<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 24, 1997
REGISTRATION FILE NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(AMENDMENT NO. ____ )
_____________________
VITAFORT INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in Its Charter)
DELAWARE 5149 68-0110509
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
1800 AVENUE OF THE STARS, SUITE 480
LOS ANGELES, CALIFORNIA 90067
(310) 552-6393
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
_______________________________________
FRANK J. HARITON, ESQ.
1350 AVENUE OF THE AMERICAS - 29TH FLOOR
NEW YORK, NY 10019
(212) 265-8600
(Name, address, including zip code and telephone number,
including area code, of agent for service)
_______________________________________
Copies of all communications to:
MARK BEYCHOK, PRESIDENT & CEO FRANK J. HARITON, ESQ.
Vitafort International Corporation 1350 Avenue Of The Americas - 29th Floor
1800 Avenue Of The Stars, Suite 480 New York, NY 10019
Los Angeles, California 90067 Telephone: (212) 265-8600
Telephone: (310) 552-6393 Facsimile: (212) 265-6041
Facsimile: (310) 556-1227
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC FROM TIME TO TIME AFTER THE
---------------------------
EFFECTIVE DATE
- --------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
========================================================================================
<CAPTION>
Proposed Proposed
Maximum Maximum Amount Of
Title Of Securities To Amount To Be Price Aggregate Registration
Be Registered Registered Per Share* Offering Price* Fee**
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
Par Value
$.0001 Per
Share 2,571,439 $0.99 $2,545,725 $771.35
========================================================================================
</TABLE>
* Based on the closing bid price of the Common Stock on the NASDAQ Electronic
Bulletin Board on June 2, 1997 as to shares of Common Stock presently
outstanding and shares issuable upon conversion of convertible preferred
stock. Based on the exercise price of options for shares issuable upon
exercise of options. The number of shares registered includes the maximum
number of shares reserved for issuance on conversion of preferred stock.
** Calculated pursuant to Rule 457(h).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective in such date as the Commission, acting pursuant to said Section 8(a)
shall determine.
<PAGE>
CROSS REFERENCE SHEET
UNDER ITEM 501 (c) OF REGULATION S-B
<TABLE>
<CAPTION>
ITEM AND NUMBER LOCATION IN PROSPECTUS
- -----------------------------------------------------------------------------------------------------------
<C> <S> <C>
1. Front of Registration Statement Front of Registration Statement
and Outside Front Cover of Prospectus and Outside Front Cover of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Experts; Counsel
14. Disclosure of Commission Position Statement of Indemnification
on Indemnification For Securities Act Liabilities
15. Organization Within Last Five Years Business of the Company
16. Description of Business Business of the Company
17. Management's Discussion and Analysis Management's Discussion and Analysis of
or Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business of the Company - Property
19. Certain Relationships and Related Transactions. Certain Transactions
20. Market for Common Equity and Related Market for Common Equity and Related
Stockholder Matters Stockholder Matters
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Change of Auditors
Accountants on Accounting and
Financial Disclosure
</TABLE>
<PAGE>
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, PRELIMINARY PROSPECTUS DATED JULY 24, 1997
PROSPECTUS
- ----------
VITAFORT INTERNATIONAL CORPORATION
COMMON STOCK
($.0001 PAR VALUE)
2,571,439 SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING STOCKHOLDERS
This Prospectus relates to 2,571,439 shares of Common Stock which
consists of:
(a) 500,000 shares of Common Stock issued in a private placement
transaction in February, 1997.
(b) 1,893,939 shares reserved for issuance upon conversion of shares
of preferred stock issued in April and May, 1997, including
shares of common stock which may be issued upon exercise of
certain options to be granted by the Company in connection with
the mandatory conversion of such preferred stock. (If all of
such preferred stock were converted into Common Stock on June 2,
1997, then they would convert into 1,086,957 shares of Common
Stock.)
(c) 177,500 shares issuable upon exercise of options granted to
consultants in February, April, and May, 1997
The shares of Common Stock may be offered for sale from time to time by the
Selling Stockholders or by donees, pledgees, transferees, or other successors in
interest through ordinary brokerage transactions in the over-the-counter market,
either directly or through brokers or to dealers, in private sales, in
negotiated transactions, or otherwise, at market prices prevailing at the time
of sale or at negotiated prices. The Company will not receive any proceeds from
the sale of the Common Stock by the Selling Stockholders. The Selling
Stockholders, and not the Company, will pay or assume all applicable brokerage
commissions or other costs of sale as may be incurred in the sale of such
securities. See "Selling Stockholders" and "Plan of Distribution".
The Company will assume no responsibility for the sale of the shares of
Common Stock of the Selling Stockholders, nor can there be any assurances that a
liquid trading market will exist for the sale of the shares of Common Stock to
be offered by the Selling Stockholders. See "Risk Factors."
The Company's Common Stock is traded in the over-the-counter market and is
quoted on the OTC Electronic Bulletin Board maintained by Nasdaq under the
symbol "VRFT". On June 2, 1997, the closing price bid for the Common Stock on
the OTC Electronic Bulletin Board was $ 0.906 per share.
All share and per share information in this Prospectus reflects a one for
twenty reverse stock split effective October 4, 1996.
------------------------------------------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE
PURCHASED BY INVESTORS WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 4.
------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
------------------------------------------------------------
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy statements, and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and
other information may be inspected and copied at the public reference facilities
maintained by the Commission at 450 5th Street, N.W., Washington, DC 20549, and
at the Commission's regional offices located at 13th Floor, Seven World Trade
Center, New York, New York 10048; 10960 Wilshire Boulevard, Suite 1710, Los
Angeles, California 90024, and 14th Floor, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material may be obtained from the Commission at
450 5th Street, N.W., Washington, DC 20549, at prescribed rates. The Company is
an electronic filer under the EDGAR (Electronic Data Gathering and Retrieval)
system maintained by the Commission. The Commission maintains a web site
(http:/www.sec.gov.) on the Internet that contains reports, proxy and
information statements and other information regarding Companies that file
electronically with the Commission. In addition, reports, proxy statements and
other information concerning the Company may be inspected at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, DC 20006.
The Company has filed with the Commission a registration statement on Form
SB-2 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"). This
Prospectus does not contain all of the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission. For further information, reference is made to
the Registration Statement.
THE COMPANY
Vitafort International Corporation (the "Company" or "Vitafort") is in the
business of developing, and marketing fat free, low fat, and reduced fat bakery
snacks that would be marketed under Company owned trademarks. Vitafort does not
own any production facilities, so established contract manufacturers (co-packer)
are utilized to manufacturer these branded products developed by the Company.
The Company's principal products are a variety of products marketed under the
Auburn Farms and Natures Warehouse trademarks and Fudgets and Caketts marketed
under the Vitafort name.
The Company's fat free and low fat snack items are based upon the Company's
proprietary formulas and are developed in conjunction with its co-packers. The
Company seeks to protect its proprietary information through confidentiality
agreements with employees, suppliers and manufacturers. These products are made
from generally available ingredients, which are then converted into the
Company's products.
The Company's principal executive offices are located at 1800 Avenue of the
Stars - Suite 480, Los Angeles, California 90067 and its telephone number is
(310) 552-6393.
2
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
Vitafort International Corporation (the "Company" or "Vitafort") is in the
business of developing, manufacturing and marketing fat free and low fat bakery
snacks that would be marketed under Company owned trademarks. Vitafort does not
own any production facilities, so established contract manufacturers (co-
packers) are utilized to manufacture these branded products developed by the
Company. The Company's principal products are a variety of products produced
under the Auburn Farms and Natures Warehouse trademarks and Fudgets and Caketts
marketed under the Vitafort name.
The Company's fat free and low fat snack items are based upon the Company's
proprietary formulas and are developed in conjunction with its co-packers. The
Company seeks to protect its proprietary information through confidentiality
agreements with employees, suppliers and manufacturers. These products are made
from generally available ingredients, which are then converted into the
Company's products.
THE OFFERING
Up to 2,571,439 shares offered by the Selling Security Holders.
SHARES OUTSTANDING
Before the Offering After the Offering
5,877,366 (1) 7,141,823 (1) (2)
(1) Does not include up to approximately 4,300,000 shares reserved for
issuance upon exercise of options and conversion of preferred shares, other
than the preferred shares and options held by the selling shareholders.
(2) Assumes the conversion of all shares of Vitafort International
Corporation 1997 Series A Preferred Stock at $0.99 per share and the exercise of
all options held by Selling Stockholders into 1,264,457 shares of Common Stock
as of June 2, 1997.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS REPORT, WHICH ARE
FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISKS AND UNCERTAINTIES. POTENTIAL
RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES
FROM OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, THE IMPACT OF QUALITY
PROBLEMS EXPERIENCED IN 1996, THE LACK OF ADEQUATE CAPITAL TO FUND CONTINUING
OPERATIONS, ECONOMIC CONDITIONS IN THE COMPANY'S PRIMARY MARKETS AND OTHER
UNCERTAINTIES DETAILED FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
SUMMARY FINANCIAL INFORMATION
The following table sets forth, for the periods and at the dates indicated,
certain summary financial information for the Company. Such data have been
derived from, and should be read in conjunction with, the financial statements
of the Company, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Prospectus.
3
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------- -------------------------
1996 1995 1997 1996
------------- ------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue $ 5,285,149 $ 2,315,151 $ 765,239 $ 840,995
Costs and expenses:
Cost of sales 6,870,120 1,482,326 548,288 708,313
Selling, general and
administrative 2,721,321 1,741,424 586,232 322,681
Research and development 737,044 378,602 39,350 157,993
Marketing 3,029,480 1,417,645 379,797 549,758
Loss from operations (8,072,816) (2,704,846) (788,428) (897,750)
Other income (expenses) (46,840) (105,835) (26,601) 11,542
Net loss $(8,122,815) $(2,812,281) $ (815,029) $ (887,662)
Net loss per share $(1.59) $(1.92) $(0.14) $(0.35)
Weighted average common shares outstanding 5,133,665 1,467,648 5,906,765 2,565,077
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
(UNAUDITED)
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital deficit $ (875,965) $ (953,002)
Total assets 2,036,514 2,106,685
Total liabilities 2,189,012 2,377,789
Stockholders' equity deficit (152,498) (271,104)
</TABLE>
RISK FACTORS
LIMITED RELEVANT OPERATING HISTORY; CONTINUING LOSSES; GOING CONCERN UNCERTAINTY
The Company was formed in 1986 and until May 1993 the Company was in
the business 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 Company disposed of these businesses. In
September 1993 the Company installed new management and entered the business of
developing and marketing branded low fat and fat-free foods using proprietary
formulations. In June 1994 the Company commercially introduced its principal
product, a line of fat-free brownies under the brand name "Fudgets". Other
products were introduced or acquired in 1995 and 1996. The Company's business
did not achieve profitability during 1995 or 1996. The Company incurred losses
of $2,812,281 in 1995, $8,122,815 in 1996, and $815,029 during the first
quarter ended March 31, 1997. The Company's auditors have included an
explanatory paragraph in their report for the year ended December 31, 1996,
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern. The Company anticipates losses from operations
during the remainder of 1997. There can be no assurance that the Company will
be profitable in the future. Furthermore, future revenues and profits, if any,
will be dependent on many factors, including, but not limited to, the Company's
ability to expand its operations in a
4
<PAGE>
timely manner to meet demand, need for additional financing, competition from
other makers of low fat or fat-free products and market acceptance of the
Company's products. If the Company is not able to significantly improve its
operating results, it may be required to cease or substantially curtail its
operations.
LIEN ON ASSETS
Pursuant to a Loan and Security Agreement between the Company and
Coast Business Credit, all of the Company's assets are subject to a lien which
secures inventory and receivable financing. The Company is currently in
violation of certain covenants under this agreement and the continuation of the
default could materially adversely affect the company.
MARKET ACCEPTANCE AND DEPENDENCE ON PRINCIPAL PRODUCTS
Consumer preferences for snack foods in general, and for fat-free and
low-fat foods in particular, are continually changing and are extremely
difficult to predict. Through March 31, 1997, the Company derived approximately
50.1% of its revenues from the sale of the Auburn Farms and Natures Warehouse
lines of products and approximately 49.9% of its revenues from the sale of
Fudgets and Caketts. There can be no assurance that the Company's products will
a) achieve a significant degree of market acceptance; b) will be sustained for
any significant period; or c) that the product life cycles will be sufficient to
permit the Company to recover start-up and other associated costs. Failure of
the Company's products to achieve or sustain market acceptance could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION
The market for snacks is large and highly competitive. Competitive
factors in the snack industry include product quality and taste, brand awareness
among consumers, access to supermarket shelf space, price, advertising and
promotion and variety of snacks offered. The Company's fat-free and low-fat
products are priced higher than traditional snacks. As a result, price erosion
due to competitive factors would have a material adverse effect on the Company.
The Company also competes with a number of manufacturers in the fat-
free and low-fat portion of the industry, including Health Valley Foods, Nabisco
(Snackwell's) and Pepperidge Farms (Greenfield). Additional competitors include
regional and private label snack companies. Potential entrants in the fat-free
and low-fat snack food market segment include the national competitors and
private label competitors.
DEPENDENCE ON KEY EXECUTIVE OFFICERS AND OTHER QUALIFIED PERSONNEL
The Company is highly dependent on certain key personnel, including
Mark Beychok, its President and Chief Executive Officer. Another key employee
is John Coppolino, Vice President Sales. The loss of one or more key personnel
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not have key man life
insurance on its officers at this time. The recruitment, retention and
motivation of skilled executives, sales and technical personnel and other
employees are important to the Company's operations. Although the Company has
not experienced significant problems in recruiting and retaining qualified
personnel, there can be no assurance that it will not encounter such problems in
the future.
AVAILABILITY OF SHELF SPACE
The majority of the Company's sales are made through supermarkets, and
the Company expects supermarket sales to constitute a significant portion of its
future sales. Such sales are affected by access to
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<PAGE>
shelf space, which is limited. Food retailers typically seek concessions,
allowances or other discounts from food manufacturers and suppliers, such as the
Company and its distributors, in return for shelf space. The Company believes
that it may have to incur such expenditures in the future in order to obtain or
retain shelf space for its products. Such expenditures, if significant, could
adversely affect the Company's business, financial condition and results of
operations.
CONTRACT MANUFACTURING AGREEMENTS
In order to achieve economies of scale and production flexibility the
Company has entered into contract manufacturing agreements with established food
manufacturers which have the facilities for the production of its products. In
the event of a contract dispute between the Company and any of these contract
manufacturers or if any contract manufacturer experiences an interruption in its
business as a result of labor disputes, acts of God or a similar occurrence over
which the Company has no control, such an event could materially and adversely
affect the Company's business. In addition, the Company has experienced quality
control problems at certain of its past contract manufacturers which may
continue to adversely effect its goodwill. The Company is presently engaged in
legal proceedings with former co-packers. See "Legal Proceedings".
PENDENCY OF LEGAL PROCEEDINGS
As set forth under the heading "Legal Proceedings", the Company is
engaged in several legal proceedings. While management believes that these
proceedings will not result in material adverse liabilities against the Company,
an adverse finding in certain of these proceedings could have a material adverse
effect on the Company.
MANAGEMENT OF GROWTH
The Company intends to expand its operations during 1997 and
thereafter, through the expansion of its sales and marketing capacity, and the
expansion and addition of distribution channels. There can be no assurance that
the Company will have sufficient financial resources necessary to achieve
growth, or that the Company will be able successfully to match its production
capacity to the demand for its products in a timely manner or to maintain its
distribution system. The Company has no long-term contracts with its
distributors. The Company has previously experienced problems both with a
slowing of demand and resulting excess capacity, as well as with sharp increases
in demand and resulting shortages of capacity. Efforts by the Company to
increase production rapidly in order to meet sharp increases in demand have
sometimes resulted, and could in the future result, in additional expenses that
materially increase the cost of goods sold and reduce profitability. The
occurrence of any of these events would likely have a material adverse effect on
the Company's business, financial condition and results of operations, as well
as on its distribution relationship and prospects. Because Fudgets and other of
the Company's fat-free products have a limited shelf life, the Company cannot
produce significant inventories for later sale.
Successful management of rapid growth will require the Company to
continue to implement and improve its financial, accounting and management
information systems and to hire, train, motivate and manage its employees. A
failure to manage the Company's growth effectively would have a material adverse
effect on the Company's business, financial condition and results of operations,
and on its ability to execute its business strategy successfully.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success is greatly dependent on its ability to preserve
its trademarks and operate without infringing upon the proprietary rights of
third parties. The Company has registered various
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trademarks in the United States. No assurance can be given as to the degree of
protection the licensed patents and trademarks will afford, the validity of such
patents or the Company's ability to avoid violating or infringing upon any
patents issued to others. Moreover, there can be no guarantee that any patents
licensed by the Company will not be infringed upon by others. Defense and
prosecution of patent claims can be expensive and time consuming, even in those
instances in which the outcome is favorable to the Company, and can result in
the diversion of resources from the Company's other activities. An adverse
outcome could subject the Company to significant liabilities to third parties,
require the Company to obtain licenses from third parties or require the Company
to cease any related product development activities or sales.
The Company's success is also dependent upon the skills, knowledge and
experience (none of which is patentable) of its technical personnel. To help
protect its rights, the Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. There is no assurance, however, that
these agreements will provide adequate protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure.
GOVERNMENT REGULATION
The packaged food industry is subject to numerous federal, state and
local government regulations, including those relating to the preparation,
labeling and marketing of food products. The Company is particularly affected
by the recently enacted Nutrition Labeling and Education Act ("NLEA"), which
requires specified nutritional information to be disclosed on all packaged
foods. In addition, the NLEA, which is administered by the Food and Drug
Administration ("FDA"), strictly regulates the standards that must be met to
make a claim that a product is "fat-free" or "low-fat." In addition, the FDA
standards could conceivably be lowered further or reduced to zero. Changes in
fat content could adversely affect the taste and texture of the Company's
products and their acceptability to consumers, which could adversely affect the
Company's sales and results of operations. Labeling standards imposed by
certain other countries may vary from those in the United States. The Company's
operations are also governed by laws and regulations relating to work place
safety and worker health, principally the Occupational Safety and Health Act
("OSHA"). The Company believes that it is currently in compliance with such
laws and regulations, and that the costs of complying with OSHA and FDA
regulations are not burdensome.
LIMITED MARKET AND POSSIBLE ILLIQUIDITY OF SHARES
The market price for the Company's securities may be significantly
affected by such factors as the Company's financial results, the introduction of
new products, and various factors affecting the food industry generally. The
market price for the Company's Common Stock may be affected by general stock
market volatility. Currently there is a limited market for the Company's Common
Stock in the over-the-counter ("OTC") market as the Common Stock is traded in
the OTC Bulletin Board. The OTC market is smaller than other securities
markets, and prices for OTC securities are not generally published in the news
media. Information about the Company and transactions in the Company's shares
may be more limited on the OTC market. Further, because the price of the Common
Stock is below $5.00 per share and the Company does not have at least $5,000,000
in net tangible assets, the Company's Common Stock is deemed to be a "penny
stock" under applicable rules of the SEC. Penny stocks are subject to
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers (as defined in such
rules) and accredited investors (generally, institutions and, for individuals,
an investor with assets in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 together with such investor's spouse). For transactions
covered by these rules, the broker-dealer must make a special suitability
determination for the purchaser and must have received the purchaser's written
consent to the transaction prior to the purchase. Consequently, the rules may
restrict the ability of broker-dealers to sell the Common
7
<PAGE>
Stock and may affect the ability of holders of Common Stock to sell their shares
in the secondary market. The above-described rules may materially adversely
affect the liquidity of the market for the Company's Common Stock.
POSSIBLE NEED FOR ADDITIONAL FINANCING
The Company's capital requirements associated with the introduction
and development of new products and the marketing of existing products have been
and will continue to be substantial. The Company anticipates (based on
management's internal forecasts and assumptions related to operations) that its
existing capital resources will only be sufficient to satisfy the Company's
intended operations at anticipated levels for a very short period. Unless the
Company is able to raise additional capital, receive other financing, or is able
to market its products on a more favorable basis, the Company will be required
to substantially curtail its operations. No assurance is given that the Company
will be able to obtain additional financing when needed. In any potential
future financing, the interests of the Company's existing security holders,
including purchasers of shares under this prospectus, could be substantially
diluted.
LACK OF DIVIDENDS
The Company has never paid any dividends on its Common Stock and does
not anticipate paying any dividends in the foreseeable future. Any future
dividends on the Common Stock will be dependent on the earnings of the Company,
if any, and its financial requirements as well as the dividend priorities of the
outstanding Series of Preferred Stock.
USE OF PROCEEDS
The Company will realize no proceeds on the sale of Common Stock by
the Selling Stockholders. Proceeds from the exercise of the Options covered
herein, if any, will be added to the Company's working capital to be used for
future sales and marketing efforts and for potential acquisitions, if any.
8
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth the name of each Selling Stockholder,
the nature of his position, office, or other material relationship to the
Company for the past three years and the number of shares of Common Stock of
each such Selling Stockholder (1) owned of record as of April 30, 1997; (2)
which are to be offered hereunder; (3) which are to be owned by each such
Selling Stockholder assuming the sale of all shares offered hereunder; and (4)
the percentage of outstanding shares of Common Stock to be owned by each Selling
Stockholder after the sale of the shares to be offered hereunder. There can be
no assurance that any of the Selling Stockholders will offer for sale or sell
any or all of the Common Stock offered by them pursuant to this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF PERCENTAGE OF
SHARES OWNED SHARES TO BE SHARES OWNED COMMON STOCK
PRIOR TO THE SOLD IN THE AFTER THE TO BE OWNED AFTER
NAME OF SELLING STOCKHOLDER OFFERING OFFERING OFFERING THE OFFERING
- ------------------------------------ ------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Credit Suisse 500,000 (1) 500,000 0 0
FT Trading 631,313 (1) 631,313 (1) 0 0
Sovereign Partners, L. P. 1,262,626 (1) 1,262,626 (1) 0 0
NET Financial International, Ltd. 52,500 (2) 52,500 (2) 0 0
Kurt Martin Consulting 125,000 (3) 125,000 (3) 0 0
</TABLE>
(1) Issuable on conversion of preferred stock. If the preferred stock were
converted on the date of this Prospectus , 1,086,957 shares would be issued
to the Selling Stockholder. See "Description of Securities - 1997 Series A
Preferred Stock" for a discussion of the terms of the Conversion of the
1997 Series A Preferred Stock.
(2) Issuable upon exercise of options with an exercise price of $1.375 per
share.
(3) Issuable upon exercise of options with an exercise price of $1.00 per
share.
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that they may offer and
sell the shares of Common Stock offered hereby from time to time in broker's
transactions, individually negotiated transactions or a combination thereof at
market prices prevailing from time to time. The precise amounts and timing of
sales, if any, of the shares offered hereby will be determined by each Selling
Shareholder in his sole discretion from time to time.
The Company has agreed to bear the costs of registering the shares of
Common Stock offered hereby under the Securities Act of 1933, as amended.
Each Selling Shareholder will deliver a Prospectus in connection with the
sale of shares of Common Stock offered hereby.
The sale of the shares of Common Stock offered hereunder is not being
underwritten. Sales may be made by each of the Selling Stockholders in broker's
transactions (in which the brokers will charge no more than their usual and
customary commissions) or otherwise at prices and at terms then prevailing or at
prices related to the then current market price of the Common Stock, or in
negotiated transactions. In this regard, the shares may be sold in one or more
of the following types of transactions: (i) a block trade in which the broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(ii) purchases by a broker or dealer as principal and resale
9
<PAGE>
by such broker or dealer for its account pursuant to this Prospectus; (iii)
ordinary brokerage transactions and transactions in which the broker solicits
purchases. In effecting sales, brokers or dealers engaged by the Selling
Stockholder may arrange for other brokers or dealers to participate. Brokers or
dealers will receive commissions or discounts from the Selling Stockholder in
amounts to be negotiated prior to any sale. Each of the Selling Stockholders
advised the Company that he has not entered into any selling arrangement with
any security dealer or broker. The Selling Stockholder offering and selling the
Common Stock and any broker or dealer participating in any such distribution may
be deemed to be an "underwriter" (as defined in the 1933 Act, as amended) with
respect to such sales.
On or prior to the effective date, each of the Selling Stockholders as a
condition to the inclusion of his shares herein shall be required to represent
and warrant to, and agree with the Company that, during such time as he or she
may be engaged in a distribution of the shares of Common Stock offered
hereunder, such Selling Stockholder will, among other things, (a) not engage in
any stabilization activity in connection with the Company's securities, (b)
furnish each broker or dealer through whom or which he offers securities copies
of the Prospectus, as may be required, (c) inform such broker or dealer as to
the number of shares of Common Stock he is selling, that such securities are
part of a distribution and that he is subject to the provisions of Rule 10b-6 of
the General Rules and Regulations under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), (d) report weekly to the Company all sales, pledges
and other dispositions of the shares of Common Stock covered hereby if any such
shall have occurred, and (e) not bid for, or purchase, any Company securities
other than as permitted under the Exchange Act.
