
disposed of in connection with this sale. This gain, along with the
results of operations of Crystal Clear Farms since inception (June 1992),
has been reflected as discontinued operations in the consolidated financial
statements.
F-10
<PAGE>
(4) ACCRUED EXPENSES
Accrued expenses as of December 31, 1995 and 1994 consist of the following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Accrued compensation $ 36,120 11,565
Accrued interest payable 7,654 --
Accrued settlements and attorneys' fees -- 181,270
Accrued financing fees 209,893 --
Accrued legal fees 67,671 42,776
Accrued public relations fees 8,916 32,381
Accrued freight and warehousing 26,592 14,577
Accrued rent 6,000 6,179
Accrued consulting fees 18,053 32,358
Other accrued expenses 255,615 122,559
------------ ------------
Total accrued expenses $ 636,514 443,665
------------ ------------
------------ ------------
</TABLE>
(5) NOTES PAYABLE
In August 1994, the Company issued a $500,000, 5% convertible note due in
February 1995. On November 12, 1995, the note and accrued interest on the
note was converted into 4,320,000 shares of the Company's common stock
using a $.125 stock price. During December 1995, the Company issued three
$25,000 notes payable bearing interest at 10%, due January 1996. As of
December 31, 1995, the aggregate balance of $75,000 is included within
current liabilities in the accompanying consolidated balance sheets.
During December 1995, the Company issued, as interim financing, and
subsequently converted into subscribed stock, approximately $1,200,000 of
notes payable. The notes were converted into common stock at $.15 per
share on December 29, 1995.
(6) LONG-TERM DEBT
The Company's long-term debt as of December 31, 1995 and 1994 consists of
the following:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
10% unsecured notes payable, due in monthly installments of
$2,344 plus interest through September 1995 $ -- 21,090
12% note payable, due in monthly installments of $4,000 plus
interest through December 1995. Secured by tangible assets -- 48,000
10% note payable, due in monthly installments of $3,125 plus
interest through July 1996. Secured by tangible assets 23,876 25,000
10% note payable, due in monthly installments of $3,125 plus
interest through September 1995. Secured by tangible assets -- 25,000
14% note payable, due in monthly installments of $4,033,
including interest, through October 1997, secured by certain of
the Company's fixed assets 74,733 --
14% note payable, due in monthly installments of $5,000 plus
interest, through April 1996 20,000 --
8% note payable, due in monthly installments of $5,091 plus
interest, commencing January 1, 1995 90,303 44,267
------------ ------------
208,912 163,357
Less current maturities 174,364 163,357
------------ ------------
$ 34,548 --
------------ ------------
------------ ------------
</TABLE>
F-11
<PAGE>
Maturities of long-term debt subsequent to December 31, 1995 are as
follows:
<TABLE>
<S> <C>
Year ending December 31:
1996 $ 174,364
1997 34,548
-------------
$ 208,912
-------------
-------------
</TABLE>
(7) INCOME TAXES
As the Company has incurred significant operating losses since inception,
its current tax liability has been limited to minimum California and
Delaware tax payments.
Income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Loss from continuing operations $ 1,600 1,600 (128,000)
Discontinued operations -- -- 128,000
-------------- -------------- --------------
$ 1,600 1,600 --
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The difference between the Federal income tax rate and the effective income
tax rate on net earnings from continuing operations is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected Federal income tax rate (35.0)% $ (983,738) (35.0)% $ (885,137) (34.0)% $ (302,141)
State income taxes, net of
Federal income tax benefit (6.1) (171,452) (6.1) (154,267) (6.1) (54,208)
Change in valuation allowance to
income tax expense 32.0 899,000 38.8 981,000 25.3 225,000
Expiration of state NOL's 1.8 50,000 -- -- -- --
Adjustment of deferred tax assets 5.3 150,000 -- -- -- --
Other, net 2.0 54,590 2.3 60,004 .4 3,349
----------- ----------- ----------- ----------- ----------- -----------
--% $ (1,600) --% $ 1,600 (14.4)% $ (128,000)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
F-12
<PAGE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
-------------- --------------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 4,850,000 3,951,000
Tax credit carryforwards 36,000 36,000
-------------- --------------
Total gross deferred income tax assets 4,886,000 3,987,000
Less valuation allowance 4,835,000 3,936,000
Deferred income tax assets, net of valuation
allowance 51,000 51,000
Deferred income tax liabilities (51,000) (51,000)
-------------- --------------
Net deferred income taxes $ -- --
-------------- --------------
-------------- --------------
</TABLE>
As of December 31, 1995, the Company had unused net operating loss
carryforwards of approximately $12,500,000 and $4,750,000 available to
offset future Federal taxable income, future California taxable income and
future book income, respectively. In addition, the Company had unused
research and experimental credits of $44,000 and $26,000 for Federal and
California state purposes. The unused net operating loss and credit
carryforwards expire in various amounts through the year 2008. In contrast
to Federal net operating losses, 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward for 5
years. However, the California net operating losses are not available for
California income tax purposes in calendar years 1991 and 1992. The
California net operating losses will expire in various amounts through the
year 2000.
