<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 7, 1998
REGISTRATION FILE NO. 333-32029
REGISTRATION FILE NO. 333-5733
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2/A2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
(AMENDMENT NO. 1 TO REGISTRATION FILE NO. 333-3209)
(POST EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION FILE NO. 333-5733)
-----------------------------
VITAFORT INTERNATIONAL CORPORATION
(Exact name of small business issuer as specified in Its Charter)
<TABLE>
<CAPTION>
DELAWARE 5149 68-0110509
<S> <C> <C>
(State or other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Number) Identification No.)
</TABLE>
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)
-----------------------------
MARK BEYCHOK, PRESIDENT & CEO
Vitafort International Corporation
1800 Avenue of the Stars, Suite 480
Los Angeles, CA 90067
(310) 552-6393
(Name, address, including zip code and telephone number, including area code, of
agent for service)
-----------------------------
COPIES OF ALL COMMUNICATIONS TO:
FRANK J. HARITON, ESQ.
The Empire State Building
350 Fifth Avenue, Suite 3000
New York, NY 10118
Telephone: (212) 695-6000
Facsimile: (212) 563-3101
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. [_]
1
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===========================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Securities Amount to be Price Aggregate Registration
to be registered Registered Per Share* Offering Price* Fee**
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Common Stock,
par value
$.0001 per
share 2,174,377 $.835 $1,815,486.50 $550.15
===========================================================================================
</TABLE>
* Based on the closing bid price of the common stock on the NASDAQ Electronic
Bulletin Board on April 30, 1998, as to shares of common stock and based on the
exercise price of options for shares issuable upon the exercise of options.
** Calculated pursuant to Rule 457(h).
There is also registered hereunder such additional shares of Common Stock,
par value $.0001, as may be issuable based upon any adjustment of the conversion
price of the preferred shares held by the Selling Security Holders.
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.
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CROSS REFERENCE SHEET
UNDER ITEM 501 (c) OF REGULATION S-B
<TABLE>
<CAPTION>
ITEM AND NUMBER LOCATION IN PROSPECTUS
- --------------------------------------------------------------------------------------------------
<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 SALES 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.
PROSPECTUS
- ----------
VITAFORT INTERNATIONAL CORPORATION
COMMON STOCK
($.0001 PAR VALUE)
8,078,799 SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING STOCKHOLDERS
This Prospectus relates to 8,078,799 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.
(c) 177,500 shares issuable upon exercise of options granted to
consultants in February, April, and May, 1997
(d) 80,000 shares of Common Stock issued in private placement
transactions in the last half of 1993.
(e) 164,250 shares of Common Stock previously issued, and 20,000
shares of Common Stock issuable, if at all, upon the exercise of
options, issued in private placement transactions in January
1994.
(f) 1,399,583 shares of Common Stock previously issued, and 1,677,220
shares of Common Stock issuable, if at all, upon the exercise of
options, issued in private placement transactions between
September of 1995 and January of 1996.
(g) 110,000 shares of Common Stock previously issued, and 110,000
shares of Common Stock issuable, if at all, upon the exercise of
options, issued in private placement transactions in May of 1996.
(h) 481,244 shares of Common stock previously issued, and 395,750
shares of Common Stock issuable, if at all, upon the exercise of
options, issued in debt to equity conversion agreements between
September 1995 and January 1996.
(i) 956,456 shares of Common Stock issuable, if at all, upon the
exercise of stock purchase options issued to various vendors,
employees, lenders and consultants to the Company, and 17,857
shares issued as a result of the exercise of such options. See
"Selling Stockholders."
(j) 95,000 shares of stock issued to consultants during 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 April 30, 1998, the closing price bid for the Common
Stock on the OTC Electronic Bulletin Board was $1.03 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.
------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS MAY 7, 1998
1
<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-packers) 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 recently expanded its product line
to include salty snacks and began utilizing its new trade name AVENUE OF THE
STARS(TM) to sell products connected to motion picture licenses. The first
effort, connected with "The Lost World: Jurassic Park" was introduced into the
marketplace in November, 1977.
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
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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, and snack foods and licensed products sold
under its Avenue of the Stars 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 8,078,799 shares offered by the Selling Security Holders.
SHARES OUTSTANDING
Before the Offering After the Offering
6,953,850 (1) 12,302,917 (1)
(1) Includes 2,847,934 previously issued shares which are offered
hereby and shares issuable upon exercise of options and conversion of preferred
stock.
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 PROSPECTUS, 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.
The Company's independent public accountants included an explanatory
paragraph in their opinion as of December 31, 1997 and 1996 uncertainty
reflecting the Company's ability to continue to operate as a "going concern".
Should the Company be unsuccessful in raising capital, it may be forced to
curtail and/or suspend operations. See Note 2 of Notes to the Consolidated
Financial Statements for the year ended December 31, 1997 for additional
information. The Company received $6,750,000 in full and complete settlement
from the Keebler arbitration on July 5, 1997. See Note 16 of Notes to the
Consolidated
3
<PAGE>
Financial Statements for the year ended December 31, 1997 for an explanation of
the total Keebler transaction.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31
-----------
1997 1996
---- ----
<S> <C> <C>
Net revenue $ 1,995,317 $ 5,285,149
Costs and expenses:
Cost of sales 1,896,410 6,870,120
Selling, general and
administrative 2,672,946 2,721,321
Research and development 337,806 737,044
Marketing 1,239,460 3,029,480
Loss from operations (4,151,305) (8,072,816)
Other income (expenses) 15,210 (45,650)
Litigation recovery, net of costs 4,748,946 0
Net income (loss)
allocable to common shareholders $ 203,867 $(8,122,815)
Net income (loss) per share $.03 $(1.58)
Weighted average common shares 5,831,404 5,133,665
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C>
Working capital (deficit) $1,503,938 $(1,217,296)
Total assets 3,912,263 1,836,514
Total liabilities 1,634,266 2,330,343
Stockholders' equity (deficit) 2,277,997 (493,829)
</TABLE>
RISK FACTORS
THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE SPECULATIVE AND
INVOLVE A HIGH DEGREE OF RISK. THEREFORE, PROSPECTIVE PURCHASERS SHOULD
CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AFFECTING THE BUSINESS OF THE
COMPANY, PRIOR TO MAKING ANY INVESTMENT THEREIN, AS WELL AS OTHER MATTERS SET
FORTH ELSEWHERE IN THIS PROSPECTUS.
4
<PAGE>
LIMITED RELEVANT OPERATING HISTORY
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 1996 and 1997. The Company's business
did not achieve profitability during 1996 or 1997.
CONTINUING LOSSES
The Company incurred losses from operations of $8,072,816 in 1996, and
$4,151,305 in 1997. For the year ended December 31, 1997, the Company has
working capital of $1,503,938 and a net capital of $2,277,997. The Company is
slow and has been delinquent in paying its accounts payable and other
obligations. The Company's auditors have included an explanatory paragraph in
their report for the year ended December 31, 1997, indicating there is
substantial doubt regarding the Company's ability to continue as a going
concern. Although the Company generated a profit before income taxes in 1997,
the profit was derived from the arbitration in the Keebler litigation. 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 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 ("Lender"), all of the Company's assets are subject to a lien
which secures inventory and receivable financing. As of December 31, 1996 and
March 31, 1997, the Company was in violation of certain covenants in that it had
not maintained minimum tangible net worth of at least $1,500,000 and minimum
working capital of $1,000,000. Should the Lender exercise its rights under the
Agreement, it may request customer payments be made directly to it, sell the
finished goods inventory at auction, and seize and sell the fixed assets of the
Company until the obligation has been satisfied. As of December 31, 1997, the
Company was again in compliance with the covenants in the Loan and Security
Agreement.
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 may not be sufficient to permit it to develop or acquire new
products and complete the marketing thereof. The Company is, therefore, likely
to require additional financing to execute its business plan. However, no
assurance is given that the Company would be able to obtain additional financing
when needed, or that, if available, such financing would be on terms acceptable
to the Company. In any such financing, the interests of the Company's existing
security holders, including purchasers of shares offered hereby, could be
substantially diluted.
5
<PAGE>
WORKING CAPITAL SHORTAGES
During the latter portion of 1996 and the first two quarters of 1997, the
Company's operations were curtailed as a result of working capital shortages.
The Company has experienced working capital shortages from time to time in the
past. While the Company's working capital position was greatly improved by the
receipt of the proceeds of the Keebler arbitration, no assurance can be given
that working capital shortages will not occur in the future.
NEED FOR MARKET ACCEPTANCE AND DEPENDENCE ON A LIMITED NUMBER OF 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. In 1997, the Company derived approximately 62% of its revenues from the
sale of the Auburn Farms and Natures Warehouse lines of products and
approximately 38% 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. Certain
of the Company's products, particularly Fudgets and Caketts, had their market
acceptance materially adversely affected by the mold problem, principally
associated with Keebler.
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 could 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. Other key employees are
Jack Spencer, Chief Operating Officer and Chief Financial Officer, and John
Coppolino, Executive Vice President. 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 has key man life insurance on
Mr. Beychok and Mr. Spencer. 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.
6
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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 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. Should the Company be unable, financially, to incur
such costs, it could be limited in its ability to increase sales volume. Such
expenditures, if significant, could adversely affect the Company's business,
financial condition and results of operations.
PAST DISPUTES WITH CONTRACT MANUFACTURERS
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. The
Company does not, itself, own or operate any production facilities. 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. Past financial restraints have hampered
the Company's ability to respond to production manufacturers financial
requirements on a timely basis, resulting in significant problems receiving
production quantities timely. In addition, the Company has experienced quality
control problems at certain of its past contract manufacturers, particularly the
Keebler Company, which may continue to adversely effect its goodwill. The
Company was recently engaged in legal proceedings with former co-packers. During
the pendency of these proceedings, the Company's ability to procure products in
response to customer demand was materially impaired which resulted in a
substantial loss of goodwill. No assurance can be given that the Company will
not, in the future, have its results again adversely effected by disputes with
its contract manufacturers.