Each of the Selling Stockholders has been advised by the Company that he or
she may not, during any period during which the shares of Common Stock are being
offered, use or disseminate information concerning the Company other than this
Prospectus. In addition, each of the Selling Stockholders has confirmed that he
has no material adverse information with regard to the current and prospective
operations of the Company except as may be disclosed in this Prospectus, and
that the reason prompting the sale of any securities by any Selling Stockholder
is to realize cash from time to time for investment, business or personal
reasons.
The Company has agreed that it will furnish the Selling Stockholders a
reasonable number of copies of this Prospectus.
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, redeemable warrants (each of which entitles the
holder to purchase one-twentieth of one share of common stock at a price of
$2.375 or $47.50 per share through the close of business on October 31, 1997, or
an earlier redemption date) and units (each of which is comprised of three
shares pre-reverse split and .15 shares post reverse split 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 Company's Registration Statement on Form S-18, until
August 27, 1992. Since such date, the Company's securities have traded on the
Electronic Bulletin Board maintained by NASDAQ. Prior to December 19, 1989,
there was no market for the Company'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, 1995 to December 31, 1996, as reported on
the Electronic Bulletin Board; and, as adjusted to take into effect a one-for-
twenty reverse stock split effected on October 4, 1996. The quotations represent
inter-dealer quotations without adjustment for retail mark-ups, mark-downs or
commissions and may not represent actual transactions:
10
<PAGE>
<TABLE>
<CAPTION>
PERIOD COMMON STOCK WARRANTS UNITS
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 1995 $16.875 $11.250 $0.188 $0.063 $4.000 $1.500
2nd Quarter 1995 $13.750 $ 5.625 $0.125 $0.063 $4.000 $0.250
3rd Quarter 1995 $ 8.125 $ 3.750 $0.188 $0.188 $1.125 $0.250
4th Quarter 1995 $ 8.438 $ 1.875 $0.188 $0.188 $1.125 $0.250
1st Quarter 1996 $13.400 $ 6.000 $0.050 $0.010 $1.625 $0.250
2nd Quarter 1996 $ 7.000 $ 4.800 $0.010 $0.010 $1.000 $1.000
3rd Quarter 1996 $ 6.200 $ 3.000 $0.010 $0.010 $1.000 $0.500
4th Quarter 1996 $ 3.800 $ 0.875 $0.010 $0.010 $0.500 $0.500
1st Quarter 1997 $ 2.750 $ 0.875 $0.010 $0.010 $0.500 $0.500
</TABLE>
THE ABOVE AMOUNTS HAVE BEEN RETROACTIVELY ADJUSTED FOR A 1 FOR 20 REVERSE STOCK
SPLIT, WHICH OCCURRED ON OCTOBER 4, 1996.
On June 2, 1997, the closing bid prices for the common stock, redeemable
warrants and units, as reported by the NASDAQ Electronic Bulletin Board, were
$.906, $.01, and $.50, respectively.
At the close of business on June 2, 1997, there were approximately 400
holders of record of the common stock and approximately 40 holders of record of
the redeemable warrants.
The Company 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
Company'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 1996
or through the date of this prospectus in 1997. Cumulative unpaid dividends on
the Series B Convertible Preferred Stock as of December 31, 1996 totaled
$25,000. During August 1996, the holder of 500 of the then 1,500 issued and
outstanding shares of Series B Convertible Preferred Stock converted his shares
and all accrued dividends thereon into 2,500 shares of Common Stock (as adjusted
for the reverse stock split effected in October 1996). 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 March 1996, the 672.5 shares of Series D Convertible Preferred
Stock and all accrued dividends thereon were converted to Common Stock at $.375
per share ($7.50 as adjusted for the reverse stock split). All unpaid dividends
on the preferred stock must be paid before dividends can be paid on the Common
Stock.
SELECTED FINANCIAL DATA
The following selected financial data for each of the two years in the
period ended December 31, 1995 and 1996 are derived from, and should be read in
conjunction with the Company's audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The selected financial data for
the three months ended March 31, 1996 and 1997 have been derived from unaudited
financial statements that are included elsewhere in this Prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
11
<PAGE>
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------------------- -------------------------
1996 1995 1997 1996
------------- ------------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C>
Net revenue $ 5,285,149 $ 2,315,151 $ 765,239 $ 840,995
Gross profit (loss) (1,584,971) 832,825 216,951 132,682
Net loss $(8,122,815) $(2,812,281) $ (815,029) $ (887,662)
Net loss per share $(1.59) $(1.92) $(0.14) $(0.35)
Weighted average common shares outstanding 5,133,665 1,467,648 5,906,765 2,565,077
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 MARCH 31, 1997
(UNAUDITED)
<S> <C> <C>
Working capital deficit $ (875,965) $ (953,002)
Total assets 2,036,514 2,106,685
Total liabilities 2,189,012 2,377,789
Stockholder's equity (deficit) (152,498) (271,104)
</TABLE>
12
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS REPORT, WHICH ARE
FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISK AND UNCERTAINTY. POTENTIAL RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES FROM
OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, THE IMPACT OF QUALITY
PROBLEMS EXPERIENCED IN 1996, THE LACK OF ADEQUATE CAPITAL TO FUND CONTINUING
OPERATIONS, ECONOMIC CONDITIONS IN THE COMPANY'S PRIMARY MARKETS AND OTHER
UNCERTAINTIES DETAILED FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------
The Company expanded its line of products in early 1996, and reduced the
concentration of sales from an almost single product organization in 1995. This
expansion of products assisted the Company's growth into more organizations and
improved the market penetration into already established channels of
distribution. The problem associated with the poor manufacturing at Vitafort's
Caketts co-packer, The Keebler Company, as well as serious problems related to
the manufacture of Fudgets at Michel's Bakery, dislocated and almost destroyed
the distribution channels that the Company had expended both significant time
and cash resources on during this strong expansion year. This problem
contributed greatly to not only the decline in sales in the latter part of 1996,
but also to the increase in costs of manufacturing and storing, sales and
marketing, and general and administration expense levels. Additionally, this
factor played a major role in exhausting the Company's liquidity and forcing it
into the capital market to raise additional capital at prices unfavorable to the
Company.
SALES
Net sales for the year ended December 31, 1996 were $5,285,149 compared to
$2,315,151, an increase of $2,969,998 or 128.3%, from 1995. This increase is
due primarily to the increase in the new products available to the Company
resulting from the acquisition of the Auburn Farms family of products and the
significant investment in the sales area to establish the distribution network.
Net sales for the first six months of 1996 were $2,304,352, which was almost the
sales volume for the entire year of 1995. The significant decline in sales in
the end of 1996 reflects the return of product by our distributors, retailers,
and other customers due primarily to the problems associated with the faulty
Caketts product manufactured by The Keebler Company and to a lesser extent
Fudgets product at Michel's.
The expansion of the product mix in 1996 is reflected in the sales
composition. In 1996, Fudgets comprised 36% of total 1996 sales while in 1995
they comprised 97% of sales. Caketts comprised approximately 36% while Auburn
Farms and Natures Warehouse branded products represented 25% of total sales in
1996.
GROSS PROFIT (LOSS)
Gross profit for the year ended December 31, 1995 was $832,825 compared to
a gross loss of ($1,584,971) for the year ended December 31, 1996. The loss in
profitability in 1996 is due to: the significant increase in the inventory
reserve accounts as a result of the declining customer interest due to the
problems related to the Keebler-produced Caketts and to a lesser extent,
Michel's produced Fudgets; the related return of significant product and the
lack of reorders and loss of volume. In addition, the decline in volume forced
the company to pay higher per unit costs than those originally calculated in
determining price. This led to further erosion in gross profit margin. As the
sales continued to slow down, the pattern continued and gross profit continued
to fall. The problem with the manufacturer of the product also manifested
itself in the Company's inability to sustain shipments on an ongoing basis,
creating additional
13
<PAGE>
product that was nearing its expiration date and requiring the Company to sell
these products as prices which generated little, if any, profit further reducing
the profit margin of the business.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1996 were $6,487,845
compared to $3,537,671 for the same period in 1995, an increase of $2,950,174;
or approximately 84%. Research and development expenses increased from $378,602
to $760,944, an increase of $382,342 or 101%. The increase in research and
development is primarily in the development of new products and packaging for
both new and existing products, Approximately $310,000 of the increase in
research and development between 1995 and 1996 is the result of this sustained
effort as the Company began the implementation of the roll-out program developed
in the marketing and sales strategic plan. Marketing expenses also reflect the
strong effort expended by the Company in positioning its products into various
distribution channels. The Company estimates it has spent approximately
$1,400,000 in product introductory costs during 1996, from which it now believes
it will derive no benefit as a result of the mold problem associated with the
co-packer products delivered to the Company's distributors, retailer, and
consumers by the Company. In addition, during the first part of 1996 the
Company increased its travel expenditures, staff, and commission costs as it
accelerated the introduction programs across the country. The approximately $
975,000 increase in selling, general & administration expenses is due primary to
the increase in legal ($175,000) and consulting ($587,000) fees caused, for the
most part, by the effort expended in locating and identifying the problems
associated with the manufacture of the product by The Keebler Company, the co-
packer for the Caketts product, and to a lesser extent Michel's, the co-packer
for the Fudgets product, and attempting to secure compensation for the costs
associated with repairing the damage done not only to its distributors,
retailers, and consumers but also to the Company's financial condition as a
direct result of the capital depletion which occurred during the year.
INCOME TAXES
As of December 31, 1996, the Company had unused net operating loss carry-
forwards of approximately $19,600,000 and $6,400,000 available to offset future
Federal taxable income and future California taxable income. 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
carry-forwards expire in various amounts through the year 2011. In contrast to
Federal net operating losses, only 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward. The California
net operating losses will expire in various amounts through the year 2000.
Due to restrictions imposed by the Internal Revenue Service Code sections
regarding substantial changes in ownership of companies with loss carry-
forwards, 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 $6,736,000 for the net operating losses and
other credits have been offset by a valuation allowance since management cannot
determine whether it is more likely than not such assets will be recovered.
INTEREST EXPENSE
Interest expense was $50,508 in 1996 and $126,290 in 1995. The decline in
interest expense results primarily from the conversion and/or retirement of the
indebtedness of the Company and the reduction of general interest rates.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net Cash for Operations ($5,309,403) ($2,264,440)
Net Cash Used for Investing Activities (172,896) (92,767)
Net Cash Provided by Financing Activities 4,354,760 3,342,636
Working Capital (Deficit) (875,965) 1,296,769
</TABLE>
The Company's net cash required for operations increased from ($2,264,440)
in 1995, to ($5,309,403) in 1996. This increase in requirements reflects the
significant amount of resources expended in introducing the new line of company
products to the market and to build the inventory levels that the Company
believed were obtainable given the product responses at trade shows. These
expenditures were wasted when the mold problem forced product returns, order
cancellations, and eliminated follow-through orders for the product.
The Company continues to utilize strategic capital exchanges to minimize,
to the extent possible, the cash requirements of the business from an on-going
basis. This strategy has included exchanging debt or services with service
providers, consultants, employees and other organizations, thereby, conserving
cash. The Company intends to continue this practice in the future when it is in
the best interest of the Company. The losses, which have resulted in some of
the price erosion of the market value of the Company's stock, have made the
utilization of such a method of compensation very difficult.
The Company continues to seek additional capital through private placements
on an on-going basis, although the future ability of the Company to raise such
capital in its current condition in amounts satisfactory to allow the Company to
continue to operate is not assured. The Company realized net proceeds of
approximately $900,000 from private placements of its securities completed
during the first four months of 1997. See "Note 13" to the financial statements
for the year ended December 31, 1996 for additional information.
The Company's independent certified public accountants have included a
modification to their opinion, which indicates there is substantial doubt about
the Company's ability to continue as a going concern. See "Note 2" to the
financial statements for the year ended December 31, 1996 for additional
information. The Company received $6,750,000 in full and complete settlement
from the Keebler arbitration on July 15, 1997. See Recent Financial
Developments for further information.
GENERAL
The Company believes that its ability to continue as a going concern
has been severely jeopardized by the adverse effects in the marketplace of the
mold in its products caused during the manufacturing process. Although the
Company believes the manufacturers, and in particular, the Keebler Company,
bears primary responsibility for this problem, there can be no assurance that
the Company can repair the damage to its reputation and financial condition.
The substantial operating losses have reduced the liquidity position of the
Company significantly, which in turn, has depressed the stock price of the
Company. The stock price reduction has further diluted the equity position of
the Company as it attempts to raise capital to maintain a viable operation.
The future outlook requires the Company to focus on existing products,
other than those previously tainted by the mold problem, and maintain an
operating margin sufficient to cover operating expenses. The Company is
currently directing its limited resources toward existing products, which are
not tainted in the minds of retailers and consumers, and for which the Company
is receiving encouraging signs that customer acceptance is increasing.
Additionally, any costs not directly related to generating revenue have been
significantly curtailed. The future ability of the Company to raise sufficient
capital to meet existing and future obligations to allow it to continue to
operate is not without a high degree of risk. Substantial doubt exists as to
the Company's ability to continue as a going concern. Should the Company not be
successful in raising additional needed capital, operations would have to be
further curtailed.
15
<PAGE>
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
- ------------------------------------------
The Company, after going through a tumultuous year in 1996 as a result of the
production problems, continues to be adversely affected by these 1996 problems
and attempted to focus on the ongoing business while at the same time preparing
for the arbitration with the Keebler Company which commenced in May.
The sales effort in the first quarter was severely hampered both by the negative
impact of the mold problems encountered during 1996 and the liquidity issues
resulting from the reduction in sales and offset costs incurred by the Company
toward the end of 1996.
To offset these adverse conditions, the Company is exploring revisions to its
existing products to both differentiate them from those tainted from last year's
production problems and to offer the consumer a similar product under different
brand names.
SALES
For the three months ended march 31, 1997, net sales were $ 765,239 compared to
$ 840,995 for the same period in 1996, a reduction of $ 75,756 or approximately
9%. This decline was most principally in the caketts line of products, where
the sales dropped from 49.0% of sales in the 1996 quarter ended march 31 to
18.2% of sales for the same period in 1997. The Company believes that the mold
problems encountered last year contributes to this significant decline in
revenue for this product. The Company intends to transition away from Caketts
to brands not affected by the mold problem. The Company may market its Caketts
formulae under a different brand name if it is able to raise adequate capital.
The Company has introduced a new product called Toast N' Jammers, which
accounted for $ 228,220 or 29.8% of overall net sales for the quarter ended
March 31, 1997. There were no Toast N' Jammers sales for the comparable quarter
of the previous year.
GROSS PROFIT
The gross profit was $ 216,951 or 28.4% of net sales for the three months ended
March 31, 1997 compared to $ 132,682 or 15.8% for the same period in 1996. The
improvement in gross profit margin is the result of the change in product mix
which has better gross margins. The Company also sold the Caketts and other
products at less than the original cost of the product but greater than the
existing inventory value.
The impact of production problems of the past continue to be a drag on the
Company's earnings. The storage charges for the three months ended March 31,
1997 are in excess of $ 70,000 and are directly related to the necessity of
storing product, that is proving difficult to market because of the 1996
problems, in refrigerated warehouses and, in some cases, in deep freeze
warehouses. The Company is attempting to liquidate these products as soon as
possible and has, it believes, adequate reserves to mitigate the potential
losses resulting from selling these products at a price that may be below the
Company's inventory carrying cost.
PRODUCT DEVELOPMENT
The losses suffered last year and the liquidity crises that resulted from those
losses has forced the company to significantly reduce its expenditures on
product development. For the three months ended March 31, 1997, the Company
spent $ 39,350 on product development as opposed to $ 157,993 for the same
period in 1996. The majority of this reduction was the elimination of the
Company employees involved in this effort and their related expenses.
16
<PAGE>
In addition, the Company continues to move forward in the cooperative product
development in conjunction with co-packers that it is currently utilizing to
produce the Company's products and that it intends to use in the future.
SALES AND MARKETING
Sales and marketing expenses for the three months ended March 31, 1997 were
$379,797 compared to $ 549,758 for the same period in 1996, a decrease of
$169,961 or 30.9%. The reduction is primarily due to staff reductions resulting
from the production problems of 1996 and the liquidity condition associated with
the decline in revenue and customer loyalty. The significant reductions were in
the areas of product promotion, travel and trade show presence where the
liquidity issue forced major reductions in expenditures in these areas.
The Company, however, is sharpening its focus on those customers that worked
with the Company in 1996 and are continuing to provide support to the Company
during this early period of 1997. While the Company has continued to lose some
customers, the customers that remain with the Company form the basic foundation
of the sales program during the early part of 1997 as the Company begins to
bring new products to market.
GENERAL AND ADMINISTRATIVE
The general and administrative expenses of the Company for the three months
ended March 31, 1997 were $ 586,232 as opposed to $ 322,681 for the same three
month period in 1996, an increase of $ 263,551 or 81.7%. The largest increase
was in the area of professional services, which was $ 338,108 for the first
quarter of 1997 compared to $ 71,259 for the first quarter of 1996, an increase
of $ 266,849 over the same quarter for 1996. The Company anticipates that the
level of expenditures for the litigations, as reported in the Company's 10-KSB,
will continue during the second quarter of 1997, which ends June 30, but these
costs should be reduced significantly after that time period.
OTHER INCOME (EXPENSES) INCLUDING INTEREST
The reduction in other income is due to the loss of interest income from the
investment of excess cash that the Company had in the first quarter of 1996,
which it has had to spend during the balance of 1996 as a result of the decline
in sales due to the production problems.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MARCH 31,
1997 1996
-------------- -------------
<S> <C> <C>
(UNAUDITED)
Net Cash Used for Operations $(517,198) $(2,411,252)
NET Cash Used for Investing Activities 0 (161,480)
NET Cash Provided by Financing Activities 721,745 4,002,003
Working Capital (Deficit) (953,002) 4,501,437
</TABLE>
The Company received $6,750,000 in full and complete settlement from the Keebler
arbitration on July 15, 1997. See Recent Financial Developments for further
information.
17
<PAGE>
has been further damaged by the increase in the amount of payment reductions by
the Company's customers for product spoilage, shelf space allotment charges
(slotting fees), advertising expenses, and other expenses related to the product
problems of 1996. This has reduced the amount the Company's lender will allow to
be advanced as loans on new invoices issued by the Company, further reducing
incoming cash flow.
Operating losses continue to hamper the cash position of the Company and are
straining the relationships between the Company's suppliers and the Company,
thereby jeopardizing the Company's ability to purchase inventory in adequate
quantities sufficient to meet customer demand.
While the Company is in default with the primary lender of the Company, there
are ongoing discussions concerning the Company's condition and both parties are
seeking a resolution to the existing default condition. The lender continues to
advance funds to the Company under the loan agreement, but at reduced advance
rates on the accounts receivable line because of the historical payment
deductions by the Company's customers.
The Company continues to attempt to bridge the difference between the actual
cash generated from operations and the cash disbursements required to meet
ongoing obligations by raising capital. The fund raising has successfully
maintained the current liquidity level of the Company but the continued expense
of litigation and the deficits from operations have severely curtailed the
Company in its ability to raise additional capital without diluting the
Company's existing stockholders.
The Company is attempting to raise additional capital to meet the working
capital deficiency, but may not be able to do so. Should the Company not be
able to raise additional capital, it may have to severely curtail operations.
Although the Company is considered a going concern at the present time, there is
substantial doubt as to its continuity. Accordingly, there is no guarantee in
the future that the Company will be able to achieve a level of profitability
that will result in the elimination of the going concern issue from the
Company's financial condition. The management of the Company, however, believes
that the Company may achieve profitability in the future, but there is
significant risk involved in attempting to achieve such profitability and there
can be no assurance that the Company will be able to survive while it attempts
to do so.
THE BUSINESS OF THE COMPANY
GENERAL
Vitafort International Corporation (the "Company" or "Vitafort") was formed
as a California corporation in 1986, and reincorporated as a Delaware
corporation in 1989. Prior to May of 1993, Vitafort was in the business of
formulating and developing value-added foods and beverages for third parties.
In addition, the Company was also marketing branded seafood. In May of 1993,
these businesses were discontinued due to lack of revenues and profit and later
in the year the Company disposed of them. In the fall of 1993, the Company
installed new management, who selected a new direction for the Company.
Vitafort would begin developing fat free and low fat bakery snacks that would be
marketed under Company owned trademarks. Vitafort, however, did not own any
production facilities, so established contract manufacturers (co-packers) would
be utilized to manufacturer these branded products developed by the Company.
In the spring of 1994, at the Natural Food Expo in Anaheim, California,
Vitafort introduced its first branded product called Fudgets(TM), a single-serve
fat free brownie with icing. Four flavors of Fudgets were marketed throughout
1994 and 1995, while Vitafort research and development continued to develop
additional low fat and fat free snacks. During this period Fudgets were sold at
retailers such as: Price
18
<PAGE>
Costco (Bellevue, WA), Circle-K (Phoenix, AZ), Ralphs (Compton, Ca), Albertsons
(Brea, CA), GNC (Pittsburgh, PA), Shop-Rite/Wakefern (Woodbridge, NJ), along
with many others. In addition, Fudgets were being marketed to hundreds of health
food stores across the country by natural food distributors.
In the spring of 1995, the Company introduced double chocolate, cappuccino
and peanut flavor Fudgets in a multi-pack of five individually wrapped 1.4 oz.,
packages. These three flavors were test marketed through the year. In the latter
part of 1995, Vitafort signed a co-packing agreement with The Keebler Company
("Keebler") and began the marketing introduction of four flavors of fat free
cakes called Caketts(TM) (lemon poppy, carrot, pound and banana). The Company
believes that this unique snack was the first individually portioned fat free
snack cake with an extended shelf life to be merchandised in the cookie section
of supermarkets.
In the fourth quarter of 1995, as the Company was completing the final
stages of its financing, the Company put in place the distribution
infrastructure that would support the roll out of these seven new flavors of
Fudgets and Caketts. In addition, the Company began the manufacture of Fudgets
at Michel's Bakery ("Michel's") at this time. Food brokers agreed to represent
the Vitafort product line and serve as the sales agents to the marketplace for
the Company.
The introduction of Fudgets and Caketts to grocery stores across the
country began in the first quarter of 1996, as retailers such as Acme
(Philadelphia, PA), Delchamps (Mobile, AL) and Shop-Rite/Wakefern (Woodbridge,
NJ) placed purchase orders for Fudgets and Caketts. The roll out continued in
the second quarter as Vitafort's distributors added Caketts and Fudgets to the
shelves of hundreds of chain stores including: Kroger (Cincinnati, OH),
Albertsons (Brea, CA), Meijer (Grand Rapids, MI), Albertsons (AZ, CA, UT and
TX), Price Chopper (Schenectady, NY) Demoulas (Tewksberry, MA), Winn-Dixie
(Jacksonville, Orlando and Tampa, FL), Kash and Karry (Tampa, FL), Publix
(Lakeland, FL) and others. In addition, the Company received direct purchases
orders from Food Lion (Salisbury, NC), Kroger (Roanoke, VA) and Richfoods
(Richmond, VA), while procuring purchase orders attached to national print
advertisements with both Thrifty Payless and Eckerd Drugs, two large drug store
chains.
In the second half of 1996, Vitafort's distributors added Stop + Shop (MA),
Kroger (Atlanta, GA), Farmer Jack's (MI), Grand Union (NY), Ralphs (CA), Hughes
(CA), and others to the supermarkets selling the Company's products. The largest
purchase order in the history of the Company was also received as K-Mart placed
a $550,000 order for product as part of a national advertisement for 2,300
stores.
During the second quarter of 1996, the Company received complaints of mold
from Caketts being manufactured by the Keebler Company, Vitafort's primary co-
packer at the time. The Company notified Keebler that it had received these
complaints and engaged Keebler in discussions to correct the problem. Keebler
attempted to solve the mold problem by creating an inspection process that would
identify the acceptable product for reshipment. The Company shipped this
inspected product to its customers. Thereafter, however, the Company received
reports that this inspected product also turned moldy. Vitafort continued to
engage Keebler in discussions regarding this problem, but in August, Keebler
abruptly terminated the manufacturing agreement. This interrupted the supply of
Caketts to customers resulting in delayed shipments and lost sales.