Differences between net operating loss carryforwards for financial
statement and Federal income tax purposes arise primarily from differences
in certain liabilities not deductible until actually paid, and differences
in the methods of computing depreciation expense.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these
losses is limited to an amount equal to the estimated fair value (for
income tax purposes) of the Company at the point of stock ownership change,
multiplied by the long-term tax-exempt rate then in effect. The annual
limitation has not been quantified at this time.
Deferred tax assets of approximately $4,886,000 for the net operating
losses and other credits have been substantially offset by a valuation
allowance since management believes it is more likely than not such assets
will not be recovered.
(8) STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Each share of Series B 10% Convertible Preferred stock is convertible into
33.33 shares of common stock, and cumulative dividends of 10% per annum are
payable annually commencing October 1992. The Series B 10% Cumulative
Preferred stock has a liquidation preference of $50 per share plus all
accrued and unpaid dividends and is on a parity with Series A 8% Cumulative
Convertible Preferred stock. It is subject to optional redemption by the
Company at any time at $50 per share plus accrued and unpaid dividends.
Cumulative unpaid dividends amounted to $30,000 and $30,000 at December 31,
1995 and 1994, respectively.
F-13
<PAGE>
In December 1995, the holder of 500 shares of Series B Cumulative Preferred
stock exchanged his shares and accumulated unpaid dividends for 64,284
shares of common stock pursuant to an agreement with the holder.
In June 1992, the Company designated the preferences for and issued
80 shares of Series C Convertible Preferred stock at $1,000 per share.
Each share of Series C Convertible Preferred stock was initially
convertible into 2,000 shares of common stock and 2,000 warrants. Series C
Convertible Preferred stock does not carry any dividend rights. The
warrants expired in June 1994. Additionally, the Series C Convertible
stock has a dilutive conversion factor. The Series C Convertible Preferred
stock has a liquidation preference of $1 per share after Series B
Cumulative Convertible Preferred stock but before Series D Cumulative
Preferred stock, and to holders of common stock.
In May 1994, the holder of 30 shares of Series C Convertible Preferred
stock exchanged his shares for 99,480 shares of common stock pursuant to an
agreement with the holder.
In October 1994, the Company designated the preferences for and issued 673
shares of Series D Convertible Preferred stock at $1,000 per share. Each
share of Series D Convertible Preferred stock is convertible into 1,333
shares of common stock. Noncumulative dividends of $80 per share per annum
are payable semiannually. The Series D Convertible Preferred stock has a
liquidation preference of $1,000 per share plus all accrued dividends after
payment of preferences on the Series B 10% Cumulative Convertible Preferred
stock. It is subject to optional redemption by the Company at any time
that the aggregate of the current market price of the common stock issuable
upon conversion of a share of Series D Preferred stock is $4 per share.
In December 1995, the holders of the Series D Convertible Preferred stock
exchanged their shares for common stock pursuant to an agreement. During
December 1995, 896,000 shares of common stock were issued and 1,112,533
shares were included in subscribed stock and were issued subsequent to
December 31, 1995.
The shares of Series B, Series C and Series D Preferred stock are not
currently registered under the Securities Exchange Act of 1934.
COMMON STOCK
Warrants to purchase 1,500,000 shares at $2.375 per share are exercisable
to April 30, 1995. The warrants are redeemable at the Company's option at
$.05 per warrant, commencing July 18, 1991, if the closing bid price for
the common stock equals or exceeds $3 for 30 consecutive trading days.
Additionally, warrants to purchase 300,000 shares at $2.375 are outstanding
as of December 31, 1995.
During August 1993, three officers of the Company subscribed to purchase
750,000 shares of common stock at $.10 per share. Notes aggregating
$74,925 were received from three officers in consideration for this
subscription. During 1995, these shares were issued.
In August 1995, the Board of Directors unanimously agreed to authorize
140,000,000 more shares of common stock, bringing the total to 180,000,000,
and stockholder approval was obtained.