PENDENCY OF LEGAL PROCEEDINGS
As set forth under the heading "Legal Proceedings", the Company is engaged
in several legal proceedings. An adverse finding in certain of these proceedings
could have a material adverse effect on the Company. See Note 13 to the
financial statements ended December 31, 1997 for additional information
concerning all legal proceedings.
MANAGEMENT OF POSSIBLE GROWTH
The Company intends to expand its operations during 1998 and thereafter,
through the expansion of its sales and marketing capacity, the addition of new
products and the expansion and addition of distribution channels. There can be
no assurance that the Company will have sufficient financial and management
resources necessary to support the capital outlays and logistical difficulties
posed by such growth as they may occur.
COORDINATION OF PRODUCT SUPPLY AND DISTRIBUTION
If the Company is to be successful, it must match its production capacity
to the demand for its products in a timely manner and 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
7
<PAGE>
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.
LIMITED PRODUCT SHELF LIFE
Because the Company's fat-free products have a limited shelf life, the
Company cannot produce significant inventories for later sale. As a result,
manufacture, distribution and marketing of these products require a high degree
of coordination. Should the Company be unsuccessful in coordinating such
functions, the Company could be adversely affected by reduced sales volume.
NEED FOR IMPROVED OPERATING CONTROLS
To improve its results, the Company must continue to implement and improve
its financial, accounting and management information systems and to hire, train,
motivate and manage its employees. A failure to improve management controls
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.
LACK OF PATENTS, DEPENDENCE ON TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success is dependent to some degree on its ability to
preserve its trademarks and operate without infringing upon the proprietary
rights of third parties. The Company has registered various trademarks in the
United States. No assurance can be given as to the degree of protection the
trademarks will afford or the Company's ability to avoid violating or infringing
upon any trademarks issued to others. Defense and prosecution of trademark
objections 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 is seeking to determine
whether its various formulas and procedures are patentable in the United States.
No assurance can be given, however, that such steps will adequately protect the
Company. Should there be an adverse outcome resulting from a dispute, the
outcome could impede the Company's ability to continue to operate.
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. While the loss of any member of the technical
staff could impede development in the short term, the greater concern is the
lack of protection afforded the Company.
POSSIBLE IMPACT OF 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
8
<PAGE>
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. Were the Company to be found to have violated any regulations
applicable to it, such finding could materially adversely affect its ongoing
operations And curtail its business significantly.
EFFECT OF PENNY STOCK RULES
The Common Stock of the Company currently trades on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. (the "NASD").
Under the Securities Enforcement and Penny Stock Reform Act of 1990, the Common
Stock is defined as a "penny stock" because its market price is below $5.00.
However, it does meet the requirements of one of the exemptions from such
definition in that its net tangible assets exceed $2,000,000. Additional
disclosures are required related to the market for penny stocks and for broker-
dealers to effect trades in a penny stock. In the absence of the Company's
obtaining NASDAQ listing, the Common Stock and the liquidity of an investment in
the Common Stock will be impaired. The Common Stock could not be included in
NASDAQ unless the price of the Common Stock came to exceed $3.00 per.
Accordingly, no assurance can be given that the Common Stock will be included in
NASDAQ in the foreseeable future and the Common Stock. If the net tangible
assets of the Company were to drop below $2,000,000, the Company would again
become a "penny stock." Furthermore, even if the Common Stock were to be
included in NASDAQ, no assurance can be given that the Company will be able to
comply with the criteria for continued listing which include, among other
things, stockholder's equity in excess of $1,000,000 and assets in excess of
$2,000,000. Consequently, the effect of these rules may restrict the ability of
broker-dealers to sell the Common Stock and may affect the ability of holders of
Common Stock to sell their shares in the secondary market.
POSSIBLE ILLIQUIDITY OF SHARES
The market for the Company's Common Stock on the OTC Bulletin Board has at
times been limited and sporadic. 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. The limitations of the trading
market for the Company's Common Stock and of the OTC Bulletin Board may
materially adversely affect the liquidity of the market for the Company's
Common Stock.
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.
9
<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 January 14, 1998; (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
Sovereign Partners, L. P. 0 (1) 3,086,210 (1) 0 0
Dominion Capital Fund, Ltd. 0 (1) 1,284,851 (1) 0 0
NET Financial International, Ltd. 127,500 (2) 127,500 (2) 0 0
Kurt Martin Consulting 125,000 (3) 125,000 (3) 0 0
</TABLE>
10
<PAGE>
<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>
Popa, Radu 2,000 (4) 2,000 (4) 0 0
Ponte, Antonio RAIFINANZ A.G. 0 (4) 2,000 (4) 0 0
Fraser, Bill 0 (4) 6,091 (4) 0 0
Ator, Bryon 0 (4) 3,125 (4) 0 0
Nicolaou, Chris 0 (4) 2,500 (4) 0 0
Schumar, Christy 0 (4) 1,500 (4) 0 0
Cohig & Associates 0 (4) 8,121 (4) 0 0
Credit des Alpes 0 (4) 8,333 (4) 0 0
Keefover, Cynthia 0 (4) 2,606 (4) 0 0
Duquette, Dan 0 (4) 14,415 (4) 0 0
Ukkstead, Daniel 0 (4) 1,250 (4) 0 0
Carson, D'Anne 0 (4) 250 (4) 0 0
Fink, David H., Trustee David H. Fink 0 (4) 25,000 (4) 0 0
</TABLE>
11
<PAGE>
<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>
Rice, David R. 0 (4) 5,000 (4) 0 0
Patterson, Dennis 0 (4) 10,000 (4) 0 0
Lenauer, Don 0 (4) 12,500 (4) 0 0
Wohl, Don 0 (4) 20,000 (4) 0 0
Johnson, Donald 0 (4) 6,500 (4) 0 0
Dornbush Mensch Mandelstam & 0 (4) 15,000 (4) 0 0
E&M RP Trust 0 (4) 4,500 (4) 0 0
Wallick, Ed 0 (4) 250 (4) 0 0
Hankins, Evelyn L.
IRA, First Trust Corp. 0 (4) 10,000 (4) 0 0
Food Integrated Technology, Inc. 0 (4) 4,500 (4) 0 0
Kassner, Fred 0 (4) 2,250 (4) 0 0
Power, Gary L. 0 (4) 10,000 (4) 0 0
McCuster, Glenn A. 0 (4) 18,750 (4) 0 0
Vink, Jack 0 (4) 1,827 (4) 0 0
Kuijper, Jacob 0 (4) 2,030 (4) 0 0
Pahlavan, Jalil 0 (4) 33,333 (4) 0 0
Sanders, James S. 0 (4) 21,250 (4) 0 0
JDK & Associates 0 (4) 100,000 (4) 0 0
Day, Jeanette 0 (4) 5,000 (4) 0 0
Catsimitidis, John 0 (4) 4,500 (4) 0 0
Berg, Ken 0 (4) 13,750 (4) 0 0
Stuart, Kimberly 0 (4) 250 (4) 0 0
Martin, Kurt 0 (4) 30,000 (4) 0 0
Delvechia, Linda 0 (4) 1,500 (4) 0 0
Seeds, Loyal & Leta 0 (4) 5,000 (4) 0 0
Pavon, Marianne 0 (4) 1,000 (4) 0 0
Okamoto, Merrick 0 (4) 12,250 (4) 0 0
Rasmovich, Michael & Laura Trustees 0 (4) 3,360 (4) 0 0
Knowles, Michael A. 0 (4) 15,000 (4) 0 0
Ricci, Paola 0 (4) 0 (4) 0 0
Swim, Paul 0 (4) 5,000 (4) 0 0
Bi-Coastal Corporation 0 (4) 17,857 (4) 0 0
Blowitz, Peter 0 (4) 14,866 (4) 0 0
Furla, Peter 0 (4) 5,000 (4) 0 0
Leahy, Peter J. IRA 0 (4) 10,000 (4) 0 0
Sasaki, Randy 0 (4) 4,998 (4) 0 0
Kaplan, Richard 0 (4) 44,953 (4) 0 0
Faust, Robert & Judy 0 (4) 24,800 (4) 0 0
Brown, Robert 0 (4) 7,467 (4) 0 0
Bier, S.F. & Company 0 (4) 0 (4) 0 0
Liolios, Scott 0 (4) 4,848 (4) 0 0
Merrell, Scott P. 0 (4) 5,000 (4) 0 0
Rice Sandberg,
Soni M & Jeffrey D. Rice, 0 (4) 5,000 (4) 0 0
Furla, Spero 0 (4) 5,000 (4) 0 0
Reid, Steven B. & Janet M. 0 (4) 12,500 (4) 0 0
Lewis, Terry 0 (4) 22,500 (4) 0 0
The Cook Revocable Living Trust 0 (4) 5,000 (4) 0 0
Galanis, Themis G. 0 (4) 5,000 (4) 0 0
Farmer, Thomas 0 (4) 6,250 (4) 0 0
Temple, Tim 0 (4) 5,250 (4) 0 0
Poindexter, Todd 0 (4) 500 (4) 0 0
</TABLE>
12
<PAGE>
<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>
Toluca Pacific Securities 0 (4) 7,333 (4) 0 0
Gribben, Trent 0 (4) 1,950 (4) 0 0
Peters, Troy 0 (4) 2,233 (4) 0 0
ATCOLP Investment Partners, LP 0 (4) 164,250 (4) 0 0
Lack, Walter J. 0 (4) 6,250 (4) 0 0
Levi, Wayne J. 0 (4) 7,467 (4) 0 0
West America Securities Corporation 0 (4) 3,945 (4) 0 0
Westside Casting Studios, Inc. 0 (4) 5,000 (4) 0 0
Henry, William O.E. 0 (4) 2,250 (4) 0 0
Vuletic, Zarko & Irma 0 (4) 5,000 (4) 0 0
Arrow Marketing, Inc. 0 (4) 18,750 (4) 0 0
Cooper, Scott 0 (4) 10,850 (4) 0 0
Schonfeld, Steve 0 (4) 2,500 (4) 0 0
Campbell, Malcolm 0 (4) 2,250 (4) 0 0
Pollon, Joff 0 (4) 12,500 (4) 0 0
Luke, Robert 0 (4) 37,500 (4) 0 0
Corporate Relations Group, Inc. 0 (4) 0 (4) 0 0
Natural Specialties 0 (4) 5,500 (4) 0 0
George, Robert & Associates, Inc. 0 (4) 0 (4) 0 0
Marathon Marketing 0 (4) 1,500 (4) 0 0
National Brokers/Phoenix 0 (4) 750 (4) 0 0
Michael Theodore Brokerage 0 (4) 300 (4) 0 0
Manna Brokerage 0 (4) 50 (4) 0 0
Newmarket Sales 0 (4) 25 (4) 0 0
Mitzvah Marketing 0 (4) 13 (4) 0 0
Snell, Albert 0 (4) 54,167 (4) 0 0
Damaske, Charles R. 0 (4) 20,000 (4) 0 0
</TABLE>
13
<PAGE>
<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>
Hunt, Cornelius 0 (4) 4,000 (4) 0 0
Schrager, David 0 (4) 2,500 (4) 0 0
Bartlett, Gary 0 (4) 6,125 (4) 0 0
McLain, Gerard J. 0 (4) 5,000 (4) 0 0
La Jolla Securities Corp. 0 (4) 11,005 (4) 0 0
Washington, Larry D., Jr. 0 (4) 20,000 (4) 0 0
Graham, Robert B. 0 (4) 50,000 (4) 0 0
Zuffrey, Roger 0 (4) 12,500 (4) 0 0
Guptill, William K. 0 (4) 2,500 (4) 0 0
Courson, Robert 30,000 30,000 0 0
Harpel, James 50,000 50,000 0 0
Nesicolacci, Tracey 120,000 120,000 0 0
Woods, Myung 25,000 25,000 0 0
Michel's Bakery 70,000 70,000 0 0
</TABLE>
(1) Issuable on conversion of preferred stock and stock options which are not
exercisable until August 10, 1998. 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 $1.00 per
share.