The Company anticipated strong orders toward the year-end of 1996 as
supermarkets across the country prepared for January and February healthy diet
promotions and advertisements. During the third quarter, the Company shipped
orders of Caketts and Fudgets produced by its new co-packer. In the fourth
quarter, however, complaints from retailers about mold on product produced by
Keebler (Caketts) and quality problems associated with product produced by
Michel's (Fudgets) continued. By December the Company learned that the damage to
the consumer acceptance of these brands caused by the previously shipped
defective product was greater than previously realized. This quality problem
created hundreds of consumer complaints that led to both loss of distributor
goodwill and a significant loss of shelf space in the supermarkets. In addition,
product had to be withdrawn from the marketplace. As a result, fourth quarter
sales were significantly adversely affected and costs relating to this problem
were much greater than previously anticipated.
19
<PAGE>
A new co-packer manufactures both Caketts and Fudgets for the Company with
acceptable quality control. The Company continues to ship Fudgets, but has
substantially curtailed shipments of Caketts due to damage done to the brand.
The Company is formulating a revised marketing plan for Fudgets.
The Company attributes its poor 1996 and first quarter 1997 results
primarily to the quality control problems of its prior co-packers, particularly
from the damage caused by the Keebler Company. The Company believes that its
current co-packers have solved this problem and that the products currently
being shipped will have minimal quality control problems, although no assurances
can be made as to the level of quality control acceptability. The Company will,
however, need to acquire additional capital to carry out the remainder of its
1997 business plan. If the Company is unable to acquire this capital, its
ability to carry out this plan will be impaired. There can be no assurance that
the Company will be successful in obtaining this capital. In addition, in light
of the fact that the Company must overcome the damage to its Caketts and Fudgets
brands caused by the 1996 quality control problems, there can be no assurance as
to the level of success the Company will achieve with its marketing plan.
The Company's fat free and low fat snack items are based upon the Company's
proprietary formulas and procedures and are developed in conjunction with its
co-packers. The Company seeks to protect its proprietary information through
confidentiality agreements with employees, suppliers and manufacturers. These
products are made from generally available ingredients, which are then converted
into the Company's products.
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. Additionally, the Company must overcome the
negative goodwill associated with the defective products produced by its former
co-packers. 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 and feel and or that the Company's products will achieve or
maintain reasonable levels of market acceptance.
ACQUISITION OF AUBURN FARMS, INC. BRANDS
On May 2, 1996, pursuant to the terms of a letter agreement, dated May 1,
1996, and the attachments thereto (the "Foreclosure Purchase Agreement" or
"FPA"), the Company acquired the trademarks "Auburn Farms" and "Natures
Warehouse" and certain related trademarks, trade dress, and related intangibles
in a foreclosure sale from secured lenders to Auburn Farms, Inc., dba. Natures
Warehouse ("AFI"). The purchase price under the FPA consisted of a cash payment
of $75,000 and deferred payments based upon gross sales, as defined in the FPA,
of products sold by the Company which bear the acquired trademarks. The
deferred payment for AFI's existing products, as defined in the FPA, equals
three and one half (3 1/2%) per cent of gross sales for a period of thirty
months commencing May 1, 1996; three (3%) per cent of gross sales for the next
ensuing period of thirty months; two and one half (2 1/2%) per cent of gross
sales for the next ensuing period of thirty months; and two (2%) per cent of
gross sales for the next ensuing period of thirty months. For newly created
products, as defined in the FPA, which utilize the acquired trademarks, the
Company is required to pay a deferred purchase price equal to one and one half
(1 1/2%) per cent of gross sales for a period of 120 months commencing May 1,
1996. $72,000 of inventory was purchased under such option in 1996. The FPA
agreement also provides that the Company has the option to purchase certain
inventories of packaging materials from AFI. During 1996, sales of products
bearing the acquired trademarks were $1,337,475; and, the total deferred
payments under the FPA were $45,612.
The Company is using co-packers to produce products bearing the acquired
trademarks.
CREDIT FACILITY
In August 1996, the Company entered into a revolving credit facility with a
financing institution, that provides a credit line of up to $4,000,000 subject
to certain covenants. Advances made to the Company
20
<PAGE>
under the facility are based on a certain percentage of eligible accounts
receivable, as defined, and a certain percentage of eligible inventory, as
defined, located in Ontario, California. The amount of inventory advances under
the facility cannot exceed $500,000. The initial term of the facility ends
August 1997, with automatic renews thereafter. Advances under the facility bear
an interest rate at the Bank of America NT plus 3%, and are secured by a first
priority lien on all of the Company's assets. Minimum interest charges after the
first three months of the term are $10,000 per month for the next three months,
and $15,000 per month thereafter. The Company paid $40,000 to the institution
upon execution of the agreement, and $40,000 to a facilitator in connection with
the placement of the loan.
The Company is using the proceeds of advances under the facility to meet
its current working capital requirements. The amount due under this credit
facility, was $440,022 on December 31, 1996, and $315,344 on March 31, 1997.
The Company is in violation of certain covenants with respect to working
capital and tangible net worth requirements, and is under negotiation with the
lender to modify the covenants. The Company classified the entire loan as a
current liability. See "Liquidity and Capital Resources" under "Management's
Discussion and Analysis or Plan of Operation".
PRODUCT MANUFACTURING
The Company manufacturers its products by entering into agreements with
established food manufacturers ("co-packers"), who have the facilities, staff,
quality assurance and process control programs for the production of their own
products as well as the Company's products ("co-packer agreements"). Co-packer
relations are intended to enable the Company to secure the expertise of
qualified food manufacturers with respect to the development, manufacture and
packaging of the product; and, to achieve economies of scale in production and
staffing requirements, while providing production flexibility to meet changes in
product mix demand by customers that the Company could not achieve on its own.
Additionally, the Company benefits from, and relies upon, the production
experience and expertise of these companies while avoiding the capital outlays,
staffing requirements, quality control, legal process requirements and other
manufacturing costs and delays that the Company would encounter were it to
attempt to manufacture its products utilizing its own facility.
As reflected in the fact that the Company is presently pursuing claims
against several former co-packers relating to poor product quality, there can be
no assurance that co-packers will meet their obligations. See "Legal
Proceedings" for information with regard to the Company's claims.
Management believes that the most recent switch in co-packer arrangements
has improved product quality and availability, while improving the Company's
gross profit margin. Management believes that the current co-packers have
sufficient capacity to meet the Company's requirements.
Since December 1992, the Company has used another co-packer, located on
Long Island, New York, as the primary supplier of Trim Slice and Vegicatessen
brand products. This co-packer operates under strict kosher guidelines.
Management believes that this co-packer has the capacity to produce sufficient
quantities of the Company's products to supply projected needs at least through
the end of 1997.
The Company is in the process of negotiating co-packing agreements with
other established firms to act as co-packers for various other products.
Management believes that, if the research and development of the products is
completed, it will be able to select co-packers and enter agreements on terms
acceptable to the Company.
DISTRIBUTION
Vitafort utilizes distributors and brokers to market its brands of fat free
and low fat snacks. these distributors ship to grocery chains in the United
States. Wholesale club stores, drug store chains and mass merchandisers are
distributed by the Company directly into their warehouses. Management believes
that, with sufficient funding, distribution can expand throughout the
marketplace with additional products and
21
<PAGE>
distributors. During 1996, K-Mart comprised 11% of the Company's net revenues
and, during 1995, Price Club comprised 25% of the Company's net revenues.
MARKETING
Vitafort developed a phased strategic marketing plan in the latter part of
1995, which continued into 1996, involving the development and expansion of the
Fudgets Fat Free Brownies and Juliette's Low Fat Chocolate Creams brands while
staging the rebuilding of the more mature Auburn Farms and Natures Warehouse
brands. The mold problem associated with the co-packers of Caketts and Fudgets
during 1996 has had a serious impact on the distribution channels of the
products. In addition, the liquidity problems caused by the same production
issues has severely hampered the Company's ability to increase the distribution
of its products through the increase in product introduction costs.
In connection with Auburn Farms and Natures Warehouse the Company has
changed packaging and formulations in an effort to appeal to a broader customer
base. The first new product was Toast `N Jammers, a toaster pastry line.
Combined with icing and a product presentation that is closer to mainstream
products, Vitafort is attempting to establish Toast `N Jammers as the standard
for the toaster pastry segment. The Company is preparing similar new products
for the other Auburn Farms brands. The severity of financial losses suffered as
a result of the product quality problem could hamper the Company's ability to
market Auburn Farms and Natures Warehouse products, as well as to execute other
projects.
CRYSTAL GEYSER
The Company 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". Under the agreement, Crystal
Geyser is obligated to purchase the necessary pre-mix from the Company. 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 Company
does not anticipate any further revenues from the licensee. During 1995, the
Company realized revenues from the sale of pre-mix totaling $2,300. There were
no revenues from this source in 1996 or anticipated to be in 1997.
FOREIGN LICENSE - MEXICO, CENTRAL & SOUTH AMERICA, AND THE CARIBBEAN
The Company 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 Company and Puerto Rico
Supplies Co., Inc., a corporation owned by members of the Pasarell family.
Stanley J. Pasarell is a former director of the Company. This license is royalty
free and the Company will derive revenue and profit, if any, from its 50%
interest in the licensee.
Despite international interest in the Company's programs, management has
determined that the Company is best served by focusing its efforts and ensuring
the success of its new products domestically before venturing across borders.
Accordingly, no efforts were made in VLA during 1996 or, to date, in 1997.
INTELLECTUAL PROPERTY RIGHT PROTECTION AND TRADEMARKS
The Company is seeking to determine whether its various formulas and
procedures are patentable in the United States, and relies upon non-disclosure,
secrecy agreements and its common law rights in order to protect its proprietary
formulae, procedures, and other information. No assurance can be given that
such steps will adequately protect the Company against competing products or
that the Company will be able to adequately enforce its rights against third
parties who may be utilizing the Company's proprietary formulae, procedures and
other information. If the Company is advised by counsel that any of its
formulae, processes, procedures or other techniques are patentable, then it may
seek appropriate patent protection.
22
<PAGE>
The Company has developed several proprietary formulations for its
products. While these formulations may or may not be protected under the U.S.
Patent laws, they may have value inasmuch as they provide Vitafort with its
unique competitive edge. The Company has established brands within certain
market niches of major product categories. The consumer acceptance of the
nutritional and flavor profiles of the products have been heavily influenced by
the proprietary formulations and processes.
The Company's trademarks and their marketing status are detailed below:
<TABLE>
<CAPTION>
TRADEMARK MARKETING ACTIVITY
<S> <C>
VITAFORT This is an actively marketed mark and used on
all Company material, however, quality problems
encountered in 1996 have impaired the value of
this mark.
CAKETTS This product once occupied significant shelf
space in supermarkets throughout the country and
continues to maintain a minor presence. Quality
problems associated with this product, however,
appear to have substantially diminished the
value of this mark.
JULIETTE'S The Company is in the early stages of expanding
this product line. The Company expects this to
become a significant percentage of total Company
sales.
FUDGETS This may be one of the key food products with
distribution in a number of supermarkets
throughout the U.S. Quality problems
encountered in 1996 may have severely limited
the realization of this mark.
AUBURN FARMS Recently acquired trade name with existing
presence in the specialty grocery classes of
trade.
NATURES WAREHOUSE Recently acquired trade name with existing
presence in the health food class of trade.
TOAST `N JAMMERS A repositioned brand name with specialty
grocery presence. With the repositioned
product, this brand has experienced expansion
versus a year ago.
JAMMERS One of the all natural fat free cookie brands in
both the health food and specialty food classes
of trade. This product line is slated for a
repositioning which should further enhance its
value to the Company.
7-GRAINERS A snack cracker brand within the health food
class of trade. This brand also holds a shelf
position within the specialty grocery class of
trade.
PASTRY POPPERS A brand predominately in the health food sector
catering to a consumer base sensitive to wheat,
this brand is slated for a repositioning.
HIGH LITE A brand name that is not currently in use but
included in plans for new products.
NUTTIN' LIKE IT This is a brand name anticipated to be used for
a new low or reduced fat peanut butter cup.
NUT WIT This is a brand name that was part of a line of
fruit-juice sweetened candy bars marketed to the
health food stores throughout the country. The
Company is currently analyzing the business
potential for re-introduction of this line.
MY O MY This is a brand name that was part of a line of
fruit-juice sweetened candy bars marketed to the
health food stores throughout the country. The
Company is currently analyzing the business
potential for re-introduction of this line.
NON-STOP This is a brand name that was part of a line of
fruit-juice sweetened candy bars marketed to the
health food stores throughout the country. The
Company is currently analyzing the business
potential for re-introduction of this line.
A-OK This is a brand name that was part of a line of
fruit-juice sweetened candy bars marketed to the
health food stores throughout the country. The
Company is currently analyzing the business
potential for re-introduction of this line.
NO HOW This is a brand name that was part of a line of
fruit-juice sweetened candy bars marketed to the
health food stores throughout the country. The
Company is currently analyzing the business
potential for re-introduction of this line.
ONLY SNACKS The Company is analyzing whether it will
continue with the line of caramel corn under
this brand name or pursue other strategies.
</TABLE>
23
<PAGE>
GOVERNMENTAL REGULATION
In general, production, packaging, processing and labeling of food and
beverage products are subject to various federal and state regulations. The
Company relies upon the experience and expertise of its co-packers to assure
compliance with applicable federal and state regulations. The Company believes
that it is in compliance with all applicable governmental regulations.
RESEARCH AND DEVELOPMENT
The Company has modified its research and development strategies from prior
years. In the past, the Company retained highly trained technical support
professionals to independently develop formulations and work with contract
manufacturers to bring the products to market readiness. The strategy moving
forward in 1997 and beyond is to work with existing manufacturers from the
outset and utilize their internal research and technical staff to develop new
products. By working in this manner, the Company intends to reduce its research
and development costs and to create a joint interests in "ownership" of a
successful, high quality product. This strategy inherently builds a strong
total quality end result.
The Company spent $737,044 and $378,602 on research and development in 1996
and 1995, respectively. The Company spent $39,350 on research and development
during the first quarter of 1997. The Company intends to create new products
using the above strategy and to launch these products in the marketplace in
1997. The current financial condition of the Company, however, may preclude it
from successfully accomplishing its goal.
COMPETITION
The Company 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 Company
seeks to compete based on the unique taste, texture and quality of its products
and by obtaining recognition for its brands.
The Vitafort brands compete within different categories and with different
products depending upon the class of trade and placement within retail outlets.
The chart below details the Company's product lines and identifies the
competitors with the classes of trade.
24
<PAGE>
<TABLE>
<CAPTION>
VITAFORT BRAND CLASS OF TRADE PRINCIPAL MARKET NICHE
COMPETITION
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Caketts Main grocery Snackwell's Caketts line
cookie snack cakes may be the
section and only shelf
food sections stable snack
of discount cake line
drug offered in the
cookie section
however the
co-packer mold
problem has
severely
curtailed its
past
competitive
advantage.
- --------------------------------------------------------------------------------
Juliette's Low Fat Chocolate Main grocery There is no Appeal to
Creams sections, known direct those
natural food competition consumers who
stores and for boxed low are not
discount drug fat chocolate willing to
stores within cream candies. sacrifice the
the U.S. taste of real
chocolates,
but demand a
nutritional
profile that
provides lower
fat than
traditional
chocolates.
- --------------------------------------------------------------------------------
Fudgets Main grocery 1. Fudgets may be
cookie section Snackwell's the only fat
Brownies free frosted
2. Pepperidge brownie line
Farms Brownies offered in the
3. cookie
Greenfield's section,
Brownies however the
4. Frookies 1996
Brownies production
problems has
limited its
advantage.
- --------------------------------------------------------------------------------
Toast `N Jammers Low Fat Specialty Health Valley Toast `N
Toaster Pastries Food sections Healthy Jammers may
of Tarts, and have a
supermarkets Natures' competitive
and specialty Choice edge .
stores. Toaster
Pastries
- --------------------------------------------------------------------------------
Jammers Fat Free Cookies and Health food Health Valley The company is
Brownies stores and Cookies, repositioning
health food Westbrae the brand to
sections of Cookies, strengthen its
supermarkets Heaven Scent future
Cookies, franchise.
Barbara's
Cookies,
Pamela's
Cookies,
Frookies
Cookies &
Brownies,
Greenfield's
Brownies
- --------------------------------------------------------------------------------
7-Grainers Fat Free Crackers Health food Health Valley Vitafort plans
stores and Crackers, to reposition
health food Hain the brand with
sections Crackers, unique new
within Barbara's product
supermarkets Crackers. entries.
- --------------------------------------------------------------------------------
</TABLE>
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 June 2, 1997, the Company had 5 employees of whom two were executive
officers, 1 was engaged in sales and marketing, and, 2 were clerical and
administrative.
PROPERTIES
The Company's principal executive office consists of 3,921 rentable square
feet located at 1800 Avenue of the Stars, Los Angeles, California, which is
leased pursuant to a three-year lease expiring August 31, 1997. The base rent
under said lease is $69,000 for the first year of the term; $72,000 for the
second
25
<PAGE>
year of the term; and, $75,000 for the third year of the term. The Company
believes that its facilities are more than adequate for its present needs, and
that it will be able to obtain smaller, less expensive offices when the current
lease expires.
LEGAL PROCEEDINGS
On November 1, 1995, Keebler Company ("Keebler") and the Company entered
into a co-packer agreement (the Agreement) to manufacture Caketts. In 1996, the
Company suffered losses and terminations of business relationships by a number
of the Company's distributors, retailers and brokers due to mold in the Caketts
product. In August 1996, Keebler gave the Company thirty (30) days notice of
termination of the Agreement between the parties, and indicated that it had
discontinued further production of the Company's product. The Agreement between
Keebler and the Company provides for the binding arbitration of disputes. On
August 15, 1996, the Company filed a demand for arbitration seeking compensatory
damages, which was heard during may 1997. The Company is seeking damages in
excess of $5,000,000. In defending the arbitration proceeding, Keebler had
alleged that Vitafort was responsible for the quality control problems and
failed to comply with certain labeling requirements. Keebler has filed a
counterclaim against the Company for breach of contract which alleges damages in
excess of $300,000. The Company believes that Keebler breached the agreement by
failing to meet its warranties to Vitafort to manufacture the products in an
acceptable process manner, improperly terminating the agreement; and, made
intentional misrepresentations regarding the cause of the mold problems. The
arbitration interim award notice of $5,983,923 plus legal fees was received on
June 20, 1997. No assurance can be given when or if the proceeds of the award
will be received. The Company received $6,750,000 in full and complete
settlement from the Keebler arbitration on July 15, 1997. See Recent Financial
Developments for further information.
The Company financed a portion of its legal costs in connection with the
arbitration through a loan from ATCOLP INVESTMENT PARTNERS, a California Limited
Partnership (the "Lender), in which Donald Wohl, a Director of the Company is
the general partner, for a loan in the amount of $300,000 (the "Loan"). The Loan
bears interest at the lesser of 15% per annum or the highest rate allowed by law
with recourse solely to the net proceeds of the arbitration, if any. The Loan
provides that the Lender will receive a portion of the proceeds of the award
based on a formula set forth therein. The Loan was approved by the disinterested
members of the Company's Board of Directors, and was on terms no less favorable
to the Company than were available from non-affiliated lenders. If the Company
is awarded $300,000 for its legal fees and costs and receives the $5,983,923
granted in the award, then it will owe the Lender approximately $1,300,000 of
the proceeds and the Company will realize net proceeds of approximately
$4,683,923 from the award. The Lender will also receive warrants for the
purchase of 200,000 shares of the Company's Common Stock at $.01 per share.
In December 1994, Lloyd Gaunt, 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, 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 Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration. The Plaintiff has appealed that
ruling. The Company denies any liability to the plaintiff and intends to
vigorously defend this action. The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment and realize a 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 in excess of $150,000. The
Company disputes this liability and filed a cross complaint against Cottage
Bakery. The parties have reached an agreement with respect to the settlement of
this action which does not subject the Company to any material liability.
26
<PAGE>
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-packer
and against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims. The litigation is in the early stages and the Company intends
to vigorously pursue the same.
Michel's Bakery, Inc., a former co-packer of Fudgets, initiated an action
in state court in Philadelphia, Pennsylvania, seeking damages in excess of
$140,000 under various contract and tort theories. In November 1996, the
Company removed this action to the Federal District Court for the Eastern
District of Pennsylvania. The Company has filed a counterclaim alleging breach
of contract and other claims relating to the product manufactured by Michel's.
The parties have reached a settlement in principal, but the final agreement has
not yet been signed.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other similar
claims arising out of the consulting relationship that previously existed
between the Company and Mr. Ellis. The Complaint seeks damages in an
unspecified amount. The court has sustained, without leave to amend, a demurrer
to the claims against Mark Beychok and sustained the demur, with leave to amend,
against the Company. Mr. Ellis recently filed an amended complaint against the
Company. The Litigation is in its early stages and the Company will vigorously
defend the action.
MANAGEMENT OF THE COMPANY
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD
- --------------------------------- --- --------------------------------------
<S> <C> <C>
Mark Beychok 39 President, CEO and a Director
Donald Wohl 61 Director
Paul Hermis 30 Director
Benjamin Tabatchnick 44 Director
John Coppolino 37 Vice President
Jack Spencer 52 Chief Operating Officer, Chief
Financial Officer
</TABLE>
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 fifteen years experience in the food
industry as an owner and operator of various food manufacturing marketing and
distribution companies.
Donald Wohl was elected a Director of the Company in November of 1993. Mr.
Wohl is a private investor and financial consultant who has been advising small
growth companies for over 30 years. Mr. Wohl is also on the board of Koo Koo
Roo, Inc., a NASDAQ listed company which operates a chain of restaurants.
Paul S. Hermis was elected a Director of the Company in February 1997. Mr.
Hermis is a co-creator, owner and founder of The Personal Edge, Body Friendly
Program and has over ten years experience in the wellness and nutritional
management industry. Mr. Hermis received a doctorate in education and
institutional management from Pepperdine University.
Benjamin Tabatchnick was elected a Director of the Company in February
1997. Since January 1990, Mr. Tabatchnick has owned and operated Tabatchnick's
Fine Foods (and predecessors), a privately
27
<PAGE>
held concern, which manufactures and distributes its own trademarked line of
frozen soups, and manufactures frozen and refrigerated foods for others on a
contract basis.
John Coppolino became Vice President during August 1996. Mr. Coppolino has
over ten years experience in the food industry, including experience as a food
broker and in product manufacture. Mr. Coppolino graduated from the Pennsylvania
State University School of Business in 1983 with a degree in Business Logistics.
Jack Spencer became Chief Financial Officer and Chief Operating Officer in
June 1997. Mr. Spencer has owned and operated Sunrise Consulting, Ltd., a
private concern specializing in restructuring, reorganizing, and rehabilitating
companies. Mr. Spencer has a BA in Economics from DePauw University (Indiana)
and an MBA from Washington University (Missouri).
COMPENSATION
Mr. Westlund, a former officer and director of the Company, signed an
employment agreement with the Company 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, where under 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 Company 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 80,000 options at $5.00 (as adjusted for the reverse stock split
effected in 1996) granted to Mr. Benz under his employment agreement would
immediately vest and the exercise price of 25,000 of such options would be
reduced from $5.00 to $2.00 (as adjusted for the reverse stock split effected in
1996). 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 25,000 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 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 where
under the moneys 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 Company 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 Company'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 Company 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 provided for the grant to the
employee of an option to
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<PAGE>
purchase 100,000 shares of common stock at $5.00 per share (as adjusted for the
reverse stock split effected in 1996). The option was vested as to 50,000 shares
upon grant and vested as to an additional 25,000 shares on December 31, 1994,
and as to the final 25,000 shares on June 30, 1995, conditioned only on
continued employment by the Company. Each agreement provides that the Company
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 Company.
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 62,500 five-year options with an exercise price of $3.00 (as adjusted
for the reverse stock split effected in 1996), a price equal to the offering
price in the Company's then on-going private placement. In November, 1995,
certain employees and consultants 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 on-going
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 19,092 shares; 9,547 options with an exercise price of
$4.50; and, 9,547 options with an exercise price of $6.00.
In August 1996, the Company entered into an employment agreement with John
Coppolino, which was dated January 1, 1996. Under his agreement, which is for a
one year term, two one year renewal terms at the option of the Company, Mr.
Coppolino received an initial salary of $102,000; and, is entitled to annual
increases of 5-6% based on increases in the cost of living. Mr. Coppolino's
employment agreement provided for the grant of 225,000 options, expiring
December 31, 2000 for the purchase of common stock at $3.00 (as adjusted for the
reverse stock split effected in October 1996). Of these options: (i) 56,250
have vested (ii) 56,250 have lapsed and (iii) 56,250 will vest on each of
January 1, 1998 and January 1, 1999, subject to the Company meeting certain
performance criteria.