During September 1995, pursuant to a contractual agreement, the Company
issued 2,000,000 shares of its common stock to a public relations/financial
consulting firm and authorized an additional 2,000,000 shares to be issued
to the consulting firm upon performance under the contract for $600,000 of
prepaid consulting fees.
Additionally, during 1995, the Company issued in a private placement
5,620,280 shares of common stock at per share prices ranging from $.125 to
$.40 as payment for services and satisfaction of certain of its
liabilities. During the same period, the Company issued 5,208,333 shares
of its common stock at per share prices ranging from $.07 to $.25 with net
proceeds to the Company of approximately $563,960.
During 1995, options to purchase 408,700 shares of the Company's common
stock were exercised at per share prices ranging from $.07 to $.25 with net
proceeds to the Company of $74,425.
In December 1995, the Company commenced a private placement offering of
common stock at a per share price of $.15. Prior to December 31, 1995, the
Company had received subscriptions for the purchase of 12,700,000 shares of
common stock. Net subscription proceeds were $1,680,249.
F-14
<PAGE>
In December 1995, the Company committed to issuing 863,508 shares of
common stock at per share prices ranging from $.12 to $.15 to certain of
its employees and consultants. As of December 31, 1995, the shares had
not been issued and, accordingly, are accounted for as subscribed stock.
(9) STOCK OPTIONS
The 1989 Stock Option Plan (the Plan) reserved 250,000 shares of common
stock to grant either nonqualified or incentive stock options. In 1991,
the Board of Directors increased the number of shares of common stock to
be reserved under the Plan to 1,000,000 shares. All directors, officers,
key employees and consultants to the Company or its subsidiaries are
eligible under the terms of the Plan. Such options may not be granted at
less than 100% of the fair market value at the date of grant (110% for an
owner of 10% or more of the outstanding stock). Upon termination of
service, the options which an individual was entitled to exercise at the
date of termination may be exercised at any time within six months of such
termination. If an employee is terminated with cause, the options are
canceled upon termination.
In August 1995, the 1989 Stock Option Plan was terminated, and in October
1995, the 1995 Stock Option Plan was created.
The 1995 Stock Option Plan is intended to award stock options to
directors, management and employees of the Company based on performance.
The options vest over periods of three to four years. As of December 31,
1995, no options had been issued under this plan.
The Company has also granted stock options outside the stock option plans
to other individuals in consideration for services performed. The
following summarizes all option activity for the years ended December 31,
1995, 1994 and 1993:
<TABLE>
<CAPTION>
Number of common stock options
-------------------------------------------
1989 Stock 1995 Stock Other stock
Option Plan Option Plan options Price range
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Outstanding as of
December 31, 1992 550,000 -- 1,625,275 $ .80 to 3.25
Granted -- -- 11,950,000 .50 to 1.9375
Exercised -- -- -- --
Canceled (550,000) -- -- 3.25
------------- ------------- -------------
Outstanding as of
December 31, 1993 -- -- 13,575,275 .07 to 2.375
Granted -- -- 340,000 .75 to 1.25
Exercised -- -- (2,721,500) .10 to .25
Canceled -- -- (90,000) 1.25
------------- ------------- -------------
Outstanding as of
December 31, 1994 -- -- 11,103,775 .07 to 2.375
Granted -- 40,000,000 34,621,271 .14 to .65
Exercised -- -- (948,809) .07 to .25
Canceled -- -- -- --
------------- ------------- -------------
Outstanding as of
December 31, 1995 -- 40,000,000 44,776,237 .07 to 3.25
------------- ------------- ------------- ---------------
------------- ------------- ------------- ---------------
</TABLE>
During 1994, the Company entered into various Option Agreements with
executive officers and consultants which granted options to purchase
340,000 shares of common stock from between $.75 to $1.25 per share for a
period of two to five years from the date of grant. Due to the lack of
significant trading volume in the Company's shares, the options were
granted at fair market value determined by the Board of Directors based on
private placement stock transactions with independent third parties.
During 1995, the Company entered into various Option Agreements with
executive officers and consultants which granted options to purchase
151,666 shares of common stock at $.50 per share for a period of two
to five years from the date of grant. The options were granted at
prices determined to approximate fair market value.
F-15
<PAGE>
During 1995, the Company granted options to purchase 735,000 shares of
common stock at prices of $.15 to $.65 per share as part of various
settlement agreements and conversions of notes payable.
In November 1995, the Company granted options to purchase 5,587,121 shares
of common stock at prices of $.165 to $.30 in conjunction with the bridge
financing.
During 1995, the Company granted options to purchase 450,000 shares of
common stock at prices of $.14 to $.65 to two of its consultants for
services to be rendered.