(3) Issuable upon exercise of options with an exercise price of $1.00 per
share.
(4) These amounts include the shares underlying warrants and options not yet
exercised.
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 by such broker or
dealer for its account pursuant to this Prospectus; (iii) ordinary brokerage
transactions and
14
<PAGE>
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. At that time, the Company fell below the net asset requirement
for continued listing and was subsequently disqualified. 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:
15
<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 $ 3.125 $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 $14.063 $ 5.938 $0.050 $0.010 $1.625 $0.250
2nd Quarter 1996 $ 7.188 $ 4.688 $0.010 $0.010 $1.000 $1.000
3rd Quarter 1996 $ 6.250 $ 2.813 $0.010 $0.010 $1.000 $0.500
4th Quarter 1996 $ 4.063 $ 0.875 $0.010 $0.010 $0.500 $0.500
1st Quarter 1997 $ 2.297 $ 0.875 $0.010 $0.010 $0.500 $0.500
2nd Quarter 1997 $ 1.625 $ 0.625 $0.010 $0.010 $0.500 $0.500
3rd Quarter 1997 $ 1.844 $ 0.813 $0.010 $0.010 $0.500 $0.500
4th Quarter 1997 $ 1.750 $ 0.750 $0.010 * $0.500 $0.500
1st Quarter 1998 $ 1.468 $ 0.687 $ 0.010 * $0.500 $0.500
</TABLE>
* Less than $ 0.010
The above amounts have been retroactively adjusted for a 1 for 20 reverse stock
split, which occurred on October 4, 1996.
On April 30, 1998, the closing bid prices for the common stock, as reported
by the NASDAQ Electronic Bulletin Board, was $1.03. The Company has been advised
that there are no current quotations available for the Warrants or Units.
At the close of business on March 17, 1998, 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 1997. Cumulative unpaid dividends on the Series B Convertible Preferred
Stock as of December 31, 1997 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
16
<PAGE>
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, 1996 and 1997 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.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------
1997 1996
---- ----
<S> <C> <C>
Net sales $1,995,317 $ 5,285,149
Gross profit (loss) 98,907 (1,584,971)
Net income (loss) 473,031 (8,122,815)
Net income (loss) allocable to common $ 203,867 $(8,122,815)
shareholders
Net income (loss) per share $ .03 $ (1.58)
Weighted average common shares 5,831,404 5,133,665
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Working capital (deficit) $1,503,938 $(1,217,296)
Total assets 3,912,263 1,836,514
Total liabilities 1,634,266 2,330,343
Stockholder's equity (deficit) 2,277,997 (493,829)
</TABLE>
17
<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 PROSPECTUS, 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, 1997 AND 1996
- --------------------------------------
The 1997 year can best be characterized as one of regrouping and re-
energizing. The first half of the year was spent in attempting to salvage
deteriorating customer and broker relationships resulting from product returns
due to mold, the inability to ship complete orders as a result of liquidity
problems created, in no small way, by the mold problem, and the broker
dissatisfaction and their lack of commissions from a lack of paid sales. In
addition, management focus was clearly on the preparation for the arbitration
involving Keebler. That effort was rewarded when the arbitration finally
resulted in the Company receiving $6,750,000 in cash in July 1997. See Note 16
to the Consolidated Financial Statements for a detailed explanation of the costs
associated with the recovery.
The second half of 1997 was devoted to repairing the damages done to
the Company's customers and brokers. These efforts involved detailed
reconciliation of customer accounts, discussions by senior management with the
merchandising managers of these customers to resolve any major disputes, and the
final settlement of a business relationship, with at least an understanding
going forward of how future transactions in general would be handled.
In product development, the Company began, after June 1997, to focus
on products to be introduced in the last quarter of 1997 and in 1998. The first
product was a reformulation of the existing toaster pastry products marketed
under the name Toast'N Jammers, plus the addition of two new frosted flavors
named Apple Cobbler and Cinnamon Toast. The new flavors increased the line to a
total of eight: frosted and unfrosted strawberry, cherry and blueberry, plus
apple cobbler and cinnamon toast. The new formulation was introduced after
Thanksgiving and the customer response to the flavors has been excellent.
Additionally, the Company began the reformulation of its chocolate truffles
marketed under the name Juliette's Private Collection. The reformulation was
completed in the last quarter of 1997 and the first two truckloads of product
were shipped around Christmas. Other products under development are scheduled
for introduction in the first half of 1998.
The Company used the remainder of 1997, after the Keebler award, to
improve its vendor relationships by negotiating multiple monthly payment
schedules for some of the Company's major creditors. This process, which
occurred over a three month period, resulted in deferred payment schedules being
negotiated for over $650,000 of the Company's liabilities.
NET SALES
The liquidity issues which created inventory availability problems and
the continued fallout from the mold significantly reduced sales in 1997 compared
to 1996. In 1997 sales were $1,995,317 compared to $5,285,149 in 1996, a
reduction of $3,289,832 or 62.2% of 1996 sales. Fudgets and Caketts, marketed
under the name Vitafort and the products associated with the mold, represented
$3,751,858 of 1996 sales or 71.0% of the total, while in 1997 the products
represented $754,408 or 37.8% of total 1997 sales. The decline of $2,997,450
for these products represents almost the entire reduction between 1996 and 1997.
In
18
<PAGE>
addition, sales of Auburn Farms brands products decreased by $300,624 due to
the problems discussed above which resulted in the Company not being able to
ship complete and timely orders.
GROSS PROFIT
Gross profit in 1997 was $98,907 or 5.0% of sales, compared to a gross
loss of $1,584,971 in 1996, an increase of $1,683,878 from 1996 to 1997. The
improvement of gross profit in 1997 over 1996 is due, in large part, to products
returned in 1996, sales of products in 1996 at less than list price, and
product that was destroyed in 1996 because it was not saleable. The product
returns due to mold continued to be a source of margin erosion. In addition,
the lack of customer acceptance of the Company's Fudgets and Caketts manifested
itself in reduced customer sales of other products. The Company also began
experiencing serious customer complaints resulting in chargebacks of Auburn
Farms and Nature's Warehouse products, which in some cases were shipped to the
customer prior to the acquisition of Auburn Farms brands and reformulations by
the Company. Finally, the reduced volume of sales translated to increased
inventory levels since some of the co-packers have minimum production
quantities. The increase in inventory levels created further margin erosion as
the Company was then forced to sell the products at prices which, for the most
part, were at or slightly above inventory cost. For the Company to achieve
higher gross margins, it must increase its sales volume to eliminate selling
inventory with short expiration periods, which requires selling to liquidators
at less than normal list price.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
In 1997, product development expenses were $337,806 compared to
$737,044 for the same period in 1996, a reduction of $399,238 or 54%. The
decrease is due in part to the reduced emphasis in the first half of 1997
because of the financial difficulties of the Company. Also, the Company made
the decision to work in conjunction with its co-packers in developing new
products or enhancing existing products. These joint efforts resulted in
reduced cost to the Company plus the added benefit of having the co-packer who
will be the ultimate manufacturer, also be an integral part of the development
process and thus "take ownership" of the program along with the Company. The
reduction in staff, $102,790, the closing of the office in Petaluma, California,
$185,755, and the reduction in travel, $107,920, accounted for approximately
$396,000 of the total reduction between 1997 and 1996.