In June 1997, the Company entered into a two year employment agreement with
Jack B. Spencer under which Mr. Spencer will serve the Company as its Chief
Operating Officer and Chief Financial Officer. The agreement provides for
compensation to Mr. Spencer in the amount of $125,000 per annum and the grant of
an aggregate of 300,000 five year incentive stock options with an exercise price
of $ 0.91 per share (such being the market price of the common stock on the date
the agreement was executed). The options vest as to 109,890 shares on September
15, 1997 as to 109,890 shares on June 16, 1998, as to 80,220 shares on June 16,
1999. Mr. Spencer's employment agreement provides that if Mr. Spencer's
employment by the Company is terminated without cause after September 15, 1997,
then Mr. Spencer shall be entitled to six months severance pay. Mr. Spencer's
employment agreement also provides that upon the occurrence of certain events
constituting a change in control of the Company, as defined therein, followed by
certain changes in Mr. Spencer's duties, Mr. Spencer shall be entitled to
receive a severance equal to one and one half times his then current salary plus
certain other benefits designed, in part, to offset any special taxes that might
be imposed upon Mr. Spencer in connection with such payments.
The following table sets forth certain information with respect to the
compensation paid by the Company to Messrs. Beychok and Coppolino (the "named
individuals") during 1996:
29
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
PRINCIPAL POSITION
& NAME YEAR SALARY OTHER ALL OTHER COMP.
<S> <C> <C> <C> <C>
CEO
Mark Beychok 1996 $137,500 $12,500 (1) $8,864 (2)
Vice President
John Coppolino 1996 72,000 14,500 (3) 9,000 (4)
</TABLE>
(1) A Portion of Mr. Beychok's salary was deferred in 1996 and was applied as
an offset against a note receivable in 1997.
(2) Comprised of $8,204 car allowance and $660 in medical insurance benefits
(3) Mr. Coppolino deferred a portion of his salary and exercised stock options
in 1996.
(4) Comprised of $9,000 car allowance.
STOCK OPTION PLAN
The Company adopted its 1989 Stock Option Plan (the "1989 Plan") pursuant
to which 12,500 shares of common stock (as adjusted for the reverse stock split
effected in 1996) 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 ("ISO's") 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 50,000 (as adjusted
for the reverse stock split effected in 1996). No options are outstanding under
this plan.
In 1995, the Company adopted a the 1995 Stock Option Plan pursuant to which
2,000,000 shares of Common Stock (as adjusted for the reverse stock split
effected in 1996) 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 Company and all its subsidiaries are eligible for option
grants. The Board determines, at 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 ISO's, 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 Company (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.
During 1995 Mr. Beychok was granted an aggregate of 687,500 options under
the 1995 Plan with an exercise price of $3.00 (as adjusted for the reverse stock
split effected in October 1996).
30
<PAGE>
The following chart sets certain information with respect to option
exercises during 1996 by the named individuals:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Name Shares Value Number of Value of Unexercised
Acquired on Realized Securities In-the-Money
Exercise Underlying Options/SAR's at
Unexercised FY-End
Options/SAR's at Exercisable/
FY-End Exercisable/ Unexercisable
Unexercisable
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Beychok -0- $-0- 430,969/699,719 $-0-
- -------------------------------------------------------------------------------------------------
John Coppolino 11,834 $-0- 59,000/221,833 $-0-
- -------------------------------------------------------------------------------------------------
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership of the common stock by each
director and by entities or persons known to the Company to own beneficially in
excess of 5% of such stock and by all officers and directors as a group, as of
June 2, 1997. 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 PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK BENEFICIAL
IDENTITY OF GROUP BENEFICIALLY OWNED OWNERSHIP
- ------------------- ------------------ -------------
<S> <C> <C>
Mark Beychok (1) 857,353 (2) 12.0 %
Donald Wohl (1) 250,000 (3) 3.5 %
Paul S. Hermis (1) 100,000 (4) 1.4 %
Benjamin Tabatchnick (1) 100,000 (4) 1.4 %
John Coppolino (1) 271,500 (5) 3.8 %
Jack Spencer (1) 0 (6) 0.0 %
ALL DIRECTORS AND OFFICERS
AS A GROUP.
(5 Persons) (2)(3)(4) and (5) 1,578,853 22.1 %
</TABLE>
(1) The address of these persons is 1800 Avenue of the Stars, Suite 480, Los
Angeles, California 90067.
(2) Includes (i) 62,500 shares underlying a currently exercisable option with
an exercise price of $0.91 per share, which expires on December 16, 2000;
(ii) 15,000 shares underlying a currently exercisable option with an
exercise price of $0.91 per share which expires on September 29, 1998;
(iii) 100,000 shares underlying a currently exercisable option with an
exercise price of $0.91 per share which expires on November 15, 1998; (iv)
150,000 shares underlying the currently exercisable portion of a stock
option, expiring December 16, 2000, which has an exercise price of $0.91
per share; (v) 9,547 shares underlying a currently exercisable option with
an exercise price of $4.50 per share which expires January 7, 1998; (vi)
9,547 shares underlying a currently exercisable option with an exercise
price of $6.00 per share which expires July 7, 1998; (vii) 3,703 shares
underlying a currently exercisable option with an exercise price of $4.50
per share which expires January 7, 1998; (viii) 3,703 shares underlying a
currently exercisable option with an exercise price of $6.00 per share
which expires July 7, 1998; (ix) 268,750 shares underlying the currently
exercisable portion of a stock option, expiring December 16, 2000, which
has an exercise price of $0.91 per share; (x) 100,000 shares underlying a
currently exercisable option with an exercise price of $0.91
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<PAGE>
which expires on June 16, 2002; and (xi) 100,000 shares underlying a
currently exercisable option with an exercise price of $.875 which expires
on December 31, 2002.
(3) Includes (i) 150,000 shares underlying the currently exercisable portion a
stock option, expiring December 16, 2000, which has an exercise price of
$0.91 per share; and (ii) 100,000 shares underlying a presently exercisable
option with an exercise price of $.0875 which expires on December 31, 2002.
Does not include any shares owned by ATCOLP INVESTMENT PARTNERS, a
California Limited Partnership in which Mr. Wohl is the general partner.
(4) Each of Messrs. Tabatchnick and Hermis holds a currently exercisable option
for the purchase of 50,000 shares at $.875 and has entered into a
consulting agreement which provides for the issuance of 50,000 shares,
subject to forfeiture if certain performance standards relating to sales
into certain markets are not met.
(5) Includes (i) 1,375 shares underlying a currently exercisable option with an
exercise price of $4.50, which expires January 7, 1998; (ii) 1,375 shares
underlying a currently exercisable option with an exercise price of $6.00,
which expires July 7, 1998; (iii) 168,750 shares underlying a currently
exercisable option with an exercise price of $0.91 per share, which expires
on December 16, 2000; and (iv) 100,000 shares underlying a currently
exercisable option with an exercise price of $0.91 which expires on June
16, 2002.
(6) Does not include an option for the purchase of 300,000 shares at $0.91
which is not currently exercisable and expires on June 16, 2002.
CERTAIN TRANSACTIONS
In September of 1993, Mr. Westlund, Mr. Beychok and Mr. Benz (who was then
an officer and a director) each purchased 12,500 shares of the Company's common
stock at $.10 per share ($2.00 per share after the 20 to 1 reverse stock split).
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 Company relating to their employment agreements.
Mr. Beychok's note was offset against accrued salary at about the same time.
see, "Management - Executive Compensation".
The Company has employment agreements with Mark Beychok and John Coppolino
and had employment agreements, consulting agreements and settlement agreements
with certain of its former officers. See "Management - Executive Compensation"
In April, 1997, the Company agreed in principal with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald Wohl,
a Director of the Company, is the general partner, for a loan in the amount of
$300,000 (the "Loan"), to fund the payment of legal fees in connection with the
Company's arbitration against the Keebler Company. See "Legal Proceedings."
The loan will be evidenced by a note which bears interest at the lesser of 15%
per annum or the highest rate allowed by law with recourse solely to the net
proceeds of the arbitration, if any. If the Company does not realize any net
proceeds from the arbitration, the Loan will be canceled and the Lender will
receive a warrant for the purchase of 400,000 shares of the Company's Common
Stock at $.01 per share. If the Loan is repaid through the application of the
net proceeds of the arbitration, the Lender will receive warrants for the
purchase of 200,000 shares of Common Stock at $.01 per share and a percentage of
net proceeds of the arbitration equal to 15% of the first $1,000,000 of net
proceeds, but not less than $100,000; 20% of the net proceeds greater than
$1,000,000 and less than $3,000,000; and, 25% of net proceeds above $3,000,000.
The Loan was approved by the disinterested members of the Company's Board of
Directors, and was on terms no less favorable to the Company than were available
from non-affiliated lenders.
32
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital Stock of the Company currently consists of (i)
30,000,000 shares of Common Stock, par value $.0001 per share, of which
5,877,366 were issued and outstanding on June 2, 1997, and (ii) 500,000 shares
of Preferred Stock, par value $.01 per share, of which on June 2, 1997 (a) 1,000
shares of Series B 10% Cumulative Convertible Preferred Stock were issued and
outstanding; (b) 50 shares of Series C Convertible Preferred Stock were issued
and outstanding; and (c) 500 shares of 1997 Series A Preferred Stock were issued
and outstanding.
Common Stock
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by Stockholders generally, including the election of directors.
Holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors if they chose to do so, and in such event, the
holders of the remaining shares will not be able to elect any persons to the
Board of Directors. The holders of Common Stock have no preemptive or other
subscription or conversion rights with respect to any Stock issued by the
Company, the Common Stock is not subject to redemption, and the holders thereof
are not liable for further calls or assessments. Holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore and to share pro-rata in any
distributions to the holders of Common Stock.
Preferred Stock
The Preferred Stock is issuable with such rights, preferences, privileges
and such number of shares constituting each series to be fixed by the board of
directors without further action by the holders of Common Stock or Preferred
Stock. The Board of Directors could, without Stockholder approval, issue
Preferred Stock with voting and conversion rights, which could dilute the voting
power of the holders of the Common Stock. The issuance of shares of Preferred
Stock by the Board of Directors could bee utilized, under certain circumstances,
as a method of preventing a takeover of the Company. As of the date of this
Memorandum, the Board of Directors as not authorized any Series of Preferred
Stock except as set forth below. Except for the shares of Preferred Stock to be
issued in this offering, there are no agreements or understanding for the
issuance of any shares of Preferred Stock.
SERIES B 10% CUMULATIVE CONVERTIBLE PREFERRED ("SERIES B PREFERRED")
The Company is authorized to issue 110,000 shares of Series B Preferred,
1,000 of which are issued and outstanding. The holders of each share of Series
B Preferred are entitled to receive annual cash dividends of $5.00 per share on
the first day of December in each year and to receive a preference on
liquidation of the Company of $50.00 per share plus accrued dividends. The
aggregate dividend preference of the 1,000 shares if Series B Preferred is
$ 5,000 per annum and the liquidation preference thereof is $50,000 plus accrued
dividends. Each share of the Series B Preferred is convertible into Common
Stock on a 1.667 for one basis (an effective conversion price of $30.00 based on
the $50.00 sale price of such shares). The Company has the right to redeem the
Series B Preferred at the price of $50.00 per share plus any accrued dividends
payable in cash and, in the event the "market price" of the Common Stock, as
defined in the Certificate of Designation of the Series B Preferred, exceeds
$60.00. In the event that the Company fails to declare the annual dividends on
the Series b Preferred, then the holders of the Series B Preferred shall have
the right, voting as a class, to elect two members to the Company's board of
directors. While the holders of the Series B may presently have such right,
they have not sought to exercise the same. Other than in such event, except
where required by Delaware Law, the holders of Series B Preferred do not have
any voting rights. The Company does not intend to issue any additional shares
of Series B Preferred Stock, has had discussions with the holders with respect
to their conversion of the same, and, if the remaining
33
<PAGE>
shares of Series B Preferred stock were converted, the Company would eliminate
the Series B Preferred stock.
SERIES C CONVERTIBLE PREFERRED STOCK ("SERIES C PREFERRED")
The Company is authorized to issue 450 shares of Series C Preferred of
which 50 shares are issued and outstanding. The holders of Series C Preferred
do not have any rights to dividends, but are entitled to a preference of
$1,000.00 per share upon the liquidation of the Company before any payments are
made to holders of junior stock. Each share of Series C Preferred is
convertible into one hundred shares of Common Stock subject to adjustment in
accordance with the anti-dilution provisions of the Series C Preferred. At the
time of the issue of the Series C Preferred, the holders thereof were also
entitled to receive a warrant for the purchase of 100 shares of Common Stock on
conversion. However, the warrant to be issued to holders of Series C Preferred
has expired. The outstanding shares of Series C Preferred were held by an
Italian bank which ceased operations. The Company does not know the identity of
the holder of the Series C Preferred stock. If the remaining shares of Series C
Preferred stock were converted, the Company would eliminate the Series C
Preferred stock.
1997 SERIES A CONVERTIBLE PREFERRED STOCK ("1997 SERIES A PREFERRED")
The Company is authorized to issue 750 shares of 1997 Series A Preferred,
all of which are issued and outstanding. The holders 1997 Series A Preferred
are entitled to annual dividends at the rate of $60.00 per annum payable on
January 2 of each year to holders of record on December 31 in cash or in Common
Stock at the then market price (as defined in the designation for the 1997
Series A Preferred). Each share of the 1997 Series A Preferred Stock has a
liquidation preference equal to $1,000 plus accrued dividends and is convertible
into common stock in an amount equal to the greater of (i) 800 shares or (ii)
$1,000 divided by 70% of the current market price (as defined in the designation
for the 1997 Series A Preferred Stock) at the time of conversion. For example,
if the market price of the Common Stock were $1.125 on the date of conversion,
each share of 1997 Series A Preferred Stock would be convertible into 1,270
shares of Common Stock. The Company has the right to convert the outstanding
shares of 1997 Series A Preferred Stock into Common Stock at any time that the
average market price of the Common Stock exceeds 200% of the average market
price of the Series A Preferred Stock on its issue date for a five day period.
Upon conversion by the Company, the holders of the 1997 Series A Preferred Stock
shall receive two year options equal in number to 15% of the number of shares of
Common Stock issued to them upon such conversion with an exercise price equal to
130% of the market price at the time of the conversion. Such resale of the
shares of Common Stock issuable upon exercise of such options are also included
in the Registration Statement of which this prospectus forms a part.
REDEEMABLE WARRANTS
The Company issued Redeemable Common Stock Purchase Warrants in its initial
public offering which, as extended, will expire on October 31, 1997. There are
1,680,000 Redeemable Common Stock Purchase Warrants outstanding which each
entitle the holder thereof to purchase one twentieth of a share of Common Stock
at an exercise price of $2.375. No Redeemable Common Stock Purchase Warrants
have been exercised and the Company does not anticipate any such exercises prior
to the expiration of the Redeemable Common Stock Purchase Warrants unless the
terms thereof are changed by the Company.
TRANSFER AGENT AND WARRANT AGENT
Continental Stock Transfer & Trust Company, Two Broadway, New York, NY
10004 is Transfer Agent for the Common Stock and Warrant Agent and Transfer
Agent for the Redeemable Common Stock Purchase Warrants.
LEGAL OPINION
The validity of the Common Stock offered hereby is being passed upon for
the Company by Frank J. Hariton, Esq., New York, New York. Frank J. Hariton,
Esq. owns: (i) 7,977 shares of Common Stock;
34
<PAGE>
(ii) 800 of the Company's Redeemable Common Stock Purchase Warrants; (iii) 3,333
options with an exercise price of $4.50; and (iv) 3,333 options with an exercise
price of $6.00.
EXPERTS
The consolidated financial statements of Vitafort International Corporation
for the year ended December 31, 1996, included in this Registration Statement on
Form SB-2 have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the period set forth in their report, which
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern, and are included herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The consolidated statements Operations, Cash Flows, and Stockholders'
Equity (Deficit) of Vitafort International Corporation for the year ended
December 31, 1995, included in this Registration Statement on Form SB-2 have
been audited by KPMG Peat Marwick, LLP, independent auditors, to the extent and
for the period set forth in their report and are included herein in reliance
upon such report given upon the authority of said firm as experts in auditing
and accounting.
CHANGE OF ACCOUNTANTS
On February 5, 1997, the Registrant dismissed the firm of KPMG Peat
Marwick, LLP ("KPMG") as the Registrant's independent auditor, effective
immediately. The Registrant then selected BDO Seidman, LLP ("BDO") to act as
the Company's independent auditor for the fiscal year ending December 31, 1996.
The foregoing actions of the Registrant were ratified by its Board of Directors.
The reports of KPMG on the Company's financial statements for the years
ended December 31, 1994 and December 31, 1995, did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report for
the year ended December 31, 1994, contained a "going concern" explanatory
paragraph.
During the two years ended December 31, 1995, and during the subsequent
period from January 1, 1996 through February 5, 1997, there were no
"Disagreements" (as such term is defined under the Federal Securities laws) with
KPMG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which Disagreements, if not resolved
to the satisfaction of KPMG, would have caused that firm to make a reference to
the subject matter of the Disagreements in connection with their report.
During the two years ended December 31, 1995, and during the period from
January 1, 1996 through February 5, 1997, the Registrant was not (i) advised by
KPMG that the Registrant did not have internal controls necessary to develop
reliable financial statements; (ii) advised by KPMG that it was no longer able
to rely on management's representations or that it was unwilling to be
associated with financial statements prepared by management; (iii) advised by
KPMG of a need to expand the scope of its audit; or (iv) advised by KPMG that
information had come to its attention that materially impacted the fairness or
the reliability of any audit report or financial statement issued or to be
issued, or caused them to be unwilling to rely on management's representations
or be associated with the Registrant's financial statements (collectively
"Reportable Events").
During the year ended December 31, 1995, and the period from January 1,
1996 to January 31, 1997, neither the Registrant, nor anyone on its behalf,
consulted BDO on (i) the application of accounting principals to a specified
transaction, either completed or proposed; the type of audit opinion that might
be rendered on the Registrant's financial statements; or (iii) any matter that
was either the subject of a Disagreement or a Reportable Event.
35
<PAGE>
STATEMENT OF INDEMNIFICATION
The Company has adopted the provisions of Section 102(b)(7) of the Delaware
General Corporation Act (the "Delaware Act") which eliminates or limits the
personal liability of a director to the Company or its stockholders for monetary
damages for breach of fiduciary duty under certain circumstances. furthermore,
under Section 145 of the Delaware Act, the Company may indemnify each of its
directors and officers against his expenses (including reasonable costs,
disbursements and counsel fees) in connection with any proceeding involving such
person by reason of his having been an officer or director to the extent he
acted in good faith and in a manner reasonably believed to be in, or not opposed
to the best interest of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
determination of whether indemnification is proper under the circumstances,
unless made by a court, shall be determined by the Board of Directors. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
36
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants-BDO Seidman, LLP F-2
Independent Auditors' Report-KPMG Peat Marwick LLP F-3
Consolidated Balance Sheets - December 31, 1996 and 1995 F-4
Consolidated Statements of Operations -
Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended December 31, 1996 and 1995 F-7
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996 and 1995 F-8
Summary of Accounting Policies F-10
Notes to Consolidated Financial Statements F-13
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Vitafort
International Corporation and Subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vitafort
International Corporation and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and cash flows for the year then ended,
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered from recurring losses from
operations, including a net loss of $8,122,815 for the year ended December 31,
1996, and has negative working capital of $875,965 as of December 31, 1996, and
a net capital deficiency of $152,498. The Company has also been slow and is
delinquent in paying its accounts payable and other obligations. These factors
raise substantial doubt about its ability to continue as a going concern. There
is no assurance that the Company will be able to realize its recorded assets and
liquidate its liabilities in the normal course of business. Management's plans
in regard to these matters are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Los Angeles, California
April 14, 1997 BDO SEIDMAN, LLP
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES:
We have audited the accompanying consolidated statements of operations,
stockholder's equity (deficit), and cash flows of Vitafort International
Corporation and subsidiaries for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Vitafort International Corporation and subsidiaries for the year ended December
31, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 16, 1996
F-3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ -----------
<S> <C> <C>
ASSETS (Notes 1 and 4)
Current assets:
Cash and cash equivalents $ 188,867 $1,316,406
Accounts receivable - trade, net of allowance for
doubtful accounts of $79,994 and $45,650
in 1996 and 1995, respectively 430,789 39,423
Notes receivable 56,000 19,778
Other receivables 4,464 147,974
Inventory 361,196 680,876
Prepaid and other current assets 271,731 365,117
---------- ----------
Total current assets 1,313,047 2,569,574
---------- ----------
Fixed assets (Note 5):
Manufacturing equipment 290,912 165,931
Furniture and office equipment 105,160 82,465
Computer equipment 173,294 148,074
---------- ----------
569,366 396,470
Less accumulated depreciation (231,592) (139,991)
---------- ----------
Net fixed assets 337,774 256,479
---------- ----------
Intangible assets 481,254 70,000
Other assets - 355,494
Less accumulated amortization ( 95,561) (67,703)
---------- ----------
Net intangible and other assets 385,693 357,791
---------- ----------
$2,036,514 $3,183,844
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidate and
financial statements.
F-4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable (Note 4) $ 440,022 $ 75,000
Accounts payable - trade 921,919 236,927
Accrued expenses (Note 3) 789,212 636,514
Current maturities of long-term debt (Note 5) 37,859 174,364
Other current liabilities - 150,000
------------ ------------
Total current liabilities 2,189,012 1,272,805
Long-term debt, exclusive of current maturities (Note 5) - 34,548
------------ ------------
Total liabilities 2,189,012 1,307,353
============ ============
Commitments and contingencies (Notes 10 and 12)
Stockholders' equity (deficit) (Notes 7, 8 and 13):
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued
and outstanding 1,000 and 1,500 shares at December 31,
1996 and 1995, respectively; aggregate liquidation
preference of $50,000 and $75,000 at December 31,
1996 and 1995, respectively 10 15
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50 shares
at December 31, 1996 and 1995; aggregate liquidation
preference of $1 at December 31, 1996 and 1995 1 1
Subscribed stock, 303,406 shares at December 31, 1996
and 1,229,474 shares at December 31, 1995 341,331 3,418,196
Notes receivable on subscribed common stock
Common stock, $.0001 par value, authorized 9,000,000
and 9,000,000 shares at December 31, 1996 and 1995,
respectively; issued and outstanding 5,133,665 and 1,911,185
shares at December 31, 1996 and 1995, respectively 8,886 3,823
Additional paid-in capital 20,547,753 11,382,120
Accumulated deficit (21,050,479) (12,927,664)
------------ ------------
Total stockholders' equity (deficit) (152,476,491) 1,876,491
------------ ------------
$ 2,036,514 $ 3,183,844
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Net revenues $ 5,285,149 $ 2,315,151
Cost of sales 6,870,120 1,482,326
----------- -----------
Gross profit (loss) (1,584,971) 832,825
----------- -----------
Operating expenses:
Research and development 737,044 378,602
Marketing 3,029,480 1,417,645
Selling, general and administrative 2,721,321 1,741,424
----------- -----------
Total operating expenses 6,487,845 3,537,671
----------- -----------
Loss from operations (8,072,816) (2,704,846)
Interest income 49,319 19,778
Interest expense (50,509) (126,290)
Other income expense (45,650) 677
----------- -----------
Loss before income taxes (8,119,656) (2,810,681)
State income taxes (Note 6) 3,159 1,600
----------- -----------
Net loss $(8,122,815) $(2,812,281)
=========== ===========
Net loss per common share $ (1.59) $ (1.92)
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES B
CUMULATIVE SERIES C
CONVERTIBLE CONVERTIBLE NOTES
PREFERRED STOCK PREFERRED STOCK RECEIVABLE ON
--------------- --------------- SUBSCRIBED SUBSCRIBED
SHARES AMOUNT SHARES AMOUNT STOCK COMMON STOCK
------ ------ ------ ------ ----- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 100 $ 20 3 $ 1 $ 74,925 (74,925)
Common stock issued for cash
in bridge offering, net of
commissions and offering costs - - - - - -
Common stock subscribed in
private placement, net of
commissions and offering costs - - - - 1,530,249 -
Conversion of debt to equity - - - - 1,416,447 74,925
Conversion of preferred stock
to common stock (25) (5) - - 372,500 -
Exercise of stock options - - - - 24,075 -
Net loss - - - - - -
------ ------ ------ ------ --------- ------------
Balance, December 31, 1995 75 15 3 1 3,418,196 -
Common stock issued from
subscriptions - - - - (3,418,196) -
Common stock issued in private
placement, net of commissions
and offering costs - - - - - -
Conversion of debt to equity - - - - - -
Conversion of preferred stock
to common stock (25) (5) - - - -
Common stock-consulting - - - - 341,331 -
Exercise of stock options - - - - - -
Net loss - - - - - -
------ ------ ------ ------ --------- ------------
Balance, December 31, 1996 50 $ 10 3 $ 1 $ 341,331 -
====== ====== ====== ====== ========= ============
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1995 1,201,305 $ 2,403 $ 9,722,557 $(10,115,383) $ (390,395)
Common stock issued for cash
in bridge offering, net of
commissions and offering costs 260,417 521 563,439 - 563,960
Common stock subscribed in
private placement, net of
commissions and offering costs - - - - 1,530,249
Conversion of debt to equity 381,014 762 1,418,399 - 2,910,533
Conversion of preferred stock
to common stock 48,014 96 (372,584) - -
Exercise of stock options 20,435 41 50,309 - 74,425
Net loss - - - (2,812,281) (2,812,281)
--------- --------- ----------- ------------ ----------
Balance, December 31, 1995 1,911,185 3,823 11,382,120 (12,927,664) 1,876,491
Common stock issued from
subscriptions - - - - (3,418,196)
Common stock issued in private
placement, net of commissions
and offering costs 1,943,974 3,887 6,148,002 - 6,151,889
Conversion of debt to equity 133,333 267 399,733 - 400,000
Conversion of preferred stock
to common stock 2,500 5 14,994 - 14,994
Common stock-consulting 931,327 481 1,933,035 - 2,274,847
Exercise of stock options 211,346 423 669,869 - 670,292
Net loss - - - (8,122,815) (8,122,815)
--------- --------- ----------- ------------ ----------
Balance, December 31, 1996 5,133,665 $ 8,886 $20,547,753 ($21,050,479) ($152,498)
========= ========= =========== ============ ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $( 8,122,815) $( 2,812,281)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 119,459 75,385
Operating expenses paid with common stock 1,933,035 -
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade, net ( 391,366) 111,514
Inventory 319,680 ( 490,126)
Intangible assets ( 55,760) -
Prepaid and other assets 93,386 52,125
Notes receivable ( 36,222) ( 19,778)
Other receivables 143,510 ( 147,974)
Increase (decrease) in:
Accounts payable - trade 684,993 ( 42,937)
Accrued expenses 152,698 859,632
Other current liabilities ( 150,000) 150,000
------------ ------------
Cash and cash equivalents used in operating activities ( 5,309,402) ( 2,264,440)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets ( 172,896) ( 92,767)
Cash and cash equivalents used in investing activities ( 172,896) ( 92,767)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 440,022 1,818,911
Repayment of notes payable ( 75,000) -
Repayment of long-term debt ( 171,053) ( 644,909)
Proceeds from stock subscription - 1,530,249
Proceeds from issuance of common stock 3,490,498 563,960
Exercise of stock options 670,292 74,425
------------ ------------
Cash and cash equivalents provided by financing activities 4,354,759 3,342,636
------------ ------------
Increase (decrease) in cash and cash equivalents ( 1,127,539) 985,429
Cash and cash equivalents at beginning of year 1,316,406 330,977
------------ ------------
Cash and cash equivalents at end of year $ 188,867 $ 1,316,406
============ ============
</TABLE>
F-8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 50,509 $ 128,978
Income taxes 2,854 1,600
========== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock for:
Conversion of debt to equity $ 400,000 $1,790,476
Conversion of accrued interest 44,998 29,427
Common stock subscribed 341,331 -
Conversion of preferred stock to common stock 14,999 372,488
Payment of expenses 1,933,035 490,630
Payment of consulting contract - 600,000
Prepayment of insurance with note payable - 90,303
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
SUMMARY OF 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, 1996 and 1995)
and Crystal Clear Farms. All material inter-company accounts and transactions
have been eliminated.