As of December 31, 1995 and 1994, options to purchase 16,828,221 and
6,898,500 shares were exercisable at prices ranging from $.07 to $3.25 per
share.
(10) LICENSING AGREEMENTS
In 1990, the Company entered into an agreement with Vitafort Latin America
(VLA), whose president is a director and stockholder of the Company. The
agreement grants VLA an exclusive ten-year license to use the "Vitafort"
trademark and to manufacture and sell the Company's products in certain
Latin American countries, royalty free. In consideration for this license,
the Company received a 50% ownership interest in VLA. VLA had not
commenced operations as of December 31, 1995.
In 1993, the Company acquired the rights to certain skin care products,
collectively referred to as Solonae. In consideration for these rights,
the Company paid $25,000 in cash plus 100,000 three-year options at an
exercise price of $.10 per share. In addition, the Company was to receive
the first $25,000 of profit recognized on Solonae sales plus 30% of future
revenues received on Solonae sales. As of December 31, 1994, no
distribution network existed for the Solonae products. The rights were
deemed to have no value and were written off as of December 31, 1994.
(11) COMMITMENTS
The Company is obligated under a lease agreement for its executive offices
through August 1997. Amounts due under the lease for the periods ending
December 31, 1996 and 1997 are $73,250 and $46,875, respectively.
Rent expense for the years ended December 31, 1995, 1994 and 1993, included
in selling, general and administrative expenses, was $72,562, $53,475 and
$105,588, respectively.
EMPLOYMENT AGREEMENTS
As of December 31, 1995, the Company held an employment agreement with one
senior executive of the Company. The agreement calls for annual aggregate
compensation of $150,000 plus bonuses of 25% of pretax profits, but not
more than 20% of the base salary for the executive. The agreement expires
on November 30, 1996. Certain payments amounting to $110,000 during 1995
were deferred. A portion of this amount was converted into the Company's
common stock at $.15 per share on October 30, 1995. The balance will be
converted into common stock on January 31, 1996.
OTHER
In October 1993, the Company entered into an exclusive marketing agreement
with Second Nature Technologies, Inc. to act as its exclusive worldwide
marketing representative for certain products, technologies, ingredients
and processes.
F-16
<PAGE>
(12) MAJOR CUSTOMERS
The Company derived the following revenue (from continuing operations) from
major customers, each of which provided 10% or more of total revenues
during the years ended December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Price Club $ 579,144 -- --
Royalties and product sales -
Crystal Geyser -- -- 99,200
----------- ----------- -----------
Total $ 579,144 -- 99,200
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(13) LITIGATION
The Company is subject to pending claims and litigation some of which
seek damages of material amounts. Management, after review and
consultation with the Company's legal counsel, considers that any
liability from the disposition of such claims and litigation would not
have a material adverse effect upon the consolidated financial position or
results of operations of the Company.
(14) SUBSEQUENT EVENTS
In January 1996, the Company completed private placement offerings of
common stock. Total shares issued in these offerings were 21,200,000 at
prices of $.15 to $.30. Total proceeds to the Company were $3,451,000, net
of expenses of $479,000.
F-17
<PAGE>
Peat Marwick LLP
725 South Figueroa Street
Los Angeles, CA 90017
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Vitafort International Corporation:
We consent to incorporation by reference in the registration statement on
Form S-8 no. 33-300435 of Vitafort International Corporation of our report
dated February 16, 1996, relating to the consolidated balance sheets of
Vitafort International Corporation and subsidiaries as of December 31, 1995,
and 1994, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 1995 which report appears in the
December 31, 1995, annual report on Form 10-KSB of Vitafort International
Corporation and Subsidiaries.
/s/ KMPG Peat Marwick LLP
Los Angeles, California
March 29, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,316,406
<SECURITIES> 0
<RECEIVABLES> 85,073
<ALLOWANCES> (45,650)
<INVENTORY> 680,876
<CURRENT-ASSETS> 2,569,574
<PP&E> 396,470
<DEPRECIATION> (139,991)
<TOTAL-ASSETS> 3,183,844
<CURRENT-LIABILITIES> 1,272,805
<BONDS> 0
0
16
<COMMON> 3,823
<OTHER-SE> 1,872,652
<TOTAL-LIABILITY-AND-EQUITY> 3,183,844
<SALES> 2,315,151
<TOTAL-REVENUES> 2,434,811
<CGS> (1,482,326)
<TOTAL-COSTS> (3,537,671)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (126,290)
<INCOME-PRETAX> (2,810,681)
<INCOME-TAX> (1,600)
<INCOME-CONTINUING> (2,812,281)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,812,281)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