SALES AND MARKETING
The lack of sales is reflected in the reduction in sales and marketing
expenses from $3,029,480 in 1996 down to $1,239,460 in 1997, a reduction of
$1,790,020 or 59.1%. The reduction in promotion, advertising, and product
introduction fees of $1,436,873 between 1996 and 1997 are due in large part to
the Company's decision to defer new product development and related expenditures
and to use advertising and promotion dollars only where there is likely to be
measurable value. The other cost reductions in staffing and related expenses,
$69,255, and travel, $207,626, are primarily the result of the problems in the
first half of the year associated with the liquidity issue and the continued
customer complaints.
GENERAL AND ADMINISTRATIVE
The effort expended in the Keebler arbitration and in improving the
systems, procedures, and administrative functions is evident by the fact that
the general and administrative expenses were $2,672,946 in 1997 and $2,721,321
in 1996, a reduction of $48,375. The emphasis on Keebler and the settlement of
the other various legal cases reduced overall legal expenses by $28,964 after
taking into account the payment by Keebler of $767,000 against the legal fees
and costs as part of the overall settlement. In addition, the liquidity
problems in the first part of 1997 and the decision by the Company not to
replace certain administrative staff positions resulted in a reduction in
payroll and related expenses, including consulting, of $43,611 in 1997 compared
to 1996. While this reduction is consistent with the Company's
19
<PAGE>
effort to reduce expenses, as the business level increases in the future, such
continued cost saving measures will be difficult to maintain.
INCOME TAXES
As of December 31, 1997, the Company had unused Federal and California
net operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, 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 carryforwards expire in
various amounts through the year 2012. 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 2002.
Net deferred tax assets of approximately $7,605,000 resulting from net
operating losses, tax credits and other temporary differences have been offset
by a valuation allowance since management cannot determine whether it is more
likely than not such assets will be realized.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
INTEREST INCOME AND EXPENSE
Interest income was $78,070 in 1997 and $49,319 in 1996. The loan
proceeds from the Keebler arbitration have been invested in short term
government securities which do not carry high interest rates, but are almost
risk free.
Interest expense was $214,690 in 1997 compared to $50,509 in 1996.
The increase is due primarily to the lending arrangement with Coast Business
Credit which has a $15,000 per month minimum interest clause in the contract.
In 1997, this amount represented $180,000 of the total interest expense.
20
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- ------------
<S> <C> <C>
Net Cash From (Used In) Operations $1,790,893 ($5,523,462)
Net Cash Used in Investing Activities (214,095) (172,896)
Net Cash Provided By Financing Activities 433,371 4,568,819
Working Capital (Deficit) 1,503,938 (1,217,296)
</TABLE>
Although the cash position has improved significantly due to the
arbitration settlement, the Company is still under pressure to maintain and
improve its financial condition and has yet to generate profitable operations.
The Company is continuing to repair the relationships with its brokers
and customers (distributors), but the effort involved is both time consuming on
management's part and costly in that the effort detracts time which could
otherwise be spent procuring orders. Although the vendor relationships are now
stable, the Company may again jeopardize this area should the liquidity problem
again become extreme.
The Company has suffered recurring losses from operations as of
December 31, 1997. Although the Company has raised additional capital after
year-end 1997 (see Note 15 to the Consolidated Financial Statements), it has not
generated sufficient revenue-producing activity to sustain its operations. 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 Consolidated
Financial Statements for additional information. The Company is attempting to
raise additional capital to meet future working capital requirements, 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.
The Company is reducing its cost of sales by centralizing the
warehousing of its products in a single location and negotiating lower rates
with existing manufacturers or by selecting another competent less expensive
producer. In addition, the Company increased prices on the majority of its
products effective August 1, 1997 and changed its terms of sale to F.O.B. the
Company's warehouse. The Company also eliminated the cash discount for prompt
payment since most customers were taking the discount beyond the terms. The
Company has also introduced reformulated products at the end of 1997 and plans
to introduce new products in 1998. These steps, coupled with improvements in
subcontract manufacturing quality control and quality assurance and monitoring
improvements in Company internal control and communications with respect to
product returns and deductions, should improve the Company's prospects to
achieve profitability.
As of December 31, 1997, the Company had unused Federal and California
net operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, 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 carryforwards expire in
various amounts through the year 2012. 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 2002.
21
<PAGE>
Net deferred tax assets of approximately $7,605,000 as of December 31,
1997 resulting from net operating losses, tax credits and other temporary
differences have been offset by a valuation allowance since management cannot
determine whether it is more likely than not such assets will be realized.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
CREDIT FACILITY
In August 1996, the Company entered into a revolving credit facility
with Coast Business Credit, 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. The amount of
inventory advances under the facility cannot exceed $500,000. The initial term
of the facility ends August 1998, with automatic renewals thereafter for one
year periods. 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 are currently $15,000 per month.
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
help meet its current working capital requirements. The amount due, under this
credit facility, was $440,022 on December 31, 1996, and $60,757 on December 31,
1997.
As of December 31, 1996 and subsequently, the Company was in violation
of certain covenants in that it had not maintained minimum tangible net worth of
at least $1,500,000 and minimum working capital of $1,000,000. If the Lender
had exercised its rights under the Agreement, it could have requested customer
payments be made directly to it, sold the finished goods inventory at auction,
and seized and sold the fixed assets of the Company until the obligation had
been satisfied. The Company classified the entire loan as a current liability as
of December 31, 1996. On September 30, 1997, due to receipt of the award from
the Keebler arbitration, the Company was no longer in violation of the loan
covenants. As of December 31, 1997, the Company was not in violation of any
covenants of the credit facility. No assurance is given that the Company will
not be in violation of any covenants in the future.
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.
In the future, the Company must 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
22
<PAGE>
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.
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on
its operations. However, substantial increases in material costs could
adversely affect the operations of the Company for future periods.
YEAR 2000
The Company's accounting software currently does not utilize a four
digit year field; however, the Company has been assured by the software
manufacturer and independent consultants that all necessary modifications for
the year 2000 have been or will be made and tested timely. The Company does not
expect the cost of these modifications will have a material effect on its
financial position or results of operations.
RECENT NEW ACCOUNTING STANDARDS
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements with fiscal years ending after December 15,
1997. The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15, which has
been superceded by SFAS No. 128. The Company adopted SFAS No. 129 on December
15, 1997 and it did not have any effect on its financial position or results of
operations.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," ("SFAS 130") issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The Company does not expect adoption of SFAS 130
to have any effect on its financial position or results of operations.
23
<PAGE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131") issued by
the FASB is effective for financial statements with fiscal years ending after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any effect on its financial position or results of
operations; however, disclosures with respect to the aforementioned items may be
increased.
24
<PAGE>
THE BUSINESS OF THE COMPANY
GENERAL
Vitafort International Corporation (the "Company" or "Vitafort" or
"Registrant") 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 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.
25
<PAGE>
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 products produced by
Keebler (Caketts) 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.
During the first half of 1997, the Company continued to suffer
declining sales resulting from returned product, loss of distributor goodwill,
and the lack of adequate capital to resolve both broker financial issues and co-
packer payment demands. This liquidity issue was the primary cause of the lack
of new product effort, the maintenance of harmonious broker relations which
could have led to increased sales, and the Company's inability to comply with
customer requests that orders be shipped complete and on time.
The Keebler arbitration award announcement in June 1997 and the
receipt of proceeds in July 1997 allowed the Registrant to begin reestablishing
mutually acceptable payment terms with its suppliers, negotiating settlements of
chargebacks from its customers as a vehicle to reestablish channels of
distribution, and planning the product introduction schedules for the remainder
of 1997 and 1998. See Note 16 to the Consolidated Financial Statements.
During the second half of 1997, the Company focused its sales and
marketing efforts on reestablishing relationships with its distributors and
brokers to address past commission issues, chargebacks from retailer issues, and
the Company's ability to currently ship product on a timely basis.
While the Company has continued to ship Fudgets and Caketts, it has
done so in reduced volume due primarily to customer dissatisfaction with the
brand name based on past performance, not based on current product or
availability. However, the Registrant is going to remove the names from the
products in the near future to avoid future customer illwill.
The Company attributes its poor 1996 and 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. 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 in 1997 and beyond. In
addition, the Company will require additional capital to carry out the marketing
and sales programs scheduled for 1998 due to the current lack of operating
profits. Should the Company begin to generate operating profits, the future
capital requirements will be reduced, but there can be no assurance that the
Company will be able to do so.
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.
26
<PAGE>
The Company introduced a new brand called Avenue of the Stars in late
1997 for snack foods and confectionery products. The purpose was to use motion
picture studios logos and trademarks for packaging differentiation of 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. During 1997, 18,501 of deferred payments
were made under the FPA and total sales of products bearing the acquired
trademarks were $1,036,851.
The Company is using co-packers to produce products bearing the
acquired trademarks.
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<PAGE>
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. However, there
can be no assurance that co-packers will meet their obligations.
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.
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 and the Company's capital resources allow, 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 distributors.
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
issue, has severely hampered the Company's ability to increase the distribution
of its products through the increase in product introduction costs. The Company
does not have formal agreements with its distributors which are the primary
customers of the Company, but delivers products under normal industry terms of
sales.
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
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<PAGE>
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.