Vitafort Latin America, a 50%-owned subsidiary, has had no operations since its
incorporation.
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 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 consist of merchandise available for sale and packaging supplies,
and are stated at the lower 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
The Company capitalizes certain marketing and promotional costs incurred to
develop a market for new as well as existing products throughout the United
States. These costs are normally amortized over a 12-month period.
Amortization of product introduction costs was $1,080,032 and $ -0- for the
years ended December 31, 1996 and 1995, respectively.
Also included in intangible assets are debt issuance costs and customer lists
which are recorded at cost. These intangible assets are being amortized on a
straight-line basis over periods not exceeding five years, or the life of the
loan, if debt.
Other assets consist of long-term consulting contracts with individuals for
which the Company has advanced cash, or has issued common stock.
These costs are reviewed by management periodically and written down to the
value of the future benefit expected to be derived.
F-10
<PAGE>
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.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on long-
lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
LOSS PER SHARE
Loss per share of common stock is computed based on the weighted average number
of shares of common stock outstanding of 5,133,665 and 1,467,648 in 1996 and
1995, respectively. Common stock equivalents, consisting of stock options and
warrants, are anti-dilutive for 1996 and 1995. Dividends on Cumulative
Preferred Stock are not material.
During the years ended December 31, 1996 and 1995, the Company satisfied certain
obligations by issuing 507,500 and 894,189 shares of common and subscribed
stock, respectively. In addition, during 1996 and 1995, 500 shares of Series B
Preferred Stock were converted to 49,998 and 64,284 shares of common stock,
respectively. In 1995 the 673 shares of Series D Preferred Stock that were
previously outstanding were converted to 896,000 shares of common stock in
negotiated conversions.
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. A valuation allowance is provided when management
cannot determine whether or not it is more likely that the net deferred tax
asset will be realized. 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.
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.
F-11
<PAGE>
STOCK COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123). FASB
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" (APB No. 25), but requires pro forma disclosures of net earnings and
earnings per share as if the fair-valued-based method of accounting had been
applied. In accordance with FASB 123, the Company elected to continue to
measure compensation cost under APB No. 25, "Accounting for Stock Issued to
Employees," and comply with the pro forma disclosure requirements. Adoption of
FASB 123 had no material impact on the Company's financial position or results
of operations. Accordingly, pro forma disclosures of net loss and net loss per
share are not presented.
F-12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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. The
Company is presently engaged in formulating and marketing fat-free foods.
NOTE 2 - LIQUIDITY AND GOING CONCERN
The Company has suffered recurring losses from operations and has a negative
working capital and net capital deficit as of December 31, 1996. While the
Company has raised additional capital after year-end 1996, (see Note 13), it has
not generated sufficient revenue-producing activity to sustain its operations.
Accordingly, there is substantial doubt regarding the Company's ability to
continue as a going concern. The Company is attempting to raise additional
capital to meet the working capital deficiency, but may not be able to do so.
Should the Company not be able to raise additional capital, it may have to
severely curtail operations.
NOTE 3 - ACCRUED EXPENSES
Accrued expenses as of December 31, 1996 and 1995 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------- ---------
<S> <C> <C>
Accrued compensation $ 90,753 $ 36,120
Accrued interest payable 436 7,654
Accrued financing fees - 209,893
Accrued legal fees 120,811 67,671
Accrued public relations fees - 8,916
Accrued freight and warehousing - 26,592
Accrued rent - 6,000
Accrued consulting fees 13,500 18,053
Other accrued expenses 115,890 255,615
Accrued advertising and promotion 447,732 -
-------- --------
Total accrued expenses $789,212 $636,514
======== ========
</TABLE>
NOTE 4 - 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 216,000 shares of the Company's common stock using a $2.50
stock price. During 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 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, plus options, on
December 29, 1995.
F-13
<PAGE>
In August 1996, the Company entered into a revolving credit facility with a
financing institution, that provides a credit line of up to $4,000,000 subject
to certain covenants. Advances made to the Company under the facility are based
on a certain percentage of eligible accounts receivable, as defined, and a
certain percentage of eligible inventory, as defined, located in Ontario,
California. The amount of inventory advances under the facility cannot exceed
$500,000. The initial term of the facility ends August 1997, with automatic
renews thereafter. Advances under the facility bear an interest rate at the Bank
of America NT plus 3%, and are secured by a first priority lien on all of the
Company's assets. Minimum interest charges after the first three months of the
term are $10,000 per month for the next three months, and $15,000 per month
thereafter. The Company paid $40,000 to the institution upon execution of the
agreement, and $40,000 to a facilitator in connection with the placement of the
loan.
The Company is in violation of certain covenants with respect to working capital
and tangible net worth requirements, and is under negotiation with the lender to
modify the covenants. The Company classified the entire loan as a current
liability.
NOTE 5 - LONG-TERM DEBT
The Company's long-term debt as of December 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------- --------
<S> <C> <C>
10% note payable, due in monthly installments of $3,125
plus interest through July 1996. $ - $ 23,876
14% note payable, due in monthly installments of $4,033,
including interest, through October 1997, secured by certain
of the Company's fixed assets 37,859 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
-------- --------
37,859 208,912
Less current maturities 37,859 174,364
-------- --------
$ - $ 34,548
======== ========
</TABLE>
NOTE 6 - INCOME TAXES
As the Company has incurred significant operating losses since inception, its
current tax provision has been limited to minimum California and Delaware tax
payments.
The difference between the Federal income tax rate and the effective income tax
rate on net loss from continuing operations is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C> <C> <C>
Expected Federal income tax rate (35.0%) ($2,843,000) (35.0)% ($983,738)
State income taxes, net of Federal
income tax benefit (6.1) (495,000) (6.1) (171,451)
Change in valuation allowance to
income tax expense 40.1 3,249,000 32.0 899,000
Expiration of state NOL's - - 1.8 50,000
Adjustment of deferred tax assets - - 5.3 150,000
Other, net 1.0 86,000 2.0 54,590
----- ----------- ------ ---------
-% ($ 3,000) -% ( $1,600)
===== =========== ====== =========
</TABLE>
F-14
<PAGE>
NOTE 6 - INCOME TAXES (CONTINUED)
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred income tax assets:
Net operating loss carry-forwards $6,700,000 $4,850,000
Tax credit carry-forwards 36,000 36,000
---------- ----------
Total gross deferred income tax assets 6,736,000 4,886,000
Less valuation allowance 6,685,000 4,835,000
---------- ----------
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, 1996, the Company had unused net operating loss carry-
forwards of approximately $19,600,000 and $6,400,000 available to offset future
Federal taxable income and future California taxable income. 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
carry-forwards expire in various amounts through the year 2011. In contrast to
Federal net operating losses, only 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward. The California
net operating losses will expire in various amounts through the year 2000.
Due to restrictions imposed by the Internal Revenue Code regarding substantial
changes in ownership of companies with loss carry-forwards, 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 $6,736,000 for the net operating losses and
other credits have been offset by a valuation allowance since management cannot
determine whether it is more likely than not such assets will be recovered.
NOTE 7 - STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Each share of Series B 10% Cumulative Convertible Preferred stock is convertible
into 33.33 shares of common stock, and cumulative convertible 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. 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 $25,000 and $40,000 at December 31, 1996
and 1995, respectively.
F-15
<PAGE>
In December 1995, the holder of 500 shares of Series B Cumulative Convertible
Preferred Stock exchanged his shares and accumulated unpaid dividends for 64,284
shares of common stock pursuant to an agreement with the holder. In August
1996, the holder of 500 shares of Series B Cumulative Convertible Preferred
Stock exchanged his shares and accumulated accrued and unpaid dividends for
49,998 shares of common stock.
Each share of Series C Convertible Preferred Stock is 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.
Each share of Series D Convertible Preferred Stock is convertible into 1,367
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.
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, 44,800 shares of common stock were issued and 55,626 shares were
included in subscribed stock and were issued subsequent to December 31, 1995.
The shares of Series B and Series C Preferred stock are not currently registered
under the Securities Exchange Act of 1934.
COMMON STOCK
In January 1996, the Company completed private placement offerings of common
stock. Total shares issued in these offerings were 1,060,000 at prices of $3.00
to $6.00. Total proceeds to the Company were $3,451,000, net of expenses of
$479,000.
During August 1993, three officers of the Company subscribed to purchase 37,500
shares of common stock at $2.00 per share. Notes aggregating $74,925 were
received from three officers in consideration for this subscription. During
1995, these notes were paid.
In August 1995, the Board of Directors unanimously agreed to authorize 7,000,000
more shares of common stock, bringing the total to 9,000,000, and stockholder
approval was obtained.
During September 1995, pursuant to a contractual agreement, the Company issued
100,000 shares of its common stock to a public relations/financial consulting
firm and authorized an additional 100,000 shares to be issued to the consulting
firm upon performance under the contract for $600,000 or prepaid consulting
fees.
Additionally, during 1995, the Company issued in a private placement 281,014
shares of common stock a per share prices ranging from $2.50 to $8.00 as payment
for services and satisfaction of certain of its liabilities. During the same
period, the Company issued 260,417 shares of its common stock at per share
prices ranging from $1.40 to $5.00 with net proceeds to the Company of
approximately $563,960.
During 1995, options to purchase 20,435 shares of the Company's common stock
were exercised at per share prices ranging from $1.40 to $5.00 with net proceeds
to the Company of $74,425.
F-16
<PAGE>
In December 1995, the Company commenced a private placement offering of common
stock at a per share price of $3.00. Prior to December 31, 1995, the Company
had received subscriptions for the purchase of 635,000 shares of common stock.
Net subscription proceeds were $1,680,249.
In December 1995, the Company committed to issuing 43,175 shares of common stock
at per share prices ranging from $2.40 to $3.00 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.
On October 7, 1996, a 1 for 20 reverse stock split was effected. All share
amounts in this report have been retroactively adjusted to reflect this stock
split.
NOTE 8 - STOCK OPTIONS
The 1989 Stock Option Plan, as amended (the Plan) reserved 1,000,000 shares of
common stock to grant either nonqualified or incentive stock options. 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. As of December 31, 1995, no options are outstanding under this
plan.
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.
The Company has also granted stock options outside the stock plans to other
individuals in consideration for services performed. The following summarizes
all option activity for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price Range
--------------- ------------- -------------
<S> <C> <C> <C>
Outstanding as of
January 1, 1995 555,189 1.40 to 47.50
Granted 2,000,000 1,731,063 2.80 to 13.00
Exercised - ( 47,440) 1.40 to 5.00
Canceled - - -
Outstanding as of
December 31, 1995 2,000,000 2,238,812 1.40 to 65.00
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price Range
-------------- -------------- -------------
<S> <C> <C> <C>
Granted 368,382 3.825
Exercised (164,216) 3.825
Canceled 432,562 -
--------- ---------
Outstanding as of
December 31, 1996 1,567,438 2,442,978 1.40 to 47.50
========= =========
Exercisable as of
December 31, 1996 534,104 2,442,978 1.40 to 47.50
========= =========
</TABLE>
The weighted average prices for options outstanding and exercisable at December
31, 1996 are primarily at the lower end of the range.
During 1994, the Company entered into various Option Agreements with executive
officers and consultants which granted options to purchase 17,000 shares of
common stock from between $15.00 to $25.00 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 7,583 shares of
common stock at $10.00 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.
During 1995, the Company granted options to purchase 36,750 shares of common
stock at prices of $.15 to $13.00 per share as part of various settlement
agreements and conversions of notes payable.
In November 1995, the Company granted options to purchase 279,356 shares of
common stock at prices of $3.30 to $6.00 in conjunction with the bridge
financing.
During 1995, the Company granted options to purchase 22,500 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 841, 411 and 344,925
shares were exercisable at prices ranging from $1.40 to $65.00 per share.
NOTE 9 - LICENSING AGREEMENTS
In 1990, the Company entered into an agreement with Vitafort Latin America
(VLA), whose president was 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, 1996.
F-18
<PAGE>
NOTE 10 - COMMITMENTS
LEASE AGREEMENT
The Company is obligated under a lease agreement for its executive offices
through August 1997. Amounts due under the lease for the period ending August
5, 1997 is $46,875.
Rent expense for the years ended December 31, 1996 and 1995, included in
selling, general and administrative expenses, was $75,743 and $72,562,
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 expired 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 was converted into common stock on
January 31, 1996. The agreement was extended by the Company on the same terms
for three additional years. Certain payments of $12,500 during 1996 were
deferred. As of December 31, 1996, the Company held an employment with another
senior executive of the Company. The agreement commenced on January 1, 1996 and
is for one year, with two annual renewals. The agreement calls for annual
aggregate compensation of $102,000 plus the higher of 5% or cost of living
(COLA) increase each subsequent year. In addition, the senior executive received
options to purchase 225,000 shares of common stock at $3.00 per share. 25% of
these options vested during 1996, 25% lapsed in early 1997 and the remainder
vest in 1998 and 1999 based on performance criteria.
AUBURN FARMS TRADEMARK ACQUISITION
The Company entered into a purchase agreement in 1996 whereby it acquired the
Auburn Farms trademarks and other related trademarks. Deferred payments, which
will be accounted for as royalties, under the agreement include 3-1/2% of gross
sales of products sold using these trademarks during the 30 months beginning May
1, 1996 with gradually reducing percentages over the next successive three
thirty-month periods. Deferred payments under the agreement made in 1996 were
$45,612 and were expensed as royalties during the year.
NOTE 11 - MAJOR CUSTOMERS
The Company derived the following revenue from major customers, each of which
provided 10% or more of total revenues during the year ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
K-Mart $606,199 $ -
Price Club - 579,144
-------- --------
Total $606,199 $579,144
======== ========
</TABLE>
F-19
<PAGE>
NOTE 12 - LITIGATION
The Company is subject to pending claims and litigation, the most significant of
which are discussed below.
On November 1, 1995, Keebler Company (Keebler) and the Company entered into a
co-packer agreement (the Agreement) to manufacture Caketts. In 1996, the
Company suffered losses and terminations of business relationships by a number
of the Company's distributors, retailers and brokers due to mold in the Caketts
products. In August 1996, Keebler gave the Company thirty (30) days notice of
termination of the Agreement between the parties, and indicated that it had
discontinued further production of the Company's product. The Agreement between
Keebler and the Company provides for the binding arbitration of disputes. On
August 15, 1996, the Company filed a demand for arbitration seeking compensatory
damages, which is scheduled to be heard during May 1997. The Company is seeking
damages in excess of $5,000,000. Keebler has filed a counterclaim against the
Company for breach of contract which alleges damages in excess of $300,000. The
Company believes that Keebler breached the agreement by failing to meet its
warranties to Vitafort to manufacture the products in an acceptable process
manner, improperly terminating the agreement; and, made intentional
misrepresentations regarding the cause of the mold problems.
In December 1994, Lloyd Gaunt, 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,
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 Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration. The Plaintiff has appealed that
ruling. The Company denies any liability to the plaintiff and intends to
vigorously defend this action. The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment and realize a 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 in excess of $150,000. The Company disputes
this liability and filed a cross complaint against Cottage Bakery. The parties
have reached an agreement in principle with respect to the settlement of this
action but the settlement agreement has not been executed; and, if such
settlement is consummated, the Company will not be subjected to any material
liability. If the action is not settled, the Company will vigorously defend the
action.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI) under
the FPA, the Company acquired certain rights of AFI against its co-packer and
against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims. The litigation is in the early stages and the Company intends
to vigorously pursue the same.
In October 1996, Michel's Bakery, Inc., a former co-packer of Fudgets, initialed
an action in the Federal District Court for the Eastern District of Pennsylvania
seeking damages in excess of $140,000 under various contract ant tort theories.
The Company has filed a counterclaim alleging breach of contract and other
claims relating to the product manufactured by Michel's. The parties have
agreed to a mediation session, scheduled to be held in April 1997. If, however,
the matter is not resolved through mediation, the Company intends to vigorously
prosecute this lawsuit.
F-20
<PAGE>
On October 9, 1996, a complaint was filed in Superior Court, the County of Los
Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a Delaware
Corporation; Mark Beychok and Does 1-50 inclusive." The complaint alleges
Breach of Oral Contract, Breach of Written Contract, and other similar claims
arising out of the consulting relationship that previously existed between the
Company and Mr. Ellis. The Complaint seeks damages in an unspecified amount.
The court has sustained, without leave to amend, a demurrer to the claims
against Mark Beychok. Mr. Ellis recently filed an amended complaint against the
Company. Litigation is in its early stages and the Company will vigorously
defend the action.
NOTE 13 - SUBSEQUENT EVENTS
The Company entered into a subscription agreement in February 1997, with an
investor who purchased 500,000 shares of common stock at $1.00 per share. At
funding, a 10% fee was paid to a facilitator and warrants were given to that
same facilitator to purchase 125,000 shares of common stock at a price of $1.375
per share.
The Company entered into a second subscription agreement in April 1997, with
another investor for $500,000 of Preferred 1997 Series "A" stock. The preferred
stock has a cumulative dividend rate of 6% percent with no voting rights. The
conversion price is either the lower of $1.25 per share or percent 30% discount
to the market price at the time of conversion. The preferred stock is
convertible at any time. The facilitator received a 10% fee from proceeds, as
well as warrants to purchase 35,000 shares of common stock at an exercise price
of $1.00 per share.
In April 1997, the Company agreed in principle with ATCOLP INVESTMENT PARTNERS,
a California Limited Partnership (the "Lender), in which Donald Wohl, a Director
of the Company, is the general partner, for a loan in the amount of $300,000
(the "Loan"), to fund the payment of legal fees in connection with the Company's
arbitration against the Keebler Company. See Note 12. The loan will be
evidenced by a note which bears interest at the lesser of 15% per annum or the
highest rate allowed by law with recourse solely to the net proceeds of the
arbitration, if any. If the Company does not realize any net proceeds from the
arbitration, the Loan will be canceled and the Lender will receive a warrant for
the purchase of 400,000 shares of the Company's Common Stock at $.01 per share.
If the Loan is repaid through the application of the net proceeds of the
arbitration, the Lender will receive warrants for the purchase of 200,000 shares
of common stock at $.01 per share and a percentage of net proceeds of the
arbitration equal to 15% of the first $1,000,000 of net proceeds; 20% of the net
proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of net
proceeds above $3,000,000. The Loan was approved by the disinterested members
of the Company's Board of Directors, and was on terms no less favorable to the
Company than were available from non-affiliated lenders.