INTELLECTUAL PROPERTY RIGHT PROTECTION AND TRADEMARKS
The Company believes that its trademarks do afford it some degree of
protection from competition and do allow it to differentiate its products from
those of its competitors through brand loyalty and identity. There are however,
no assurances that such trademarks may offer significant protection from
competitors or that the Company would be successful should litigation to protect
such trademarks become necessary. 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.
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.
FUDGETS This was one of the key food products
with distribution in a number of
supermarkets throughout the U.S.
Quality problems encountered in 1996
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 Trade name acquired in May, 1996 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.
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.
AVENUE OF THE STARS A new mark used for products which
shall be part of motion picture
licensing agreements.
JULIETTE'S PRIVATE A mark established for a line of low
COLLECTION fat chocolate products first shipped in
December 1997.
</TABLE>
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<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 interest in "ownership" of a
successful, high quality product. This strategy inherently builds a strong
total quality end result.
The Company spent $337,806 and $737,044 on research and development in
1997 and 1996, respectively. The Company intends to create new products using
the above strategy and to launch products in the marketplace in 1998 and beyond.
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.
<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 stores offered in the
cookie
section;
however the
co-packer mold
problem has
severely
curtailed its
past
competitive
advantage.
- --------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Juliette's Private Collection Main grocery There is no Appeal to
Chocolate Truffles 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 Snackwell's Fudgets may be
cookie section Brownies the only fat
Pepperidge free frosted
Farms brownie line
Brownies offered in the
Greenfield's cookie
Brownies section;
Frookies however the
Brownies 1996
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 in taste
stores. Toaster and all
Pastries natural
ingredients.
- --------------------------------------------------------------------------------
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 toward
the end of
1998.
- -------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL REGULATION AND SEASONALITY
Management believes that the costs associated with compliance with
environmental regulations do not at this time impose a significant burden upon
the Company's operations. Any change in that burden, however, could adversely
impact the Company. Management does not believe that the Company's business is
seasonal to any significant extent.
EMPLOYEES
As of March 16, 1998, the Company had 11 employees of whom 3 were
executive officers, 2 were engaged in sales and marketing, and 6 were clerical
and administrative.
DESCRIPTION OF PROPERTY
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 which expired August 31, 1997. The
base rent under said lease was $69,000 for the first year of the term; $72,000
for the
31
<PAGE>
second year of the term; and, $75,000 for the third year of the term. The
Company is now leasing the same space on a month-to-month basis at a rate of
$6,250 per month.
LEGAL PROCEEDINGS
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
companies' officers. Included among the defendants were 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 's losses on the Company's securities might be as
little as $15,000.
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 in the United States District Court of the
Eastern District of California alleging Lanham Act violations, misappropriation
of trade secrets, unfair competition and related claims. The defendants have
filed counterclaims against the Company, Auburn Farms, and Mark Beychok alleging
various tort and contract claims. The litigation is in the discovery stage with
trial scheduled to begin September 14, 1998.
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 dismissed the complaint against Mark Beychok
without leave to amend. Mr. Ellis recently filed an amended complaint against
the Company. The Company is defending the action vigorously and trial is
scheduled for March 31, 1998.
The Company filed a counter-claim against Ellis charging violations of
Section 16(b) of the Securities Exchange Act of 1934 (short swing profits).
Ellis sold stock in violation of that section and, therefore, the profits,
estimated at $20,000, belong to the Company. In March 1998, the court ruled in
favor of the Company in this matter and awarded it $21,260.
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 41 President, CEO and a Director
Donald Wohl 62 Director
Paul G. Cowen 64 Director
Benjamin Tabatchnick 45 Director
</TABLE>
32
<PAGE>
<TABLE>
<S> <C> <C>
Jack B. Spencer 53 Chief Operating Officer, Chief Financial
Officer
John Coppolino 37 Executive Vice President
</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. Mr. Beychok graduated in 1979 from the Haas Business
School at the University of California (Berkeley).
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 G. COWEN was elected a director in January 1998. Mr. Cowen was
-------------
the founder of Paul Cowen Associates in 1984, an executive recruitment firm.
Prior to that, Mr. Cowen was in senior marketing and sales positions at Xerox
and Vivitar. Mr. Cowen has a BA from Ohio University and an MS from Indiana
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 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.
JACK B. 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 since 1990. Mr. Spencer has a BA in Economics from
DePauw University (Indiana) and an MBA from Washington University (Missouri).
JOHN COPPOLINO began as Director of Sales in 1994 and became Executive
--------------
Vice President during September 1997. Mr. Coppolino was a vice president for LC
Marketing from 1993 to 1994. 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.
33
<PAGE>
EXECUTIVE COMPENSATION
On December 1, 1993, the Company entered into a three-year employment
agreement with Mark Beychok which provided for an annual base salary of
$150,000, the grant of an option to purchase 100,000 shares of common stock at
$5.00 per share (as adjusted for the reverse stock split effected in 1996), and
$1,000,000 of life insurance, 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, Mr. Beychok agreed to convert his
accrued salary 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 September 1997,
Mr. Beychok entered into a new employment agreement ("Agreement") with the
Company for three years. Under the Agreement, Mr. Beychok receives an annual
base salary of $150,000 and was granted options for 450,000 shares of stock at
an exercise price of $0.87 per share. Such options vest 75,000 each on
September 3, 1997, March 3, 1998, September 3, 1998, March 3, 1999, September 3,
1999, and March 3, 2000. In May 1997 the price of all options other than those
related to the private placement were repriced to $0.91. In September 1997 Mr.
Beychok was given a successful litigation reward of $51,535 plus 100,000 shares
of common stock at fair market value of $1.00.
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, with 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 May 1997 the Board of Directors
reduced the option price of all unlapsed options to $0.91 and removed the
vesting requirement. In September 1997, Mr. Coppolino entered into a new
employment agreement ("Agreement") with the Company for two years. Under the
Agreement, Mr. Coppolino receives an annual base salary of $120,000, and was
granted options for 300,000 shares of stock at an exercise price of $0.87 per
share. Such options vest 75,000 each on September 3, 1997, March 3, 1998,
September 3, 1998, and March 3, 1999. In September 1997, Mr. Coppolino was
given a successful litigation reward of $25,000, forgiveness of debt of $25,000,
plus 25,000 shares of common stock at $1.00, being the fair market value at the
date of the award.
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 and 109,890 shares on June 16, 1998, and 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 annual
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, Spencer and Coppolino (the
"named individuals") during 1997, 1996 and 1995:
34
<PAGE>
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
PRINCIPAL POSITION ALL OTHER ANNUAL
& NAME YEAR SALARY OTHER COMPENSATION
<S> <C> <C> <C> <C>
CEO / President
Mark Beychok 1997 $150,000 $ 12,500 (1) $102,467 (2)
1996 137,500 12,500 (3) 8,864 (4)
1995 40,000 110,000 (5) 14,212 (6)
COO / CFO
Jack B. Spencer June 1997 $ 67,708 $ 0 $ 68,875 (7)
1996 - - -
1995 - - -
Executive Vice President
John Coppolino 1997 $120,000 $ 20,750 (8) $ 59,000 (9)
1996 87,500 14,500 (10) 9,000 (11)
1995 - - -
</TABLE>
(1) A portion of Mr. Beychok's salary was deferred in 1996 and paid in 1997.
(2) Comprised of $9,584 car allowance, accrued vacation of $41,348, plus
$51,535 as a successful litigation reward.
(3) A portion of Mr. Beychok's salary was deferred in 1996 and paid in 1997.
(4) Comprised of $8,204 car allowance and $660 in medical insurance benefits.
(5) A portion of Mr. Beychok's salary was deferred during 1994 and applied as
an offset against a note payable in 1995. A portion of Mr. Beychok's salary
was deferred in 1995 and the majority converted to common stock and options
during 1995 and early 1996.
(6) Comprised of $10,912 car allowance and $3,300 n medical insurance benefits.
(7) Comprised of $3,250 car allowance, plus 75,000 shares of common stock for
joining the Company at $0.875 per share.
(8) A portion of Mr. Coppolino's salary, $15,500, and car allowance, $5,250,
were deferred in 1996 and paid in 1997.
(9) Comprised of $9,000 car allowance and $50,000 as a successful litigation
reward.
(10) Mr. Coppolino deferred a portion of his salary and exercised stock options
in 1996.
(11) 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 the 1995 Stock Option Plan (the "1995
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 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".
35
<PAGE>
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). The exercise price of these options was
reduced to $0.91 in May 1997 (the current price of these options).
The following chart sets forth the options granted to directors and
officers in 1997:
<TABLE>
<CAPTION>
Potential realized
Percent of value at assumed
Number of total annual rate of
securities options/SARs Exercise appreciation for
underlying granted to of base option term
options/SARs employees in price Expiration
Name granted fiscal year ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Beychok, CEO 100,000 2.8% $0.875 12/31/02 111,675 140,920
Mark Beychok, CEO 100,000 2.8% $ 0.91 06/16/02 116,142 146,556
Mark Beychok, CEO 450,000 12.8% $ 0.87 09/19/02 499,664 630,515
Jack B. Spencer,
COO/CFO 300,000 8.5% $ 0.91 06/13/02 348,425 439,669
John Coppolino 100,000 2.8% $ 0.91 06/16/02 116,142 146,556
John Coppolino 300,000 8.5% $ 0.87 09/19/02 333,109 420,343
Donald Wohl 100,000 2.8% $0.875 12/31/02 111,675 140,920
Benjamin Tabatchnick 50,000 1.4% $0.875 02/17/02 55,837 70,460
</TABLE>
The following chart sets forth certain information with respect to
options/warrants outstanding at December 31, 1997 to the
named individuals:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options/SARs at Options/SAR's at
Name Shares Acquired Value FY-End Exercisable/ FY-End Exercisable/
on Exercise Realized Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Beychok -0- $-0- 1,088,031/300,000 $ -0- / $ -0-
- ----------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jack B. Spencer -0- $-0- 109,890/190,110 $ -0- / $ -0-
John Coppolino -0- $-0- 421,500/150,000 $ -0- / $ -0-
Donald Wohl -0- $-0- $ -0- / $ -0-
Benjamin Tabatchnick -0- $-0- $ -0- / $ -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 March 20, 1998. 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) 1,188,031 (2) 14.1 %
Donald Wohl (1) 250,000 (3) 3.0 %
Paul G. Cowen (1) 50,000 (4) .6 %
Benjamin Tabatchnick (1) 150,000 (4) 1.8 %
John Coppolino (1) 450,087 (5) 5.3 %
Jack Spencer (1) 109,890 (6) 1.3 %
ALL DIRECTORS AND OFFICERS AS A GROUP.
(6 persons) (2)(3)(4)(5) and (6) 2,198,008 26.1 %
</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) 3,703 shares underlying a currently exercisable option with
an exercise price of $4.50 per share which expires January 7, 1998; (vi)
3,703 shares underlying a currently exercisable option with an exercise
price of $6.00 per share which expires July 7, 1998; (vii) 403,125 shares
underlying the currently exercisable portion of a stock option, expiring
December 16, 2000, which has an exercise price of $0.91 per share; (viii)
100,000 shares underlying a currently exercisable option with an exercise
price of $0.91 which expires on June 16, 2002; (ix) 100,000 shares
underlying a currently exercisable option with an exercise price of $.875
which expires on December 31, 2002; and (x) 150,000 shares underlying a
currently exercisable option with an exercise price of $0.87 which expires
September 1, 2002 and does not include 300,000 shares underlying options
which are not currently exercisable with an exercise price of $0.87
expiring September 1, 2002.
(3) Includes (i) 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; and (ii) 100,000 shares underlying a presently exercisable
option with an exercise price of $0.875 which expires on December 31, 2002.
Does
37
<PAGE>
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 Cowen holds a currently exercisable option
for the purchase of 50,000 shares at $0.875 granted in 1998. Mr.
Tabatchnick holds a currently exercisable option for an additional 50,000
shares at $0.875 granted in 1997, 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 expired 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; (iv) 100,000 shares underlying a currently
exercisable option with an exercise price of $0.91 which expires on June
16, 2002; (v) 150,000 shares underlying a currently exercisable option
with an exercise price of $0.87 which expires on September 1, 2002; and
does not include (vi) 150,000 shares with an exercise price of $0.87 which
are not currently exercisable expiring September 1, 2002.
(6) Includes 109,890 shares underlying a currently exercisable option with an
exercise price of $0.91, expiring June 13, 2002; and does not include
190,890 shares underlying options which are not currently exercisable with
an exercise price of $0.91 expiring June 13, 2002.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has employment agreements with Mark Beychok, Jack Spencer
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 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 16: Litigation
Recovery, Net of Costs. The loan was 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 did not
realize any net proceeds from the arbitration, the Loan would be canceled and
the Lender would receive a warrant for the purchase of 400,000 shares of the
Company's Common Stock at $.01 per share. If the Loan was repaid through the
application of the net proceeds of the arbitration, the Lender would 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. A second proposal, from another source,
contained terms which would have required the Company to pay $2,050,000 in fees
based on the actual award, repay the $300,000 advance, and be granted a warrant
for 1,000,000 shares of the Company's common stock at an exercise price of
$1.00. The loan amount of $300,000 was repaid upon settlement of the litigation
in June 1997 and receipt of funds in July 1997, plus $1,236,883 in conformity
with the agreed upon formula, plus a warrant for 200,000 shares of the Company's
common stock at a $0.01 per share. See Note 16 to the Consolidated Financial
Statements for the recording of the entire transaction.
The Company entered into a one year consulting agreement with Benjamin
Tabatchnick, a Director of the Company, on April 1, 1997. Mr. Tabatchnick, in
exchange for 50,000 shares of the Company's common stock plus 2% of the new
sales endeavors in the school and food service business areas, agreed to
38
<PAGE>
assist the Company in developing programs, formulations, marketing and sales in
the above mentioned business areas.
The Company granted options in 1997 for 50,000 shares to Paul S.
Hermis who was then a Director of the Company. Mr. Hermis resigned as a
Director on February 21, 1998.
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 STOCK ("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
39
<PAGE>
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 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, 1998.
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.
40
<PAGE>
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; (ii) 800 of the Company's
Redeemable Common Stock Purchase Warrants; and (iii) 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, 1997 and 1996, included in this
Registration Statement on Form SB-2/A2 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.
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 report of KPMG on the Company's financial statements for the year
ended December 31, 1995, did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.
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.
41
<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.
42
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997 and 1996 F-7
Summary of Accounting Policies F-9
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 sheets of Vitafort
International Corporation and Subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the two years 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Vitafort
International Corporation and Subsidiaries at December 31, 1997 and 1996, and
the consolidated results of their operations and cash flows for each of the two
years 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 recurring losses from operations,
including a loss from operations of $4,151,305 for the year ended December 31,
1997. The Company has also previously had working capital shortages. These and
other factors raise substantial doubt about its ability to continue as a going
concern. 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
March 30, 1998 BDO SEIDMAN, LLP
F-2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS (Note 6)
Current assets:
Cash and cash equivalents $2,199,036 $ 188,867
Accounts receivable - trade, net of allowance for doubtful
accounts of $25,743 and $79,994 as of December 31, 1997
and 1996, respectively 412,289 230,789
Notes receivable 10,000 56,000
Other receivables - 4,464
Inventory (Note 3) 247,611 361,196
Prepaid and other current assets (Note 4) 269,268 271,731
---------- ----------
Total current assets 3,138,204 1,113,047
---------- ----------
Equipment (Note 7):
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,160 105,160
Computer equipment 193,571 173,294
---------- ----------
589,643 569,366
Less accumulated depreciation 347,493 231,592
---------- ----------
Net equipment 242,150 337,774
---------- ----------
Other Assets:
Advances to Global International Sourcing (Note 15) 193,818 -
Intangible assets, net of accumulated amortization of
$73,163 and $95,561 in 1997 and 1996 338,091 385,693
---------- ----------
531,909 385,693
---------- ----------
$3,912,263 $1,836,514
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
<S> <C> <C>
Current liabilities:
Note payable - bank (Note 6) $ 60,757 $ 440,022
Notes payable - other (Note 6) 283,898 -
Accounts payable - trade 909,315 1,510,982
Accrued expenses (Note 5) 342,437 341,480
Current maturities of long-term debt (Note 7) 37,859 37,859
------------ ------------
Total current liabilities 1,634,266 2,330,343
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity (deficit) (Notes 9, 10 and 15):
Series A, 6% Cumulative Convertible Preferred Stock,
$0.01 par value cumulative; 750 shares authorized;
750 shares issued and outstanding at December 31,
1997 and none at December 31, 1996; aggregate
liquidation preference of $750,000 at December 31, 1997 8 -
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued
and outstanding 1,000 ; aggregate liquidation
preference of $50,000 10 10
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50 shares;
aggregate liquidation preference of $50,000 1 1
Common stock, $.0001 par value, authorized 30,000,000 shares;
issued and outstanding 6,683,853 and 4,908,664 8,863 8,686
Additional paid-in capital 23,115,727 20,547,953
Accumulated deficit (20,846,612) (21,050,479)
------------ ------------
Total stockholders' equity (deficit) 2,277,997 (493,829)
------------ ------------
$ 3,912,263 $ 1,836,514
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
----------- -----------
<S> <C> <C>
Net revenues $ 1,995,317 $ 5,285,149
Cost of sales 1,896,410 6,870,120
----------- -----------
Gross profit (loss) 98,907 (1,584,971)
----------- -----------
Operating expenses:
Research and development 337,806 737,044
Sales and marketing 1,239,460 3,029,480
General and administrative 2,672,946 2,721,321
----------- -----------
Total operating expenses 4,250,212 6,487,845
----------- -----------
Loss from operations (4,151,305) (8,072,816)
Interest income 78,070 49,319
Interest expense (214,690) (50,509)
Other income (expense) 15,210 (45,650)
Litigation recovery, net of costs (Note 16) 4,748,946 -
----------- -----------
Income (loss) before income taxes 476,231 (8,119,656)
State income taxes (Note 8) 3,200 3,159
----------- -----------
Net Income (loss) 473,031 (8,122,815)
Deemed dividends to preferred shareholders 269,164 -
----------- -----------
Net income (loss) allocable to common shareholders $ 203,867 $(8,122,815)
=========== ===========
Basic net income (loss) per common share $ .03 $ (1.58)
=========== ===========
Diluted net income (loss) per share $ .03 $ (1.58)
=========== ===========
Basic weighted average shares of common stock 5,831,404 5,133,665
=========== ===========
Diluted weighted average shares of common stock 6,343,397 5,133,665
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
Increase (Decrease) in Cash and Cash Equivalents 1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ 473,031 $(8,122,815)
Adjustments to reconcile net loss to net cash and cash equivalents
provided by (used in) operating activities:
Depreciation and amortization 163,503 119,459
Allowance for doubtful accounts (54,251) -
Stock issued for services (Note 16) 138,000 -
Operating expenses paid with common stock - 1,377,644
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade, net (127,249) (191,366)
Inventory 113,585 319,680
Other - (55,760)
Prepaid and other assets 2,463 93,386
Notes receivable 46,000 (36,222)
Other receivables 4,464 143,510
Increase (decrease) in:
Accounts payable and accrued expenses 1,031,347 979,022
Other current liabilities - (150,000)
----------- -----------
Cash and cash equivalents provided by (used in) operating activities 1,790,893 (5,523,462)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (20,277) (172,896)
Advances to Global International (193,818) -
----------- -----------
Cash and cash equivalents used in investing activities (214,095) (172,896)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 838,426 599,715
Repayment of line of credit (1,217,691) ( 75,000)
Proceeds from notes payable 307,871 -
Repayment of notes payable (625,695) (171,053)
Proceeds from issuance of stock 1,123,000 3,499,841
Exercise of stock options and warrants 7,460 715,316
----------- -----------
Cash and cash equivalents provided by financing activities 433,371 4,568,819
----------- -----------
Increase (decrease) in cash and cash equivalents 2,010,169 (1,127,539)
Cash and cash equivalents at beginning of year 188,867 1,316,406
----------- -----------
Cash and cash equivalents at end of year $ 2,199,036 $ 188,867
=========== ===========
</TABLE>
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 215,126 $ 50,509
Income taxes 3,200 2,854
Supplemental disclosure of non-cash operating, investing and
financing activities:
Issuance of common stock for:
Conversion of liabilities to equity $1,030,335 $ 400,000
Conversion of accrued interest - 59,694
Conversion of preferred stock to common stock - 14,999
Payment of consulting contract - (300,000)
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements of Vitafort
International Corporation (the "Company") include the accounts of the Company
and its subsidiaries: Nutrifish Corporation (90.5% owned as of December 31,
1997 and 1996); Hollywood Partners, Inc. (formerly Vitafort Distributors, Inc.);
and Crystal Clear Farms. All subsidiaries were inactive in 1997. All material
intercompany accounts and transactions have been eliminated.