F-21
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets - March 31, 1997 and 1996 F-24
Consolidated Statements of Operations -
Three Months Ended March 31, 1997 and 1996 F-26
Consolidated Statement of Stockholders' Deficit -
Three Months Ended March 31, 1997 F-27
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 F-28
Notes to Consolidated Financial Statements F-28
</TABLE>
F-22
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 393,414 $ 188,867
Accounts receivable-trade, net of allowance
for doubtful accounts of $67,743 at
March 31, 1997 and $79,994 at
December 31, 1996 508,316 430,789
Notes receivables 55,500 56,000
Other receivables 6,887 4,464
Inventory, net 171,259 361,196
Prepaid expenses and other assets 289,411 271,731
---------- ----------
Total Current Assets 1,424,787 1,313,047
Fixed Assets:
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,160 105,160
Computer equipment 173,294 173,294
---------- ----------
Total Fixed Assets 569,366 569,366
Less accumulated depreciation and amortization (260,060) (231,592)
---------- ----------
Net Fixed Assets 309,306 337,774
Other Assets:
Intangible and other assets 411,254 481,254
Less accumulated amortization (38,662) (95,561)
---------- ----------
Net Other Assets 372,592 385,693
========== ==========
Total Assets $2,106,685 $2,036,514
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements
F-23
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<S> <C> <C>
Current Liabilities:
Notes payable $ 315,344 $ 440,022
Accounts payable - trade 1,031,151 921,919
Accrued expenses 843,435 789,212
Current maturities of long-term debt 187,859 37,859
------------ ------------
Total Liabilities 2,377,789 2,189,012
Stockholders' Equity (Deficit):
Series B, 10% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 110,000 shares authorized,
1,000 shares issued and outstanding at March 31, 1997
and December 31, 1996; aggregate liquidation preference
of $50,000 at March 31, 1997 and December 31, 1996. 10 10
Series C, Convertible Preferred Stock, $0.01 par value,
450 shares authorized, 50 shares issued and outstanding
as of March 31, 1997 and December 31, 1996; aggregate
liquidation preference of $1 at March 31, 1997 and
December 31, 1996. 1 1
Subscribed stock, 751,460 shares at March 31, 1997 and
303,406 shares at December 31, 1996. 710,005 341,331
Common stock, $.0001 par value. Authorized 9,000,000
shares at March 31, 1997 and December 31, 1996, issued
and outstanding 5,155,305 and 4,830,259 shares at
March 31, 1997 and December 31, 1996. 8,918 8,886
Additional paid-in capital 20,875,470 20,547,753
Accumulated deficit (21,865,508) (21,050,479)
------------ ------------
Total Stockholders' Deficit (271,104) (152,498)
============ ============
Total Liabilities and Stockholders' Equity $ 2,106,685 $ 2,036,514
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-24
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Net revenue $ 765,239 $ 840,995
Cost of sales 548,288 708,313
---------- ----------
Gross profit 216,951 132,682
Operating expenses:
Product development 39,350 157,993
Sales and marketing 379,797 549,758
General and administrative 586,232 322,681
---------- ----------
Total operating expenses 1,005,379 1,030,432
---------- ----------
Operating loss (788,428) (897,750)
Other income/(expense) 14,010 17,094
Interest expense (40,611) (5,552)
---------- ----------
Loss before provision for income taxes (815,029) (886,208)
Provision for income taxes 0 1,454
---------- ----------
Net loss $ (815,029) $ (887,662)
========== ==========
Net loss per common share $ (0.14) $(0.35)
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-25
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------
1997 1996
---- ----
(UNAUDITED)
<S> <C> <C>
Cash flows from operations:
Net loss $ (815,029) $ (887,662)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 41,569 31,003
(Increase) decrease in:
Inventory 189,937 (1,016,782)
Accounts receivable (77,527) (332,170)
Prepaids and other assets (19,603) 213,283
Increase (decrease) in:
Accounts payable 109,232 (28,243)
Accrued expenses 54,223 (240,681)
Other 0 (150,000)
----------- -----------
Net cash used in operating activities (517,198) (2,411,252)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment 0 (161,480)
----------- -----------
Net cash used in investing activities 0 (161,480)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 696,422 4,145,612
Proceeds from (repayment of) notes payable, short-term 25,323 (20,461)
Proceeds from long-term debt 0 (123,148)
----------- -----------
Net cash provided by financing activities 721,745 4,002,003
----------- -----------
Net increase in cash 204,547 1,429,271
----------- -----------
Cash at beginning of period 188,867 1,316,406
----------- -----------
Cash at end of period $ 393,414 $ 2,745,677
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 40,611 $ 4,379
=========== ===========
Supplemental disclosures of non-cashing investing and financing
activities:
Issuance of common stock for:
Payment of deferred compensation $ 0 $ 42,620
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-26
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
SERIES B & C ADDITIONAL
CONVERTIBLE SUBSCRIBED COMMON STOCK PAID-IN ACCUMULATED
PREFERRED STOCK STOCK SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------------- ---------- ------------------ ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 $ 11 $ 341,331 4,830,259 $8,886 $20,547,753 $(21,050,479) $(152,498)
Common stock subscribed in
private placement, net of
commissions and offerings - 450,000 - - - - 450,000
Common stock-consulting - (264,426) 235,046 23 226,477 (37,926)
Exercise of stock options - 183,100 - - - - 183,100
Common stock issued as
settlement of contract
dispute - - 70,000 7 78,743 - 78,750
Common stock issued for
consulting - - 20,000 2 22,498 - 22,500
Net loss - - - - - (815,029) (815,029)
--------------- ---------- ------------------ ----------- ------------ ---------
Balance, March 31, 1997 $ 11 $ 710,005 5,155,305 8,918 20,875,470 (21,865,508) $(271,104)
=============== ========== ================== =========== ============ =========
</TABLE>
F-27
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) General:
The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the
periods presented. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and related footnotes do not contain certain information that
will be included in the CompanyOs annual consolidated financial statements
and footnotes thereto. For further information, refer to the consolidated
financial statements and related footnotes for the year ended December 31,
1996 included in the CompanyOs Annual Report on Form 10-KSB.
The Company is presently engaged in formulating and marketing fat-free and
low fat foods.
(2) Summary of significant accounting policies:
(a) The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All material inter-
company accounts and transactions have been eliminated. The
subsidiaries have had no operations since 1994 and will remain inactive
in the near future.
(b) Inventories are stated at the lower cost (first-in, first-out basis) or
market.
(c) Prepaid assets include product introduction expenses which are recorded
at cost and amortized over the economic life thereof, but not in excess
of twelve months.
(d) Fixed assets are composed 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, generally five or less years.
(e) Intangible assets are composed of debt issuance costs, customer lists,
acquisition costs of Auburn Farms and NatureOs Warehouse trademark,
prepaid professional service contracts and are recorded at cost. The
acquisition costs associated with Auburn Farms are being amortized on a
straight-line basis over twenty years. All other intangible assets are
being amortized on a straight-line basis over periods not exceeding
five years.
(f) For the purpose of cash flow, the Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
(g) Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
F-28
<PAGE>
(3) Net Income (Loss) Per Share:
Net income (loss) per share of common stock is computed based on the
weighted average number of shares of common stock outstanding of 5,906,765
and 2,565,077 for the three-month period ended March 31, 1997 and 1996,
respectively. Dividends on Cumulative Preferred Stock are not material.
(4) Inventory Valuation/Reserve:
Inventories are stated at the lower cost (first-in, first-out basis) or
market. Market-based valuations are based upon estimates and assumptions,
and are generally limited to slow moving product offerings.
(5) Accrued Expenses:
Accrued expenses as of March 31, 1997 and December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
<S> <C> <C>
Accrued compensation $114,653 $ 65,570
Accrued interest payable 436 436
Accrued legal fees 85,040 70,811
Accrued consulting fees 22,500 22,500
Accrued advertising and promotion 285,919 407,359
Other accrued expenses 334,887 222,536
-------- --------
Total accrued expenses $843,435 $789,212
======== ========
</TABLE>
(6) Bank Financing:
The Company is in default with respect to certain financial covenants under
the terms of its agreement with the secured lender. Discussions are
ongoing with respect to curing the defaults, however no assurances can be
given that such defaults can be cured and that the lender will not request
full payment of the loan.
For financial statement purposes, the entire amount is classified as a
current liability.
F-29
<PAGE>
(7) Notes Payable and Long-term Debt:
<TABLE>
<CAPTION>
Current Long Term Total
-------- --------- --------
<S> <C> <C> <C>
10% anticipated note payable, terms are
currently under negotiation 150,000 0 150,000
14% note payable, due in monthly
installments of $4,033, including interest,
through October 1997 Secured by certain
of the Company's fixed assets. 37,859 0 37,859
-------- --------- --------
$187,859 $ 0 $187,859
======== ========= ========
</TABLE>
(8) Stockholders' Equity:
During the three-month period ended March 31, 1997, the following common
stock transactions occurred:
a. The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
b. The Company issued 20,000 shares at a value of $1.125 per share to a
former employee as compensation for consulting services and past
unpaid accrued vacation.
c. The Company issued 183,100 shares at $1.00 per share for options
exercised under the Non-Incentive Stock Option Plan. Such options were
exercised in lieu of payroll compensation and other various expenses
by non-officers of the Company.
d. The Company entered into a subscription agreement in February 1997,
with an investor who purchased 500,000 shares of common stock at $1.00
per share. At funding, a 10% fee was paid to a facilitator and
warrants were given to that same facilitator to purchase 125,000
shares of common stock at a price of $1.375 per share.
(9) Going Concern:
The Company's condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. At
March 31, 1997, current assets were exceeded by current liabilities by
$953,002 and the Company's accumulated deficit aggregates ($21,865,508).
Accordingly, there is substantial doubt regarding the Company's ability to
continue as a going concern. The Company's ability to continue operations
is dependent upon its ability to reach a satisfactory level of
profitability and to generate sufficient cash flow resources to meet
ongoing obligations. The Company is attempting to raise additional capital
to meet the working capital deficiency, but may not be able to do so. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
(10) Legal Proceedings:
On November 1, 1995, Keebler Company (Keebler) and the Company entered into
a co-packer agreement (the Agreement) to manufacture Caketts. In 1996, the
Company suffered losses and terminations of business relationships by a
number of the Company's distributors, retailers and brokers due to mold in
the Caketts product. In August 1996, Keebler gave the Company thirty (30)
days notice of termination of the Agreement between the parties, and
indicated that it had
F-30
<PAGE>
discontinued further production of the Company's product. The Agreement
between Keebler and the Company provides for the binding arbitration of
disputes. On August 15, 1996, the Company filed a demand for arbitration
seeking compensatory damages, which is scheduled to be heard during May
1997. The Company is seeking damages in excess of $5,000,000. In defending
the arbitration proceeding, Keebler had alleged that Vitafort was
responsible for the quality control problems and failed to comply with
certain labeling requirements. Keebler has filed a counterclaim against the
Company for breach of contract which alleges damages in excess of $300,000.
The Company believes that Keebler breached the agreement by failing to meet
its warranties to Vitafort to manufacture the products in an acceptable
process manner, improperly terminating the agreement; and, made intentional
misrepresentations regarding the cause of the mold problems. The Company
received $6,750,000 in full and complete settlement from the Keebler
arbitration on July 15, 1997. See Recent Financial Developments for further
information.
In December 1994, Lloyd Gaunt, 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, 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 Court has dismissed the
class action claims as to the Company and granted a motion that the claims
against the brokerage firms and associated persons must be submitted to
arbitration. The Plaintiff has appealed that ruling. The Company denies any
liability to the plaintiff and intends to vigorously defend this action.
The Company notes that the plaintiff sold a portion of the securities he
purchased from the Company, realizing a profit; that the balance of the
securities became salable under Rule 144; and that, if sold, the Plaintiff
could recoup his entire investment and realize a 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 in excess of
$150,000. The Company disputes this liability and filed a cross complaint
against Cottage Bakery. The parties have executed a settlement agreement
which does not subject the Company to any material liability.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-
packer and against Barbara's Bakery. The Company is pursuing these rights,
and in May 1996, initiated an action alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition and related claims.
The defendants have filed counterclaims against the Company and Auburn
Farms alleging various tort and contract claims. The litigation is in the
early stages and the Company intends to vigorously pursue the same.
Michel's Bakery, Inc., a former co-packer of Fudgets, initiated an action
in state court in Philadelphia, Pennsylvania, seeking damages in excess of
$140,000 under various contract and tort theories. In November 1996, the
Company removed this action to the Federal District Court for the Eastern
District of Pennsylvania. The Company has filed a counterclaim alleging
breach of contract and other claims relating to the product manufactured by
Michel's. The parties have agreed to discuss a settlement which, if
completed, would be favorable to the Company. If, however, the matter is
not resolved through mediation, the Company intends to vigorously prosecute
this lawsuit.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and
F-31
<PAGE>
Does 1-50 inclusive." The complaint alleges Breach of Oral Contract, Breach
of Written Contract, and other similar claims arising out of the consulting
relationship that previously existed between the Company and Mr. Ellis. The
Complaint seeks damages in an unspecified amount. The court has sustained,
without leave to amend, a demurrer to the claims against Mark Beychok and
sustained the demur, with leave to amend, against the Company. Mr. Ellis
recently filed an amended complaint against the Company. The litigation is
in its early stages and the Company will vigorously defend the action.
(11) Subsequent Events:
The Company entered into a subscription agreement in April and May 1997,
with an investor for $750,000 of Preferred 1997 Series "A" stock. The
preferred stock has a cumulative dividend rate of 6% percent with no voting
rights. The conversion price is the lower of $1.25 per share or a thirty
percent (30%) discount to the market price at the time of conversion. The
preferred stock is convertible at any time. The facilitator received a 10%
fee from proceeds, as well as warrants to purchase 35,000 shares of common
stock at an exercise price of $1.00 per share.
In April 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender"), in which Donald
Wohl, a Director of the Company, is the general partner, for a loan in the
amount of $300,000 (the "Loan"), to fund the payment of legal fees in
connection with the Company's arbitration against the Keebler Company. The
loan will be evidenced by a note which bears interest at the lesser of 15%
per annum or the highest rate allowed by law with recourse solely to the
net proceeds of the arbitration, if any. If the Company does not realize
any net proceeds from the arbitration, the Loan will be canceled and the
Lender will receive a warrant for the purchase of 400,000 shares of the
Company's Common Stock at $.01 per share. If the Loan is repaid through the
application of the net proceeds of the arbitration, the Lender will receive
warrants for the purchase of 200,000 shares of common stock at $.01 per
share and a percentage of net proceeds of the arbitration equal to 15% of
the first $1,000,000 of net proceeds; 20% of the net proceeds greater than
$1,000,000 and less than $3,000,000; and, 25% of net proceeds above
$3,000,000. The Loan was approved by the disinterested members of the
Company's Board of Directors, and was on terms no less favorable to the
Company than were available from non-affiliated lenders.
F-32
<PAGE>
RECENT FINANCIAL DEVELOPMENTS
(1) Keebler Company:
On Friday, June 20, 1997, the Company received notice of the interim award
under the arbitration with the Keebler Company. The award was for
$5,983,923 as well as compensation for all legal fees and costs associated
with the arbitration proceedings. Based on the agreement with ATCOLP
INVESTMENT PARTNERS (the "Lender"), the Company agreed to pay the Lender a
sliding percentage of the proceeds from the settlement in exchange for
advancing $300,000 to the Company to meet the litigation expenses. The
calculation of the amount due the Lender is estimated to be $1,606,000,
including principal and interest, leaving approximately $4,377,923
remaining for the Company (assuming the Company is not able to recoup any
of its legal fees and costs). On Tuesday July 15, the Company received
$6,750,000 in full and final settlement. Since the amount is less than the
combined award and the legal fees and costs, the amount due the lender has
not yet been calculated nor paid.
(2) Jack Spencer Employment:
Jack Spencer became Chief Financial Officer and Chief Operating Officer in
June 1997. Mr. Spencer has owned and operated Sunrise Consulting, Ltd., a
private concern specializing in restructuring, reorganizing, and
rehabilitating companies. Mr. Spencer has a BA in Economics from DePauw
University (Indiana) and an MBA from Washington University (Missouri).
F-33
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Company's Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware ("DGCL").
SECTION 145 of the DGCL, as amended, applies to the Company and the
relevant portion of the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct
was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
(b) A corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the corporation and
except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the
extent that the Court of Chancery or the court in which such action
or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
(c) To the extent that a director, officer, employee or
agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to
in subsections (a) and (b) of this
II-1
<PAGE>
section, or in defense of any claim, issue or matter therein, he
shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of
this section (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in subsections (a) and
(b) of this section. Such determination shall be made (1) by the
board of directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding,
or (2) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an
officer or director in defending any civil, criminal, administrative
or in vestigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such
director or officer to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the
corporation as authorized in this section. Such expenses (including
attorneys' fees) incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the board of
directors deems appropriate.
(f) The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this
section shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be
entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding
such office.
(g) A corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status
as such, whether or not the corporation would have the power to
indemnify him against such liability under this section.
(h) For purposes of this section, references to "the
corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if
its separate existence had continued, would have had power and
authority to indemnify its directors, officer and employees or
agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was
serving at the request of such constituent corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand
in the same position under this section with respect to the
resulting or surviving corporation as he would have with respect to
such constituent corporation if its separate existence had
continued.
II-2
<PAGE>
(i) For purpose of this section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith
and in a manner he reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests
of the corporation" as referred to in this section.
(j) The indemnification and advancement of expenses
provided by, or granted pursuant to, this section shall, unless
otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a director, officer, employee or agent
and shall inure to the benefit of the heirs, executors and
administrators of such a person.
The Company maintains insurance for the benefit of its directors and
officers and the directors and officers of its subsidiaries, insuring such
persons against certain liabilities, including liabilities arising under the
securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable. Furthermore, the Company has given certain
undertakings with respect to indemnification in connection with this
Registration Statement.
<TABLE>
<CAPTION>
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<S> <C>
Securities and Exchange Commission filing fee $ 768.77
National Association of Securities Dealers, Inc. filing fee $ 753.69
Transfer Agent's and Registrar's Fees $ *
Legal fees and expenses $ *
Accounting fees and expenses $ *
Miscellaneous $ *
--------
TOTAL $ *
</TABLE>
* To be provided by amendment
All amounts estimated except for Securities and Exchange Commission and National
Association of Securities Dealers, Inc. filing fee.
(1) As required by agreements between the Company and the Selling Stockholders,
all of these expenses of issuance and distribution will be paid by the Company.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. (TO FOLLOW)
ITEM 27. EXHIBITS.
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*****
II-3
<PAGE>
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 Registrant's 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 "January
1996 S-8").
3.11 Certificate of Elimination - Series A Preferred Stock. Incorporated
by reference to Exhibit 4.24 to the Registrant's Registration
Statement on Form S-8 Filed May 22, 1996 File Number 333-04271 (the
"May 1996 S-8").
3.12 Certificate of Elimination - Series D Preferred Stock. Incorporated
by reference to Exhibit 4.25 to the May 1996 S-8.
3.13 Certificate of Amendment to the Registrant's Certificate of
Incorporation, filed October 4, 1996. Incorporated by reference
to Exhibit 4.29 to the Registrant's Registration Statement on
Form S-8 Filed December 12, 1996, File Number 333-17763 (the
"December 1996 S-8").
4.1 Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1
Filed with the Registrant's Annual Report on Form 10K-SB for the
Year ended December 31, 1996 (the "1996 10K-SB")
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 January 1996 S-8.
4.11 Warrant Extension Agreement, June 15, 1995. Incorporated by
reference to Exhibit 4.19 to the January 1996 S-8.
4.12 Warrant Extension Agreement, July 17, 1995. Incorporated by
reference to Exhibit 4.20 to the January 1996 S-8.
4.13 Warrant Extension Agreement, August 16, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.15 Warrant Extension Agreement, April 30, 1996. Incorporated by
reference to Exhibit 4.23 to the May 1996 S-8.
4.16 Warrant Extension Agreement, July 31, 1996. Incorporated by
reference to Exhibit 4.26 to the December 1996 S-8.
4.17 Warrant Extension Agreement, September 30, 1996. Incorporated by
reference to Exhibit 4.27 to the December 1996 S-8.
4.18 Warrant Extension Agreement, November 11, 1996. Incorporated by
reference to Exhibit 4.28 to the December 1996 S-8.
4.19 Warrant Extension Agreement, April 15, 1997. Incorporated by
reference to Exhibit 4.19 to the 1996 10K-SB.
5.1 Opinion of Frank J. Hariton, Esq. To be filed by amendment.
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*
II-4
<PAGE>
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 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, MD. 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.**
II-5
<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, MD., 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 "1994 S-8").
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 1994 S-8.
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 1994 S-8.
10.54 Employment Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit
99.04 to 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 the 1994 S-8.
II-6
<PAGE>
10.61 Vitafort International Corporation 90 Day Operating Plan.
Incorporated by reference to exhibit 99.21 to the 1994 S-8.
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 1994 S-8.
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. Incorporated by reference to the like
numbered exhibit to the Registrant's Form 10-KSB for the year
ended December 31, 1995.
10.65 Consulting Agreement and Mutual Release, dated as of March 1, 1995,
between the Registrant and Steven R. Westlund. Incorporated by
reference to the like numbered exhibit to the Registrant's Form
10-KSB for the year ended December 31, 1995.
10.66 Letter Agreement, dated November 30, 1995, between the Registrant
and Steven Westlund. Incorporated by reference to the like
numbered exhibit to the Registrant's Form 10-KSB for the year
ended December 31, 1995.
10.67 The Vitafort International Corporation 1995 Stock Option Plan.
Incorporated by reference to exhibit 99.01 to the January 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
January 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 January 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 January 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 January 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 January 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 January 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 January 1996 S-8.
10.75 Conversion Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.18 to the May 1996 S-8.
10.76 Class A Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.19 to the May 1996 S-8.
10.77 Class B Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.20 to the May 1996 S-8.
10.78 Employment Agreement, between the Registrant and John Coppolino.
Incorporated by reference to Exhibit 10.78 to the 1996 Form
10-KSB.
10.79 Foreclosure Purchase Agreement related to the Acquisition of assets
of Auburn Farms, Inc. Incorporated by reference to Exhibit 1 to
the Registrant's Form 8-K, dated May 2, 1996.
10.80 Loan and Security Agreement, dated August 15, 1996, between the
Registrant and Coast Business Credit, a division of Southern
Pacific Thrift & Loan Association. Incorporated by reference to
Exhibit 1 to the Registrant's Form 8-K, dated August 15, 1996.
10.81 Agreement, dated as of July 10, 1996, between the Registrant and
Second Nature Technologies, Inc. Incorporated by reference to
Exhibit 10.81 to the 1996 Form 10-KSB.
10.82 Employment Agreement between Jack Spencer and the Registrant (filed
herewith).
10.83 Investment Agreement between Registrant and ATCOLP Investment
Partners (filed herewith).
22. Subsidiaries of the Registrant:
The Registrant does not have any significant subsidiaries.
II-7
<PAGE>
23.1. Consent of BDO Seidman LLP (Filed Herewith)
23.2. Consent of KPMG Peat Marwick LLP (Filed Herewith)
23.3 Consent of Frank J. Hariton, Esq. (To be included in Exhibit 5)
* Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form S-18, file number 33-31883.
** 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.
ITEM 29. UNDERTAKINGS.
A. Rule 415 Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933; (ii) To reflect in the prospectus any
facts or events arising after the effective date of the
Registration Statement or the most recent post-effective
amendment thereof which, individually or in the aggregate,
represent a fundamental change in the information set forth in
the Registration Statement; (iii) To include any material
information with respect to the plan of distribution not
previously disclosed in the Registration Statement or any
material change to such information in the Registration
Statement; provided, however, that paragraphs (1)(i) and (1)(ii)
do not apply if the registration statement is on Form S-3, Form
S-8, and the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic
reports filed by the Company pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934 that are incorporated by
reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities herein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering
thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
II-8
<PAGE>
B. INDEMNIFICATION UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Los
Angeles, State of California on June 21, 1997.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
-------------------------------
Mark Beychok, President
II-10
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark Beychok and Jack Spencer, and each
of them, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them or their substitutes may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ Mark Beychok Director, Chief Executive July 21, 1997
- ------------------------ Officer and President
Mark Beychok (Principal Executive)
/s/ Jack Spencer Chief Operating Officer / July 21, 1997
- ------------------------ Chief Financial Officer
Jack Spencer (Principal Accounting
and Financial Officer)
/s/ Donald Wohl Director July 21, 1997
- ------------------------
Donald Wohl
/s/ Benjamin Tabatchnick Director July 21, 1997
- ------------------------
Benjamin Tabatchnick
/s/ Paul S. Hermis Director July 21, 1997
- ------------------------
Paul S. Hermis
II-11
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- --------------------------------------------------------------------
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 Registrant's 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 "January
1996 S-8").
3.11 Certificate of Elimination - Series A Preferred Stock. Incorporated
by reference to Exhibit 4.24 to the Registrant's Registration
Statement on Form S-8 Filed May 22, 1996 File Number 333-04271 (the
"May 1996 S-8").
3.12 Certificate of Elimination - Series D Preferred Stock. Incorporated
by reference to Exhibit 4.25 to the May 1996 S-8.
3.13 Certificate of Amendment to the Registrant's Certificate of
Incorporation, filed October 4, 1996. Incorporated by reference
to Exhibit 4.29 to the Registrant's Registration Statement on
Form S-8 Filed December 12, 1996, File Number 333-17763 (the
"December 1996 S-8").
4.1 Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1
Filed with the Registrant's Annual Report on Form 10K-SB for the
Year ended December 31, 1996 (the "1996 10K-SB")
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 January 1996 S-8.
4.11 Warrant Extension Agreement, June 15, 1995. Incorporated by
reference to Exhibit 4.19 to the January 1996 S-8.
4.12 Warrant Extension Agreement, July 17, 1995. Incorporated by
reference to Exhibit 4.20 to the January 1996 S-8.
4.13 Warrant Extension Agreement, August 16, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.15 Warrant Extension Agreement, April 30, 1996. Incorporated by
reference to Exhibit 4.23 to the May 1996 S-8.
4.16 Warrant Extension Agreement, July 31, 1996. Incorporated by
reference to Exhibit 4.26 to the December 1996 S-8.
4.17 Warrant Extension Agreement, September 30, 1996. Incorporated by
reference to Exhibit 4.27 to the December 1996 S-8.
4.18 Warrant Extension Agreement, November 11, 1996. Incorporated by
reference to Exhibit 4.28 to the December 1996 S-8.
4.19 Warrant Extension Agreement, April 15, 1997. Incorporated by
reference to Exhibit 4.19 to the 1996 10K-SB.
5.1 Opinion of Frank J. Hariton, Esq. To be filed by amendment.
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*
<PAGE>
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 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, MD. 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.**
10.34 Employment Agreement between the Registrant and Stephen D. Clow,
dated December 1, 1990.**
<PAGE>
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, MD., 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 "1994 S-8").
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 1994 S-8.
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 1994 S-8.
10.54 Employment Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit
99.04 to 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 1994 S-8.
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 the 1994 S-8.
10.61 Vitafort International Corporation 90 Day Operating Plan.
Incorporated by reference to exhibit 99.21 to the 1994 S-8.
<PAGE>
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 1994 S-8.
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. Incorporated by reference to the like
numbered exhibit to the Registrant's Form 10-KSB for the year
ended December 31, 1995.
10.65 Consulting Agreement and Mutual Release, dated as of March 1, 1995,
between the Registrant and Steven R. Westlund. Incorporated by
reference to the like numbered exhibit to the Registrant's Form
10-KSB for the year ended December 31, 1995.
10.66 Letter Agreement, dated November 30, 1995, between the Registrant
and Steven Westlund. Incorporated by reference to the like
numbered exhibit to the Registrant's Form 10-KSB for the year
ended December 31, 1995.
10.67 The Vitafort International Corporation 1995 Stock Option Plan.
Incorporated by reference to exhibit 99.01 to the January 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
January 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 January 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 January 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 January 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 January 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 January 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 January 1996 S-8.
10.75 Conversion Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.18 to the May 1996 S-8.
10.76 Class A Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.19 to the May 1996 S-8.
10.77 Class B Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.20 to the May 1996 S-8.
10.78 Employment Agreement, between the Registrant and John Coppolino.
Incorporated by reference to Exhibit 10.78 to the 1996 Form
10-KSB.
10.79 Foreclosure Purchase Agreement related to the Acquisition of assets
of Auburn Farms, Inc. Incorporated by reference to Exhibit 1 to
the Registrant's Form 8-K, dated May 2, 1996.
<PAGE>
10.80 Loan and Security Agreement, dated August 15, 1996, between the
Registrant and Coast Business Credit, a division of Southern
Pacific Thrift & Loan Association. Incorporated by reference to
Exhibit 1 to the Registrant's Form 8-K, dated August 15, 1996.
10.81 Agreement, dated as of July 10, 1996, between the Registrant and
Second Nature Technologies, Inc. Incorporated by reference to
Exhibit 10.81 to the 1996 Form 10-KSB.
10.82 Employment Agreement between Jack Spencer and the Registrant (filed
herewith).
10.83 Investment Agreement between Registrant and ATCOLP Investment
Partners (filed herewith).
22. Subsidiaries of the Registrant:
The Registrant does not have any significant subsidiaries.
23.1 Consent of BDO Seidman LLP (Filed Herewith)
23.2 Consent of KPMG Peat Marwick LLP (Filed Herewith)
23.3 Consent of Frank J. Hariton, Esq. (To be included in Exhibit 5)
* Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form S-18, file number 33-31883.
** 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.
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
the 16th day of June, 1997 (the "Effective Date") by and between VITAFORT
INTERNATIONAL CORPORATION, a Delaware corporation (the "Company") and JACK B.
SPENCER, an individual ("Spencer").
BACKGROUND
----------
A. The Company wishes to employ Spencer as the Company's Chief Operating
Officer and Chief Financial Officer ("COO/CFO") in accordance with and subject
to the terms and conditions set forth in this Agreement.
B. Spencer wishes to be so employed.
AGREEMENT
---------
1. EMPLOYMENT. The Company hereby engages and employs Spencer in the
----------
capacity of COO/CFO as of the Effective Date. The Company's Board of Directors
(the "Board") may also provide such additional designations of title to
Spencer as the Board, in its discretion, may deem appropriate. Spencer agrees
to perform the executive duties and functions customarily associated with the
offices of COO/CFO and as specified from time to time by the Board.
Except for legal holidays, vacations and absences due to temporary illness,
Spencer shall devote his time, attention and energies to the business of the
Company on a full-time basis. Spencer represents and warrants to the Company
that he is under no restriction, limitation or other prohibition to perform his
duties as described herein.
2. CONDITIONS OF EMPLOYMENT.
------------------------
(a) Term. The term of this Agreement shall commence on the
----
Effective Date hereof and shall continue for a period of two (2) years
thereafter unless earlier terminated as provided herein. Notwithstanding
the foregoing, the "Change in Control" provisions of Section 6 hereof shall
survive termination or expiration of this Agreement.
(b) With Cause. The Company may, at any time, discharge Spencer
----------
"with cause", whereupon his employment shall terminate immediately upon the
giving of written notice of such discharge. As used in this Agreement, the
term "with cause" shall mean, (i) the conviction of any crime involving
dishonesty or resulting in imprisonment without the option of a fine, (ii)
the continuing material non-observance or the material breach by Spencer of
any of the material provisions of this Agreement after due written notice
to Spencer from the Board specifying with particularity the nature of such
non-observance or breach, or (iii) the continuing neglect, failure or
refusal of Spencer to carry
<PAGE>
out the duties properly assigned to him after due written notice to Spencer
from the Board specifying with particularity the nature of such neglect,
failure or refusal.
(c) Without Cause. The Company may terminate Spencer "without
-------------
cause" at any time prior to the 91st day after the Effective Date hereof.
(d) Disability. If Spencer shall at any time be incapacitated or
----------
prevented by illness, injury, accident or other circumstances beyond his
control ("incapacity") from discharging his duties pursuant to this
Agreement for a total of 60 days or more in any 120 consecutive day period,
the Company may by notice in writing to Spencer given at any time so long
as the incapacity shall continue: (i) discontinue payment in whole or in
part of Spencer's base salary on and from such date as may be specified in
the notice until the incapacity shall cease; or (ii) (whether or not
payment shall already have been discontinued as aforesaid) terminate this
Agreement forthwith or on such date as may be specified in the notice.
Subject to the foregoing, Spencer's base salary shall, notwithstanding the
incapacity, continue to be paid to Spencer in accordance with the
provisions of this Agreement in respect of the period of incapacity prior
to such discontinuance or termination.
(e) Death. If Spencer dies prior to the expiration of the term of
-----
this Agreement, the compensation due him from the Company under this
Agreement shall be the amount which Spencer would be paid if permanently
disabled, and shall be paid to his executors, administrators, heirs,
personal representatives, successors, and assigns.
3. COMPENSATION.
-------------
(a) Salary. Spencer's initial salary level shall be at the rate of
------
$125,000 per annum. This salary level will be reviewed at least annually by
the Board, but will not be reduced without Spencer's prior written consent.
(b) Options. As of the Effective Date, the Company has granted to
-------
Spencer Three Hundred Thousand (300,000) Incentive Stock Options ("ISOs")
pursuant to the Company's 1995 Stock Option Plan (the "Option Plan"). The
Company represents and warrants that the Option Plan has been duly approved
by the Company's shareholders. The exercise price for all of the ISOs (the
"Exercise Price") shall equal one hundred percent (100%) of the fair market
value ("FMV") of the Company's common stock on the Effective Date. Spencer
may exercise vested ISOs at any time after six (6) months from the
Effective Date and on or prior to the earlier of (i) the fifth (5th)
anniversary of the Effective Date, or (ii) ninety (90) days after
termination of Spencer's employment. Subject to Sections 5(c) and 6(m)(v)
hereof, the ISOs shall vest in accordance with the following vesting
schedule (with a view toward complying with the limitations set forth in
Section 422A of the Internal Revenue Code, as amended):
<TABLE>
<CAPTION>
VESTING DATE NUMBER OF ISOs (CALCULATION)
- ---------------------------------------- -----------------------------------
<S> <C>
* 91 days after the Effective Date ($100,000 / Exercise Price)
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
* First Anniversary of the Effective ($100,000 / Exercise Price)
Date
* Second Anniversary of the Effective ($100,000 / Exercise Price)
Date
* January 1, 2000 All remaining unvested ISOs (if any)
</TABLE>
In the event the foregoing calculations result in a fractional
ISO amount, the number of vested ISOs shall be rounded down to the nearest
----
whole number.
(c) Vacation. Spencer shall receive four (4) weeks paid vacation
--------
each year which shall be taken in accordance with the Company's vacation
policy, or from time to time at the option of Spencer. Spencer shall also
receive all the paid holidays observed by the Company.
(d) Insurance. The Company shall, at its expense, provide Spencer
---------
and his immediate family with comprehensive medical insurance coverage at
least comparable to the coverage provided to the Company's other executive
officers. The Company shall also maintain Directors and Officers (D&O)
insurance which shall cover Spencer with reasonable coverages and policy
limits. The Company shall further provide, at its expense, "key-man"
Accidental Death Insurance with a face value of One Million Dollars
($1,000,000) to be divided equally between the Company, on the one hand,
and Spencer's designated beneficiary or estate, on the other hand. Spencer
represents and warrants that, for purposes of securing such "key-man
insurance", he is not aware of any medical condition that would cause the
insurance premiums to be materially higher than for a normal male of his
age.
(e) Expense Reimbursements and Allowances. Spencer shall be
-------------------------------------
reimbursed for all reasonable out-of-pocket expenses in accordance with the
Company's established policies applicable to executive officers. In this
regard, the Company will reimburse Spencer for all travel-related expenses,
including without limitation all travel to and from his home in Louisiana.
The Company shall also provide a car allowance of Five Hundred Dollars
($500) per month to defray the cost of business automobile expense.
(f) Indemnification. The Company shall indemnify Spencer, to the
---------------
maximum extent then permitted by applicable law, from and against any and
all claims, actions, suits, losses, fines, judgments, interest, costs and
expenses (including without limitation actual attorney's fees and
disbursements) arising out of or relating to Spencer's actions or omissions
as an officer, director (if ever applicable) or employee of the Company
and/or any affiliate of the Company and/or as a trustee or fiduciary of any
plan, trust or other program established by the Company. This Section 3(f)
shall survive termination or expiration of this Agreement.
3
<PAGE>
(g) Attorney's Fees. Upon execution and delivery hereof, the
---------------
Company shall pay to Spencer full reimbursement of the attorney's fees and
disbursements incurred by Spencer in the preparation, negotiation,
execution and delivery of this Agreement.
4. CONFIDENTIALITY. Spencer agrees to hold in confidence and not
---------------
disclose, publish or disseminate to any third party any of the company's trade
secrets or proprietary information. This section 4 shall survive termination or
expiration of this agreement. Spencer agrees further to execute the company's
standard form confidentiality agreements if their terms are customary and
reasonable.
5. SEVERANCE. Except in the context of a "change in control" wherein the
---------
amount and nature of spencer's severance arrangements shall be solely and
exclusively governed and controlled by section 6 hereof (and this section 5
shall have no relevance), the following severance arrangements are agreed to by
the parties.
(a) 90-Day Provision. The Company and Spencer may each
----------------
unilaterally terminate this Agreement and Spencer's employment, with or
without cause, at any time upon written notice on or prior to the 90th day
after the Effective Date ("90-Day Termination"). In the event of a 90-Day
Termination, no severance pay shall be due or payable to Spencer.
(b) With Cause. In the event the Company terminates this Agreement
----------
and Spencer's employment "with cause" pursuant to Section 2(b) hereof, no
severance pay shall be due or payable to Spencer.
(c) Without Cause. In the event that, after 90 days from the
-------------
Effective Date, the Company terminates Spencer's employment "without
cause," Spencer's ISOs shall immediately vest, Spencer's insurance benefits
shall be continued for six (6) months, and Spencer shall be entitled to six
(6) months' severance pay (payable on termination). The Company shall,
however, have no further obligation to pay any other salary, bonus, accrued
vacation or other amounts attributable to the period after termination of
this Agreement.
(d) Disability/Death. No severance pay shall be due or payable in
----------------
the of Spencer's employment termination as a result of his death or as a
result of his incapacity (as defined in Section 2(d)) hereof.
6. CHANGE IN CONTROL PROVISIONS.
----------------------------
(a) Survival. The provisions of this Section 6 shall (i) survive
--------
this Agreement and shall continue one (1) day past termination of Spencer's
employment, and (ii) only become effective upon a "Change in Control," as
defined below. No termination or expiration of this Agreement shall limit,
alter or otherwise affect Spencer's continuing rights hereunder with
respect to the benefits and rights afforded to him as provided herein.
4
<PAGE>
(b) Background. The Company believes that because of its position
----------
in the industry, financial resources and historical operating results there
is a possibility that the Company may become the subject of a Change in
Control (as defined below), either now or at some time in the future.
The Company believes that it is in the best interest of the
Company and its respect to any pending or threatened Change in Control of
the Company and to assure that the Company will have the continued
dedication and availability of Spencer, notwithstanding the possibility,
threat or occurrence of a Change in Control. The Company believes that
these goals can best be accomplished by alleviating certain of the risks
and uncertainties with regard to Spencer's financial and professional
security that would be created by a pending or threatened Change in Control
and that inevitably would distract Spencer and could impair his ability to
objectively perform his duties for and on behalf of the Company.
Accordingly, the Company believes that it is appropriate and in the best
interest of the Company and its shareholders to provide to Spencer
compensation arrangements upon a Change in Control that lessen Spencer's
financial risks and uncertainties and that are reasonably competitive with
those of other corporations.
With these and other considerations in mind, the Board has
authorized the Company to enter into these arrangements with Spencer to
provide the protections set forth herein following a Change in Control.
(c) Purpose. The purpose of these arrangements is to provide that,
-------
in the event of a "Change of Control" (as defined in Paragraph (e) below),
Spencer shall become entitled to receive certain additional benefits, as
described herein, in the event of his termination.
(d) Notice of Termination; Date of Termination.
------------------------------------------
(i) Any termination of Spencer's employment by the Company
or by Spencer shall be communicated by a written notice to the other
party hereto (the "Notice of Termination"). The Notice of Termination
shall indicate the specific termination provision in this Agreement
that is applicable and is being relied upon, and shall set forth in
reasonable detail the facts and circumstances claimed to provide a
basis for termination of employment under the provision so indicated.
(ii) "Date of Termination" shall mean:
(x) If Spencer's employment is terminated pursuant
to Section 2(d) hereof because of his
"incapacity," the date specified in the Notice
of Termination;
(y) If Spencer' employment is terminated by Spencer
pursuant to Paragraph (k) of this Section 6, the
date specified in the Notice of Termination; and
5
<PAGE>
(z) If Spencer's employment is terminated for any
other reason, the date specified in the Notice
of Termination.
(e) Change in Control. As used in this Agreement, the phrase
-----------------
"Change in Control" shall mean:
(i) Except as provided by Paragraph (iii) hereof, the
acquisition by any person, entity or "group", within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934
(the "Exchange Act"), of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of forty percent (40%)
or more of the combined voting power of the then outstanding
securities entitled to vote generally in the election of directors of
the Company; or
(ii) Individuals who, as of the Effective Date hereof,
constitute the Board of Directors of the Company (as of the Effective
Date hereof the "Incumbent Board") cease for any reason to constitute
at least a majority of the Board of Directors of the Company, provided
that any person becoming a director subsequent to the Effective Date
hereof whose election, or nomination for election by the Company's
shareholders, is or was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of
office is in connection with an actual or threatened election contest
relating to the election of the directors of the Company, as such
terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act) shall be, for purposes of this Agreement, considered as
though such person were a member of the Incumbent Board; or
(iii) Approval by the stockholders of the Company of a
reorganization, merger or consolidation of the Company with any other
person, entity or corporation, other than
(y) a merger or consolidation which would result in
the voting securities of the Company outstanding
immediately prior thereto continuing to
represent (either by remaining outstanding or by
being converted into voting securities of
another entity) more than sixty percent (60%) of
the combined voting power of the securities
entitled to vote generally in the election of
directors of the Company or such other entity
outstanding immediately after such merger or
consolidation, or
(z) a merger or consolidation effected to implement
a recapitalization of the Company (or similar
transaction) in which no person, entity or group
(other than any employee benefit plan of any of
the Company) acquires beneficial ownership of
forty percent (40%) or more of the combined
voting power of the securities entitled to vote
generally in
6
<PAGE>
the election of directors of the Company outstanding
immediately after such merger or consolidation; or
(iv) Approval by the stockholders of the Company of a plan
of complete liquidation of the Company or an agreement for the sale or
other disposition by the Company of all or substantially all of such
Company's assets .
(f) Effect of a Change in Control. In the event of a Change of
-----------------------------
Control, Paragraphs (g) through (n) of this Section 6 shall become
applicable to Spencer.
(g) Voluntary Resignation.
----------------------
In the event that Spencer's employment with the Company
terminates as a result of his voluntary resignation for other than "Good
Reason" (as defined in Paragraph (k) below), Spencer shall be entitled to
no "Severance Payment" (as defined in Paragraph (l) below) and no
additional benefits (as provided in Paragraph (m) below). For purposes of
this Agreement, the term "voluntary resignation" shall not include a
resignation which is tendered by Spencer pursuant to the request of the
Company's Board or management ("Management"). A resignation tendered
pursuant to the request of the Board or Management shall, for purposes of
this Agreement, be deemed and treated as an involuntary termination and
Spencer's entitlement to the Severance Payment and additional benefits as
described in Paragraphs (l) and (m) below shall depend upon whether the
Board's request was based on "cause" (as defined in Section 2(b) hereof) or
was not based on "cause."
(h) Involuntary Termination for Cause/Disability/Death.
--------------------------------------------------
In the event that Spencer's employment with the Company is
terminated by the Company "with cause" (as defined in Section 2(b) hereof),
as a result of Spencer's "incapacity" (as defined in Section 2(d) hereof,
or as a result of his death, Spencer shall not be entitled to the Severance
Payment or additional benefits described in Paragraphs (l) and (m) below.
(The preceding sentence shall not, however, prohibit or prevent Spencer
from accepting severance pay or benefits if and to the extent the Company
determines, in its sole discretion, to make severance pay or benefits
available.)
If Spencer's employment shall be properly terminated with cause
or as a result of his "incapacity" or death, the Company shall pay Spencer
(or his estate) his full salary, accrued benefits, and other amounts
legally owing to Spencer through the Date of Termination. The Company shall
thereafter have no further obligations to Spencer (or his estate) under
this Section 6.
(i) Involuntary Termination Without Cause.
--------------------------------------
In the event that Spencer's employment with the Company is
terminated by the Company without cause following, or within four (4)
months prior to, a Change in
7
<PAGE>
Control, Spencer shall be entitled to the Severance Payment and additional
benefits described in Paragraphs (l) and (m) below.
(j) Voluntary Retirement.
--------------------
For purposes of this Agreement, "Retirement" shall mean
termination of Spencer's employment, with his voluntary consent, in
accordance with the Company's retirement policy (including early
retirement) generally applicable to its salaried employees or in accordance
with any retirement arrangement established with respect to him with
Spencer's voluntary consent.
In the event of Spencer's voluntary Retirement, the Company
shall have no obligation to make or provide the Severance Payment or
additional benefits described in Paragraphs (l) and (m) below.
(k) Termination of Employment by Spencer For Good Reason.
----------------------------------------------------
(i) Spencer may terminate his employment for "Good
Reason." For purposes of this Agreement, "Good Reason" will exist if
any one or more of the following occur:
(v) Failure by the Company to honor any of its
material obligations under this Agreement; or
(w) Any purported termination by the Company of
Spencer's employment that is not effected pursuant to a Notice
of Termination satisfying the requirements of Paragraph (d)
above and, for purposes of this Agreement, no such purported
termination shall be effective; or
(x) Failure to elect or reelect or otherwise to
maintain Spencer to or in the office or the position (or a
substantially equivalent office or position) in the Company
that Spencer held as of the date hereof, or the removal of or
failure to reelect Spencer as a Director of the Company, if
Spencer shall have been a Director of the Company immediately
prior to such removal or failure to reelect; or
(y) Spencer's overall compensation or perquisites
are reduced or adversely modified in any material respect, or
Spencer's authority or duties are materially changed, in either
case without the prior and voluntary written consent of
Spencer, which change is not fully remedied within ten (10)
calendar days after receipt by the Company of written notice
from Spencer identifying such change(s). For purposes of this
Agreement, Spencer's authority or duties shall be conclusively
considered to have been "materially changed" if, without
Spencer's express and voluntary written consent, there is any
substantial diminution or adverse modification in Spencer's
title, status, overall position, responsibilities,
8
<PAGE>
reporting relationship, general working environment (including without
limitation secretarial and staff support, offices, and frequency and
mode of travel); or
(z) A change in circumstances significantly affecting
Spencer's position, including without limitation a change in the scope
of the business or other activities for which he was responsible as of
the Effective Date of this Agreement, and, as a result thereof,
Spencer has been rendered substantially unable to carry out, has been
substantially hindered in the performance of, or has suffered a
substantial reduction in any of the authorities, powers, functions,
responsibilities or duties attached to the position held by Spencer as
of the date hereof, which situation is not fully remedied within ten
(10) calendar days after written notice to the Company from Spencer of
such determination.
(iii) In the event of termination of employment by Spencer for Good
Reason following, or within six (6) months prior to, a Change in Control,
Spencer shall be entitled to the Severance Payment and additional benefits
as described in Paragraphs (l) and (m) below.
(l) Severance Payment.
-----------------
(i) If Spencer's employment is terminated following, or within six
(6) months prior to a Change in Control, as a result of an involuntary
termination without cause, Spencer's termination of employment for Good
Reason, or as a result of any other reason except for Spencer's voluntary
resignation (as set forth in Paragraph (g) above), Spencer's voluntary
Retirement (as set forth in Paragraph (j) above) or Spencer's death or
"incapacity" (as set forth in Section 2(d) hereof), then Spencer's
termination shall be deemed to be a "Qualifying Termination." In the event
of a Qualifying Termination, the Company shall be obligated to make the
"Severance Payment" to Spencer. For purposes of this Agreement, the
"Severance Payment" shall equal (y) one-half ( 1/2) of Spencer's
"Compensation" if the Change in Control and Qualifying Termination both
occur within nine (9) months of the Effective Date hereof, and (z) one and
one-half (1-1/2) times Spencer's "Compensation" in the event either the
Change in Control or the Qualifying Termination occur at any time after the
nine month anniversary of the Effective Date hereof. Spencer shall be
entitled to receive the Severance Payment in a cash lump sum within five
(5) calendar days after the later of Spencer's Date of Termination or the
date of the Change in Control.
(ii) For purposes of this Agreement, Spencer's "Compensation" shall
equal the sum of (1) Spencer's highest annual salary rate with the Company
within the three-year period ending on Spencer's Date of Termination, plus
(2) the "Bonus Increment." The Bonus Increment shall equal the annualized
average of
9
<PAGE>
all bonuses and incentive compensation payments other than stock options
paid or payable to Spencer during the three-year period immediately before
Spencer's Date of Termination under all of the Company's bonus and
incentive compensation plans or arrangements.
(iii) In lieu of a cash lump sum, Spencer may, in his sole
discretion, elect to receive the Severance Payment in equal annual
installments over three (3) years (or such lesser number of years as
Spencer may elect). Such installments shall be paid to Spencer on each
anniversary of Spencer's Date of Termination, beginning with the first such
anniversary and continuing on each such anniversary thereafter until fully
paid. Such election to receive the Severance Payment in installments may be
made and/or revoked by Spencer at any time prior to the termination of his
employment by providing written notice to the Board of such election. Any
such election by Spencer to receive the Severance Payment in installments
that has been made and not revoked prior to Spencer's termination shall,
effective the date of such termination, be irrevocable and binding on all
parties hereto.
In the event that at the time of Spencer's Qualifying Termination
there is not in effect an election by Spencer to receive the Severance
Payment in installments, such Severance Payment shall be paid to Spencer in
a single cash lump sum. In the event that Spencer has made an appropriate
election to receive the Severance Payment in annual installments, and
Spencer becomes entitled to such Severance Payment as provided in this
Agreement, then such Severance Payment, to the extent at any time unpaid
and/or deferred, shall be deemed to bear interest at the base or prime rate
in effect from time to time as publicly announced by Bank of America NT&SA
(the "Prime Rate"). Accrued interest shall be due and payable together with
each annual installment of the Severance Payment.
(m) Additional Benefits.
-------------------
(i) In the event of a Qualifying Termination, the Company agrees
and covenants that Spencer and his dependents shall be entitled to continue
to participate in all benefit programs which had been made available to
Spencer before the Qualifying Termination including without limitation, any
and all medical insurance, dental insurance, vision insurance, life
insurance, disability insurance, retirement and/or pension plans and other
benefit programs of the Company and/or its affiliates. These programs shall
be continued for the benefit of Spencer and his dependents at no cost to
Spencer or his dependents, except to the extent of Spencer's income tax
payable thereon because tax rules require the inclusion of the value of
such benefits in Spencer's income. The programs shall be continued in the
same way and at the same level as immediately prior to the Qualifying
Termination, and shall continue for the benefit of Spencer and his
dependents for eighteen (18) months (the "Benefit Period"). In the event
that participation in any such plan or program is barred or unavailable for
any reason,
10
<PAGE>
the Company shall arrange to provide Spencer and his dependents, at the
expense of the Company, with benefits substantially comparable to those
which he and his dependents were entitled to receive under such plans and
programs as were in effect immediately prior to the time of the Qualifying
Termination.
(ii) In the event of a Qualifying Termination, Spencer or his
successors may, at the expense of the Company, utilize the reasonable
services of accountants and attorneys of his or their choice for assistance
in interpreting and enforcing this Agreement as well as for preparation of
his tax returns for the year of the Qualifying Termination and for each
other year all or any portion of which is included within the Benefit
Period.