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.
RECLASSIFICATION AND PRESENTATION
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are investments with original maturities of
three months or less and short-term, highly liquid investments that are both
readily convertible to known amounts of cash and are so near their maturity that
they present insignificant risk of changes in value because of changes in
interest rates.
INVENTORIES
Inventories consist of merchandise available for sale, packaging
supplies and raw materials, and are stated at the lower of cost (first-in,
first-out) or market.
EQUIPMENT
Equipment is comprised of manufacturing equipment, furniture, office
equipment and computer equipment and is recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful life not in excess
of five years.
PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets, which include product introduction
expenses, are recorded at cost and amortized over the economic life thereof, but
not in excess of twelve months.
F-8
<PAGE>
ADVERTISING
General costs are expenses as incurred or prepaid until the
advertisement is published, at which time the related costs are expensed.
OTHER INTANGIBLE ASSETS
Intangible assets are composed of acquisition costs of Auburn Farms
and Natures Warehouse trademarks and debt issuance costs and are recorded at
cost. The acquisition costs associated with trademarks 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.
These costs are reviewed by management periodically and written down
to the value of the future benefit expected to be derived.
REVENUE
Product sales and related costs are recognized when the Company's
products are shipped from the commercial warehouse used by the Company or the
contract manufacturer to the customer.
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 Company periodically reviews such assets for possible impairment
and expected losses, if any, are recorded currently.
INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128") issued by the FASB is effective for financial statements
with fiscal years and interim periods ending after December 15, 1997. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible debentures. The Company adopted SFAS 128
on December 15, 1997 and it had no effect on income (loss) per share.
F-9
<PAGE>
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. 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.
STOCK COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 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, and comply with the pro forma
disclosure requirements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements with fiscal years ending after December 15,
1997. The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15, which has
been superceded by SFAS No. 128. The Company adopted SFAS No. 129 on December
15, 1997 and it did not have any effect on its financial position or results of
operations.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," ("SFAS 130") issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The Company does not expect adoption of SFAS 130
to have any effect on its financial position or results of operations.
F-10
<PAGE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131") issued by
the FASB is effective for financial statements with fiscal years ending after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any effect on its financial position or results of
operations; however, disclosures with respect to the aforementioned items may be
increased.
F-11
<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, 1989 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
For the past several years, the Company has suffered recurring losses
from operations, including $4,151,305 for the year ended December 31, 1997.
Although the Company has raised additional capital after year-end 1997 (see Note
15), 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 future financial obligations, 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.
The Company has reduced its cost of sales by centralizing the
warehousing of its products in a single location and negotiated lower rates with
existing manufacturers or by selecting another competent less expensive
producer. In addition, the Company increased prices on the majority of its
products effective August 1 of this year and changed its terms of sale to F.O.B.
the Company's warehouse. The Company also eliminated the cash discount for
prompt payment since most customers were taking the discount beyond the terms.
The Company has also introduced reformulated products at the end of 1997 and
plans to introduce new products in 1998. These steps, coupled with improvements
in subcontract manufacturing quality control and quality assurance, monitoring
improvements in Company internal control and communications with respect to
product returns and deductions, should improve the Company's prospects to
achieve profitability.
NOTE 3 - INVENTORY
Inventories are stated at the lower of cost (first in, first out) or
market. Market-based valuations are based upon estimates and assumptions, and
are generally limited to slow moving product offerings. Inventory consists of
the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
Finished goods $ 30,188 $168,709
Packaging and raw material 217,423 192,487
-------- --------
$247,611 $361,196
======== ========
</TABLE>
F-12
<PAGE>
NOTE 4 - PREPAID AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets, as of December 31, 1997 and
1996, are detailed as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
Deposits $ 1,100 $ 10,000
Product introduction costs 10,711 177,865
Insurance 36,377 14,897
Consulting 108,080 -
Other prepaids 113,000 68,969
-------- --------
Total prepaid and other current assets $269,268 $271,731
======== ========
</TABLE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
Accrued compensation $156,764 $ 90,753
Accrued interest payable - 436
Accrued legal fees 40,112 120,811
Accrued consulting fees 4,919 13,500
Other accrued expenses 140,642 115,980
-------- --------
Total accrued expenses $342,437 $341,480
======== ========
</TABLE>
NOTE 6 - NOTES PAYABLE
BANK
----
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. The amount of
inventory advances under the facility cannot exceed $500,000. The initial term
of the facility ends August 1998, with automatic renewals thereafter for one
year periods. Advances under the facility bear an interest rate at the Bank of
America NT prime plus 3%, and are secured by a first priority lien on all of the
Company's assets. Minimum interest charges are currently $15,000 per month.
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 was in violation of certain covenants with respect to working capital
and tangible net worth requirements during the first half of 1997. Upon receipt
of the Keebler award, the Company was no longer in violation of any of the
covenants. No assurance can be given that the Company will not be in violation
of such covenants in the future.
OTHER
-----
Notes payable - other, represents the current balance of the original
conversion of $601,723 of trade accounts payable. These notes are unsecured and
payable in various monthly installments with a maximum
F-13
<PAGE>
repayment of approximately $64,000 in January 1998 (including interest at
various rates). The notes have various maturity dates through December 1998.
NOTE 7 - LONG-TERM DEBT
The Company's long-term debt, which approximates fair value, as of
December 31, 1997 and 1996 consists of a 14% note payable in the amount of
$37,859, due in monthly installments of $4,033, secured by certain of the
Company's equipment. The entire amount is classified as a current liability.
Under the Agreement with Coast Business Credit, payments on this note ceased as
part of the condition for Coast making the loan.
NOTE 8 - INCOME TAXES
As the Company has incurred significant operating losses since
inception, its current tax provision has been limited to minimum California tax
payments.
The difference between the Federal income tax rate and the effective
income tax rate on net income (loss) from continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C> <C>
Estimated Federal income taxes 34.0% $ 162,000 (35.0)% $(2,760,000)
State income taxes, net of Federal
income tax benefit 6.0 28,000 (6.0) (498,000)
Change in valuation allowance (44.0) (206,800) 39.1 3,172,000
Other, net 4.0 20,000 1.0 82,841
----- --------- ----- -----------
- % $ 3,200 - % $ 3,159
===== ========= ===== ===========
</TABLE>
The tax effects of temporary differences that give rise to deferred
tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 7,230,000 $ 7,259,000
Tax credit carryforwards 70,000 70,000
Allowance for bad debts 70,000 32,000
Inventory reserves 200,000 473,000
Other 55,000 26,000
----------- -----------
Total gross deferred income tax assets 7,625,000 7,860,000
Deferred income tax liabilities (20,000) (24,000)
----------- -----------
7,605,000 7,836,000
Less valuation allowance (7,605,000) (7,836,000)
----------- -----------
Net deferred income taxes $ - $ -
=========== ===========
</TABLE>
Net deferred tax assets of approximately $7,605,000 resulting from net
operating losses, tax credits and other temporary differences have been offset
by a valuation allowance since management cannot determine whether it is more
likely than not such assets will be realized.
F-14
<PAGE>
As of December 31, 1997, the Company had unused Federal and California
net operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, available to offset against 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 carryforwards expire in
various amounts through the year 2012. 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 2002.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
NOTE 9 - STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company entered into a subscription agreement in the amount of
$500,000 in April 1997 with an unrelated investor for 500 shares of 1997 Series
A Preferred Stock. The preferred stock has a cumulative dividend rate of 6%
with no voting rights. The conversion price is the lower of $1.25 per share or
a 30% discount to the market price at the time of conversion. The preferred
stock is convertible at any time. For accounting purposes, the original issue
discount of $214,286 is being treated as a deemed dividend. The facilitator
received a 10% fee from the proceeds, as well as warrants to purchase 35,000
shares of common stock at an exercise price of $1.00 per share. Cumulative
unpaid dividends amounted to $22,500 at December 31, 1997.