(iii) In the event of a Qualifying Termination, Spencer shall be
entitled, at the expense of the Company, to "Automobile Benefits" during
the entire term of the Benefit Period. For purposes hereof, "Automobile
Benefits" shall include a $500 per month allowance to defray automobile
expenses and costs.
(iv) In the event any perquisite or benefit enjoyed by Spencer or
his dependents is reduced or eliminated within six (6) months before a
Qualifying Termination, then for all purposes of this Agreement, the
perquisite or benefit as was in effect prior to such reduction or
elimination shall be deemed to have been in place immediately prior to the
Date of Termination.
(v) In the event of a Qualifying Termination, all of Spencer's
unvested stock options and equity-based incentives shall immediately vest
and be fully exerciseable.
(n) Indemnification for Golden Parachute Excise Tax.
-----------------------------------------------
(i) In the event that it shall be determined that any payment,
benefit or distribution provided, or to be provided, by the Company (or by
any person whose actions result in a Change in Control or any person
affiliated with the Company or such person) to or for the benefit of
Spencer under the terms of this Agreement, or under any other agreement,
plan or arrangement with the Company (or with any person whose actions
result in a Change in Control or any person affiliated with the Company or
such person), would be subject to any excise tax imposed pursuant to
Section 4999 of the Internal Revenue Code of 1986, as amended, or any
comparable provision of state law (an "Excise Tax"), the Company agrees
that it will promptly pay or cause to be paid to Spencer, in addition to
any other payments made or required to be made pursuant to the terms of
this Agreement, an additional amount in cash (a "Gross-Up Payment") equal
to the sum of (i) the amount of such Excise Tax plus (ii) all Attributable
Taxes and Penalties. For purposes of this Agreement, "Attributable Taxes
and Penalties" means all taxes, interest and penalties, including, without
limitation, any federal, state and local income taxes and any Excise Taxes,
which become payable by Spencer as a result of the receipt of the Gross-Up
Payment or the assessment of any Excise Tax
11
<PAGE>
against Spencer. It is intended that under this provision the Company will
indemnify Spencer in such a manner that Spencer shall not suffer any loss
or expense by reason of the assessment of any Excise Tax or the
reimbursement of Spencer for payment of any such Excise Tax.
(ii) In determining the amount of any Gross-Up Payment payable
pursuant to Paragraph (i) above, Spencer shall be deemed to pay federal
income taxes at the highest marginal rate of federal income taxation in the
calendar year in which the Gross-Up Payment is to be made, and state and
local taxes at the highest marginal rates of taxation for such year in the
state and locality of Spencer's residence. For such purposes, federal
income taxes shall be determined net of the maximum reduction in such
federal income taxes that could be obtained from the deduction of such
state and local taxes.
(iii) Within 30 days after Spencer's Date of Termination, a mutually
agreed upon nationally recognized accounting firm (the "Accounting Firm"),
shall make a determination as to whether any Excise Tax should be reported
and paid by Spencer for any period or periods by reason of any payment,
benefit or distribution under this Agreement or under any other agreement,
plan or arrangement with the Company (or with any person whose actions
result in a Change in Control or any person affiliated with the Company or
such person). If the Accounting Firm determines that any Excise Tax should
be reported and paid by Spencer, the Accounting Firm shall also determine
the amount of such Excise Tax and the amount of the Gross-Up Payment
required to be paid to Spencer by the Company with respect to such Excise
Tax. In such event, the Company shall, within five (5) business days after
such determination, pay or cause to be paid to Spencer the amount of the
Gross-Up Payment with respect to the Excise Tax as determined by the
Accounting Firm, and Spencer shall report and pay the Excise Tax as so
determined. If the Accounting Firm determines that no Excise Tax should be
reported and paid by Spencer, it shall furnish Spencer with its opinion
that there is substantial authority not to report any Excise Tax, and
Spencer shall prepare and file his tax returns in accordance with such
advice until such time as the Internal Revenue Service (the "IRS") or any
applicable state taxing authority shall notify Spencer that such manner of
reporting is improper. The Company shall be responsible for all fees and
expenses connected with the determinations by the Accounting Firm pursuant
to this Paragraph (n).
(iv) In the event that Spencer is at any time required to pay any
Excise Tax (or any interest or penalties with respect to any Excise Tax) in
addition to any amount determined pursuant to Paragraph (iii) by reason of
any payment, benefit or distribution under this Agreement or under any
other agreement, plan or arrangement with the Company (or with any person
whose actions result in a Change in Control or any person affiliated with
the Company or such person), within five (5) business days after Spencer
notifies the Company of such required additional Excise Tax (or additional
interest or penalties) the Company shall pay
12
<PAGE>
or cause to be paid to Spencer a Gross-Up Payment determined with respect
to such additional Excise Tax (and any such additional interest and
penalties). In the event that Spencer receives any refund of any Excise Tax
with respect to which Spencer has previously received a Gross-Up Payment
hereunder, Spencer shall promptly pay to the Company the amount of such
refund (together with any interest paid or credited thereon after taxes
applicable thereto).
(v) Spencer agrees to notify the Company in a timely manner in the
event of any audit or other proceeding by the IRS or any state taxing
authority in which the IRS or the state taxing authority asserts that any
Excise Tax should be assessed against Spencer and to cooperate with the
Company (at the Company's sole cost and expense) in contesting any such
proposed assessment with respect to such Excise Tax (a "Proposed
Assessment"). Spencer agrees not to settle any Proposed Assessment without
the consent of the Company. If, however, Spencer's tax liability for any
year cannot be finally resolved principally by reason of a failure to
settle a Proposed Assessment, Spencer may demand that the Company settle
the Proposed Assessment. If the Company does not settle the Proposed
Assessment, or does not consent to allow Spencer to settle the Proposed
Assessment, within ten (10) days following such demand, the Company shall
indemnify and hold harmless Spencer (i) with respect to any additional
interest and/or penalties that Spencer is required to pay by reason of the
delay in finally resolving Spencer's tax liability and (ii) with respect to
any taxes, interest and penalties that Spencer is required to pay by reason
of any indemnification payment under this Paragraph.
(o) Non-Exclusivity of Rights.
--------------------------
Nothing in this Agreement shall prevent or limit Spencer's continuing
or future participation in any benefit, bonus, incentive or other plan or
program provided by the Company or any of its affiliated companies. Amounts
which are vested benefits or which Spencer is otherwise entitled to receive
under any plan or program of the Company or any of its affiliated companies
at or subsequent to the date of any termination shall be payable in
accordance with such plan or program except as otherwise provided herein.
7. MISCELLANEOUS.
-------------
(a) No Assignment. Neither party may assign this Agreement without
-------------
the prior written consent of the other.
(b) Complete Agreement. This Agreement contains the entire
------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all previous oral and written agreements and all contemporaneous
oral negotiations, commitments, writings and understandings.
13
<PAGE>
(c) Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(d) Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the internal laws of the State of California.
(e) Modifications and Waivers. No waiver or modification of this
-------------------------
Agreement shall be binding unless it is in a writing signed by both parties
hereto.
(f) Severability. In the event any provision or provisions of this
------------
Agreement is or are to be held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
(g) Legal Fees. If any legal action, arbitration or other
----------
proceeding is brought for the enforcement of this Agreement, or because of
any alleged dispute, breach or default in connection with this Agreement,
the successful or prevailing party shall be entitled to recover all of its
costs incurred in such action or proceeding, including without limitation
its actual attorneys' fees and disbursements, in addition to any other
relief to which it may be entitled.
(h) Construction. The language of this Agreement shall be
------------
construed simply and according to its fair meaning, and shall not be
construed for or against any party hereto as a result of the source of its
draftsmanship.
(i) Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing, served personally on,
or mailed by certified or registered United States mail to, the party to be
charged with receipt hereof. Notices and other communications served by
mail shall be deemed given hereunder seventy-two (72) hours after deposit
of such notice or communication in the United States Post Office as
certified or registered mail with postage prepaid and duly addressed to the
receiving party at the address set below such party's signature hereon, or
at such other address as such party has designated in a written notice
given as provided herein.
(j) Arbitration. Any controversy or claim arising out of or
-----------
relating to this Agreement, or an alleged breach of this Agreement, shall
be settled by arbitration administered by JAMS/ENDispute, and judgment on
the award rendered by the arbitrator(s) may be entered in the Superior
Court in and for the County of Los Angeles, California. In case of a
dispute, any party may commence arbitration by giving written notice to the
others of its desire to do so. Each party hereto agrees that service of
process for an arbitration proceeding will be deemed completed when a
notice of another party's desire to arbitrate is received by such party.
Each party hereby agrees that any such arbitration shall be held in the
County of Los Angeles, California and consents to the jurisdiction of the
Superior Court in and for the County of Los Angeles for entering of any
judgment. The arbitrator shall have authority equal to that of a Superior
Court Judge to grant equitable relief in an action pending in Los Angeles
County Superior Court in
14
<PAGE>
which all parties have appeared. Judgment upon the Arbitrator's award may
be entered as if after trial in accordance with California law. Should any
party fail to pay fees as required, any other party may advance the same
and shall be entitled to a judgment from the arbitrator in the amount of
such fees plus interest. Any award issued by the arbitrator shall bear
interest at the judgment rate in effect in the State of California from the
date determined by the arbitrator.
(k) Notices. Any notice or communications required or permitted to
-------
be given to the parties hereto shall be delivered personally or be sent by
United States registered or certified mail, postage prepaid and return
receipt requested, and addressed or delivered as follows, or as such other
addresses the party addressed may have substituted by notice pursuant to
this Section:
(i) If to the Company:
Vitafort International Corporation
1800 Avenue of the Stars, Suite 480
Los Angeles, California 90067
Attn: President
(ii) If to Spencer:
Jack B. Spencer
3 Edward Place
Hammond, Louisiana 70401
IN WITNESS WHEREOF, the parties hereto have entered into this Agreement as
of the Effective Date.
"COMPANY" "SPENCER"
VITAFORT INTERNATIONAL CORPORATION JACK B. SPENCER
By: By:
------------------------------- ---------------------------
Mark Beychok, President Jack B. Spencer
15
<PAGE>
EXHIBIT 10.83
INVESTMENT AGREEMENT
--------------------
THIS INVESTMENT AGREEMENT ("Agreement") is made this ____ day of
_____________, 1997 by and between VITAFORT INTERNATIONAL CORPORATION, a
Delaware corporation ("Corporation") and ATCOLP INVESTMENT PARTNERS, a
California limited partnership ("Partnership"), to be effective _____________,
1997 (the "Effective Date").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Corporation is engaged in the business of selling food products on
a retail and wholesale basis; and
WHEREAS, Corporation's current financial status is such that it requires
additional sources of funding and capital to keep it operating; and
WHEREAS, Corporation is interested in obtaining funding from Partnership
for the purposes of providing it with sufficient cash necessary for it to
marshal the funds it currently has available to it in its operations and, at the
same time, be able to prosecute the arbitration case brought by Corporation
against Keebler Company ("Keebler") identified by the arbitrator as 74 488 01081
96 and pay its attorneys the sums necessary to complete the arbitration which
had commenced on ______________, 1996 (the "Keebler Arbitration"); and
WHEREAS, Partnership is willing to make an investment in the Keebler
Arbitration in consideration for the agreements contained herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. INVESTMENT. In consideration of the agreements contained herein,
----------
Partnership hereby agrees to provide Corporation with Three Hundred Thousand
Dollars ($300,000) as an investment in the Keebler Arbitration (the "Investment
Amount"). As collateral for Corporation's payment obligations to Partnership
under this Agreement, Corporation agrees to pledge a security interest in and to
all of its right, title and interest to the proceeds of any arbitrator's award
in the Keebler Arbitration. To memorialize said agreement, Corporation agrees to
execute the Security Agreement attached hereto as Exhibit A, which is
incorporated into this Agreement by this reference. In addition to the
foregoing, Corporation agrees to execute any and all documentation necessary to
allow the Partnership to perfect its security interest in the collateral pledged
hereunder.
<PAGE>
2. INVESTMENT AGREEMENT.
--------------------
(a) The parties acknowledge and understand that in the event that
Corporation fails to prevail in the Keebler Arbitration, the parties agree that
Corporation shall provide Partnership, for the investment described herein,
warrants to purchase four hundred thousand (400,000) shares of Corporation's
common stock at a price of one cent ($.01) per share. This shall be
Partnership's sole compensation in the event Corporation fails to prevail in the
Keebler Arbitration.
(b) In the event that Corporation prevails in the Keebler Arbitration,
Corporation shall repay Partnership the Investment Amount, plus interest at the
lesser of (x) the highest rate permitted by law; or (y) fifteen percent (15%)
per annum, computed from the Effective Date until the date of payment, and
provide Partnership with additional compensation as follows:
(i) In the event that the award in favor of the Corporation is in an
amount not to exceed One Million Dollars ($1,000,000) "Net" (as
defined below), then the Corporation shall receive the following:
(A) Warrants entitling the Partnership to acquire two hundred
thousand (200,000) shares of Corporation stock at one cent
($.01) per share; and
(B) An amount equal to fifteen percent (15%) of the Net amount
awarded to the Corporation, but not less than One Hundred
Thousand Dollars ($100,000).
(ii) In the event an award in favor of the Corporation is between One
Million One Dollars ($1,000,001) and Three Million Dollars
($3,000,000), the Partnership shall receive the following:
(A) Warrants entitling the Partnership to acquire two hundred
thousand (200,000) shares of Corporation stock at one cent
($.01) per share; and
(B) An amount equal to fifteen percent (15%) of the first One
Million Dollars ($1,000,000) Net awarded to the Corporation,
plus twenty percent (20%) of the Net amount awarded in excess
of One Million Dollars ($1,000,000).
(iii) In the event the award in favor of the Corporation is in excess of
Three Million Dollars ($3,000,000), the Partnership shall receive:
-2-
<PAGE>
(A) Warrants entitling the Partnership to acquire two hundred
thousand (200,000) shares of Corporation stock at one cent
($.01) per share; and
(B) An amount equal to fifteen percent (15%) of the first One
Million Dollars ($1,000,000) Net amount awarded to the
Corporation, plus twenty percent (20%) of the Net amount
awarded in excess of One Million Dollars ($1,000,000), up to
Three Million Dollars ($3,000,000), plus twenty-five percent
(25%) of the Net amount awarded in excess of Three Million
Dollars ($3,000,000).
(iv) For purposes hereof, a "Net" award means the amounts awarded to the
Corporation by the arbitrator in excess of any legal fees, expert
witness fees, costs and expenses incurred by Corporation in the
prosecution of the Keebler Arbitration. The parties hereto
acknowledge and agree that the term "Net" has been defined in the
fashion set forth in this subparagraph 2(d) due to the fact that
the contract giving rise to the Keebler Arbitration contains a
provision which requires the arbitrator to award the prevailing
party their costs and attorney's fees in prosecuting such
arbitration, in addition to any other recovery awarded by the
arbitrator. Notwithstanding anything contained in the foregoing to
the contrary, the term "Net" as used in this Agreement shall be
applied to determine the proper Net award, even if the arbitrator's
award does not break down the amount so awarded into separate
categories of legal fees, costs and expenses awarded on the one
hand, and liability award in favor of the Corporation and against
Keebler on the other hand.
3. REGISTRATION. Within one hundred twenty (120) days following the
------------
Effective Date, Corporation shall use its best efforts to register, with the
appropriate state and federal securities regulatory authorities, the warrants
described in Section 2 above so that if said warrants are exercised following
their issuance hereunder, the shares issued pursuant to said warrants shall be
available for sale by the Partnership without further need for securities
registration. In addition to the foregoing, the Corporation shall obtain the
corporate consents necessary to allow it to issue the additional common stock
represented by such warrants.
4. SEVERABILITY. In the event any court of competent jurisdiction
------------
believes that any component of the consideration to be provided to the
Partnership in exchange for either the loan or the inducement for the
Partnership to become a Corporation shareholder in accordance with this
Agreement is against public policy and, therefore, void, the parties agree that
such documents shall be read in such fashion that all other components of the
consideration received by the Partnership as described in this letter shall be
considered part of the original agreement between the parties and the offending
provision(s) shall be considered to never have been part of such agreement.
-3-
<PAGE>
5. KEEBLER ARBITRATION. The parties hereto acknowledge and agree that
-------------------
Corporation instituted the Keebler Arbitration on its own initiative and
approximately six (6) months prior to Corporation's seeking out Partnership to
engage in the transactions described herein. Partnership expressly acknowledges
and agrees that it shall in no way assist, conduct or interfere in any other way
with Corporation's prosecution of the Keebler Arbitration and shall have no
rights to approve or disapprove any settlement sought or received by
Corporation.
6. GENERAL. Any notices required under this Agreement shall be sent by
-------
certified mail or personally delivered. The descriptive headings set forth in
this Agreement are for the convenience of the parties and are not to be used in
interpreting the terms contained in this Agreement. The terms set forth in this
Agreement shall be binding upon and inure to the benefit of each of the parties
and or its successors, permitted assigns and legal representatives. The
Agreement and the Exhibits attached to this Agreement constitute the entire
agreement between the parties with respect to the subject matter described in
this Agreement. The waiver by any party of any breach of any provision of this
Agreement shall not be construed as a continuing waiver.
IN WITNESS WHEREOF, the parties have each caused this Agreement to be
executed on the date first written above.
ATCOLP INVESTMENT PARTNERS, a
California limited partnership
/s/ Donald Wohl
-------------------------------
(Name of a General Partner)
-------------------------------
Donald Wohl, GP
General Partner
ACCEPTED:
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
------------------------------
Its President
-4-
<PAGE>
SECURITY AGREEMENT
------------------
THIS SECURITY AGREEMENT ("Agreement") made this ___ day of ______________,
1997, by and among ATCOLP INVESTMENT PARTNERS, a California limited partnership
("Secured Party") and VITAFORT INTERNATIONAL CORPORATION, a Delaware corporation
("Debtor") is made to induce Secured Party concurrent with this Agreement to
invest an amount equal to Three Hundred Thousand Dollars ($300,000) in Debtor
pursuant to an Investment Agreement of even date herewith (the "Investment
Agreement"), to be effective _______________, 1997.
1. Debtor hereby grants a security interest in, and mortgages to Secured
Party, the assets, and any and all additions and accessions to such assets and
products or proceeds of such assets, designated in Exhibit A, a copy of which is
attached to this Agreement and expressly incorporated into this Agreement by
this reference (all such assets, additions, accessions, products and proceeds
collectively hereinafter referred to as the "Collateral") to secure payment of
the amounts owed by Debtor to Secured Party under the Investment Agreement and
any and all other obligations of Debtor to Secured Party of any nature
(collectively the "Obligations").
2. Debtor hereby represents, warrants and covenants to Secured Party
that:
(a) The Collateral is free and clear of any and all liens, claims, or
encumbrances, except as otherwise represented to Secured Party in
writing, and that there are no restrictions upon the transfer of the
Collateral, in that Debtor has good and marketable title and the full
right and power to transfer the Collateral free and clear of any and
all liens, claims or encumbrances other than as noted above.
(b) Debtor will not, without the prior written consent of Secured Party,
sell, lease, assign, pledge, or otherwise dispose of, move, relocate
or transfer any of the Collateral; and
(c) To the best of Debtor's knowledge and belief, Debtor are not in
violation of any applicable statute, rule, regulation or ordinance of
any governmental entity which would materially and adversely affect
the Collateral.
3. There are no actions or proceedings pending by or against Debtor
before any court or administrative agency and Debtor has no knowledge of any
pending, threatened or imminent litigation, governmental investigations or
claims, complaints, actions or prosecutions involving Debtor which would
materially and adversely affect the Collateral. If any of the foregoing should
arise during
<PAGE>
the term of this Agreement, Debtor shall immediately notify Secured Party in
writing. Debtor shall execute any and all documentation, including any Financing
Statements required by Secured Party, if any, in order to perfect its security
interest in the Collateral pledged herein. Upon payment in full by Debtor of all
Obligations, Secured Party shall terminate the lien that it has placed on the
Collateral hereunder and surrender and transfer to Debtor all rights received as
a result of its lien as granted hereunder.
4. Upon the occurrence of any default by Debtor under the Obligations,
this Agreement or under any other documents evidencing or relating to the
Obligations including, without limitation, the Note or that certain Investment
Agreement of even date herewith executed by and between the parties hereto, but
subject to the cure periods set forth in each Obligation, Secured Party shall
have the right to accelerate any or all Obligations and shall have all of the
rights and remedies provided to a secured creditor under the Uniform Commercial
Code and applicable state law. Secured Party shall give Debtor reasonable notice
prior to any disposition of the Collateral, which notice requirement shall be
satisfied if given ten (10) days prior to any such disposition. The net proceeds
realized upon any sale or other disposition of the Collateral, after deducting
expenses of the sale or other handling or disposition and reasonable attorney's
fees, costs, and expenses incurred by Secured Party, shall be applied to the
payment of the Obligations, but not to exceed the outstanding balances on the
Obligations. Secured Party shall account to Debtor for any surplus realized on
such disposition. Debtor shall remain liable for any deficiency remaining on the
Obligations after application of the Collateral sale proceeds as described
above, which Debtor agrees to pay forthwith upon demand.
5. Secured Party shall not be deemed to have waived any rights under
this Agreement, under the Obligations or under any related documents, unless
such waiver is in writing and signed by Secured Party. No delay or omission on
the part of Secured Party in exercising any right shall operate as a waiver of
such right or any other right. A waiver by any party of any provision of this
Agreement shall not constitute a waiver of nor prejudice any other party's
rights to otherwise demand strict compliance with that provision or any other
provision. No prior waiver, nor any course of dealing between Secured Party and
Debtor, shall constitute a waiver of Secured Party's rights or Debtor's
obligations as to any future transactions. Whenever consent by Secured Party is
required in this Agreement, the granting of such consent by Secured Party in any
instance shall not constitute a continuing consent to subsequent instances where
such consent is required.
6. All notices required to be given by a party to the other parties
under this Agreement shall be in writing and shall be effective when actually
delivered or when deposited in the United States Mail, First Class, postage
prepaid, addressed to the other parties at such address as each party may
designate to the other parties in writing.
7. This agreement shall be binding upon Debtor and its respective
successors and permitted assigns. If this Agreement contains any blanks when
executed by Debtor, Secured Party in hereby authorized, without notice to
Debtor, to complete any such blanks according to the terms upon which the
Collateral is pledged. Wherever possible, each provision of this Agreement shall
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
such law, such provision shall be considered severable and be ineffective to the
extent of such prohibition or invalidity, without invalidating the remaining
provisions of this Security Agreement.
2
<PAGE>
8. Debtor agrees that unless Debtor obtains the prior written consent of
Secured Party, Debtor will keep the Collateral free from any adverse lien,
security interest or encumbrance, and shall not waste or destroy the Collateral
or any part thereof, and shall not use the Collateral in violation of any
statute or ordinance applicable thereto.
9. Debtor will pay promptly when due all taxes and assessments upon the
Collateral or upon any notes evidencing the Obligations.
10. At its option, Secured Party may discharge taxes, liens or security
interests or other encumbrances at any time levied or placed on the Collateral,
may place and pay for insurance on the Collateral upon the failure by the Debtor
after being requested to do so, with such expense incurred to be added, in equal
amounts to amounts due under the Investment Agreement.
11. Upon request by Secured Party, Debtor shall take whatever action is
reasonably necessary to fulfill the terms of this Agreement, including but not
limited to the execution and filing of such documents evidencing or perfecting
the liens, including the filing of the financing statements referenced above,
arising out of the pledge of the Collateral pursuant to this Agreement.
IN WITNESS WHEREOF, the parties to this Agreement have each executed this
Agreement on the day and year first above written.
VITAFORT INTERNATIONAL
CORPORATION
ATTEST:
By: /s/ Mark Beychok
--------------------------
Its: President
- --------------------------
Secretary
ATCOLP INVESTMENT PARTNERS
/s/ Donald Wohl
------------------------------
General Partner
By: /s/ Gen Partner
--------------------------
Its:
3
<PAGE>
EXHIBIT A
---------
DESCRIPTION OF COLLATERAL
-------------------------
All of Debtor's right, title and interest in and to any and all of the
proceeds of any award obtained by Debtor in Debtor's arbitration against Keebler
Company.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
Vitafort International Corporation
Los Angeles, California
We hereby consent to the use in the Prospectus constituting a part of the
Registration Statement on Form SB-2 of our report dated April 14, 1997, relating
to the audit of the consolidated financial statements of Vitafort International
Corporation for the year ended December 31, 1996, which are contained in that
Prospectus. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
We consent to the reference to us under the caption "Experts" in the Prospectus.
BDO Seidman, LLP
Los Angeles, California
July 21, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
-----------------------------
The Board of Directors
Vitafort International Corporation
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Los Angeles, California
July 21, 1997