The Company entered into a subscription agreement in the amount of
$250,000 in May 1997 with another investor for 250 shares of 1997 Series A
Preferred Stock. The series has a cumulative dividend rate of 6%, no voting
rights, and is convertible at any time at the lower of $1.25 or a 30% discount
to the market price at the time of conversion. For accounting purposes, the
original issue discount of $54,878 is being treated as a deemed dividend. The
facilitator received a 10% fee from the proceeds and a warrant to purchase
17,500 shares of common stock at an exercise price of $1.00 per share.
Cumulative unpaid dividends amounted to $10,000 at December 31, 1997.
Each share of Series B 10% Cumulative Convertible Preferred stock is
convertible into 1.667 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 $20,000 at
December 31, 1997 and 1996, respectively.
During 1996, the Company offered the holders of Series B Cumulated
Convertible Preferred Stock more favorable exchange rates to encourage
conversion of the shares to common stock. As a result, 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 2,500
shares of common stock. The value of the inducement to the Series B holders was
not material.
F-15
<PAGE>
Each share of Series C Convertible Preferred Stock is convertible into
100 shares of common stock and 100 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 $1,000
per share after Series B Cumulative Convertible Preferred Stock, and to holders
of common stock.
The shares of Series A, Series B and Series C Preferred stock are not
currently registered under the Securities Exchange Act of 1934.
COMMON STOCK
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 which was later reduced to $1.00.
The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
The Company issued 662,589 shares of common stock to various providers
of services under an S-8 filing. The Company realized $638,363 from this
transaction.
100,000 shares of common stock at $.93 per share was issued to a
professional firm for previous services rendered.
The Company issued 86,000 shares of common stock at various amounts
per share in compensation for services rendered, realizing $83,581 from this
transaction.
The Company issued 20,000 shares at a value of $1.125 per share and
10,000 shares at a value of $1.06 per share upon the exercise of options granted
to a former employee as compensation for consulting services and past unpaid
accrued vacation.
The Company issued 182,600 shares at $.875 per share upon the exercise
of options granted under the Non-Incentive Stock Option Plan. Non-officers of
the Company paid the exercise price of such options through the application of
accrued payroll and other various expenses.
On July 16, 1997, the Company accepted a cashless exchange of expenses
for options on 30,000 shares of common stock valued at $1.00 per share to a
consultant.
The Company issued cashless options of 60,000 shares of common stock
valued at $.93 per share and 40,000 shares of common stock valued at $1.00 per
share for consulting services.
In January 1996, the Company completed its private placement offerings
of common stock. Total shares issued in these offerings were 1,121,667 at prices
of $3.00 to $6.00. Total proceeds to the Company were $3,028,500, net of
expenses of $336,500. At December 31, 1995, $1,530,249 was received
representing subscriptions for 635,000 common shares under this private
placement offering.
In March 1996, the Company completed a private placement of 250,000
common shares receiving $1,350,000, net of expenses of $150,000.
F-16
<PAGE>
In April 1996, the Company completed a private placement of 283,333
common shares receiving $651,590, net of expenses of $118,410.
In November 1996, the Company converted $400,000 of notes payable to
80,000 shares of common stock at fair market value at that time.
During 1996 the Company issued 579,957 shares of common stock valued
at $1,377,644 to attorneys, consultants and employees as payment for services.
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 of prepaid consulting fees. In 1996, this contract was terminated. As
a result, the final 100,000 shares representing $300,000 were never issued and
were eliminated from subscribed stock.
On October 4, 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 10 - STOCK OPTIONS
The 1989 Stock Option Plan, as amended (the "Plan") reserved 50,000
shares of common stock (as adjusted for the reverse split effected in 1996) 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, 1997,
no options are outstanding under this plan.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995
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 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".
The Company has also granted stock options outside the Plans to other
individuals, such as employees and consultants, in consideration for services
performed. The options were granted at fair market value and at various terms
and vesting periods. The following table on the next page summarizes all option
activity for the years ended December 31, 1997 and 1996:
F-17
<PAGE>
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price
----------- ----------- --------
<S> <C> <C> <C>
Outstanding as of January 1, 1996 2,000,000 794,222 $2.73
Granted 22,500 79,750 1.11
Exercised (53,725) (120,490) 1.47
Canceled (423,775) (42,250) 3.78
--------- --------- -----
Outstanding as of December 31, 1996 1,545,000 711,232 3.54
Granted 185,600 3,343,500 0.93
Exercised (182,600) (160,000) 1.24
Canceled (316,292) (8,750) 2.02
--------- --------- -----
Outstanding as of December 31, 1997 1,231,708 3,885,982 $1.55
========= ========= =====
Exercisable as of December 31, 1997 1,131,708 3,095,872 $1.69
========= ========= =====
</TABLE>
FASB Statement 123, "Accounting for Stock-Based Compensation,"
requires the Company to provide pro forma information regarding net income and
earnings per share as if compensation cost for the Company's stock option plans
had been determined in accordance with the fair value based method prescribed in
FASB Statement 123. The Company estimates the fair value of each stock option,
using the Black-Scholes method, at the weighted-average assumption used for
grants in fiscal 1997 and 1996 dividend yield of zero percent; expected
volatility of 28 percent and 36 percent; risk-free interest rate of seven
percent; and expected lives of 5.1 and 5.0 years, respectively.
The weighted average fair value of options granted during 1997 and
1996 was $.39 and $.38, respectively.
Under the accounting provisions of FASB Statement 123, the Company's
net income (loss) and income (loss) per share for 1997 and 1996 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net Income (Loss) 1997 1996
- -------------------------------------------------------------
<S> <C> <C>
As reported $203,867 ($8,122,815)
Pro forma $(31,881) ($8,122,815)
Basic income (loss) per share
- -----------------------------
As reported $ 0.03 ($ 1.58)
Pro forma $ (0.01) ($ 1.58)
Diluted income (loss) per share
- -------------------------------
As reported $ 0.03 ($ 1.58)
Pro forma $ (0.01) ($ 1.58)
</TABLE>
F-18
<PAGE>
Due to the fact that the Company's stock option programs vest over
many years and additionally awards may be made each year, the above pro forma
numbers are not indicative of the financial impact had the disclosure provisions
of FASB 123 been applicable to all years of previous grants. The numbers above
do not include the effect of options granted prior to 1995 that vested in 1996
and 1997.
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
-------------------
Number Weighted-Average Number Weighted
Range of Outstanding Remaining Weighted-Average Exercisable Average
Exercisable Prices At 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------ ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
$ 0.80 - $ 2.80 4,197,010 1.8 $ 0.94 3,306,900 $ 0.95
- ---------------------------------------------------------------------------------------------------------
$ 3.00 362,333 1.1 3.00 362,333 3.00
- ---------------------------------------------------------------------------------------------------------
$ 3.30 - $ 7.50 520,597 0.6 4.67 520,597 4.67
- ---------------------------------------------------------------------------------------------------------
$10.00 - $20.00 37,750 9.93 12.52 37,750 12.52
- -----------------========================================================================================
Totals 5,117,690 1.2 $ 1.55 4,227,580 $ 1.69
- -----------------========================================================================================
</TABLE>
NOTE 11 - COMMITMENTS
LEASE AGREEMENT
The Company was obligated under a lease agreement for its executive
offices through August 1997. From September 1997 forward, the Company is renting
the offices on a month-to-month basis at a rate of $6,250 per month.
Rent expense for the years ended December 31, 1997 and 1996 including
parking, included in selling, general and administrative expenses, was $98,538
and $75,743, respectively.
EMPLOYMENT AGREEMENTS
On December 1, 1993, the Company entered into a three-year employment
agreement with Mark Beychok which provided for an annual base salary of
$150,000, the grant of an option to purchase 100,000 shares of common stock at
$5.00 per share (as adjusted for the reverse stock split effected in 1996), and
$1,000,000 of life insurance, 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, Mr. Beychok agreed to convert his
accrued salary 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 September 1997,
Mr. Beychok entered into a
F-19
<PAGE>
new employment agreement ("Agreement") with the Company for three years. Under
the Agreement, Mr. Beychok receives an annual base salary of $150,000 and was
granted options for 450,000 shares of stock at an exercise price of $0.87 per
share. Such options vest 75,000 each on September 3, 1997, March 3, 1998,
September 3, 1998, March 3, 1999, September 3, 1999, and March 3, 2000. In May
1997 the price of all options other than those related to the private placement
were repriced to $0.91. In September 1997 Mr. Beychok was given a successful
litigation reward of $51,535 plus 100,000 shares of common stock at fair market
value of $1.00.
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, with 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 May 1997 the Board of Directors
reduced the option price of all unlapsed options to $0.91 and removed the
vesting requirement. In September 1997, Mr. Coppolino entered into a new
employment agreement ("Agreement") with the Company for two years. Under the
Agreement, Mr. Coppolino receives an annual base salary of $120,000, and was
granted options for 300,000 shares of stock at an exercise price of $0.87 per
share. Such options vest 75,000 each on September 3, 1997, March 3, 1998,
September 3, 1998, and March 3, 1999. In September 1997, Mr. Coppolino was
given a successful litigation reward of $25,000, forgiveness of debt of $25,000,
plus 25,000 shares of common stock at $1.00, being the fair market value at the
date of the award.
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 and 109,890 shares on June 16, 1998, and 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 annual
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.
AUBURN FARMS TRADEMARK ACQUISITION
The Company entered into a purchase agreement in 1996 whereby it
acquired the Auburn Farms trademark and other related trademarks. Deferred
payments, which will be accounted for as royalties under the agreement, amount
to 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 in 1997 were $18,801 and were expensed as
royalties during the year.
NOTE 12 - 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, 1997 and 1996:
F-20
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
K-Mart $ - $606,199
A-1 International, Inc. 320,235 -
-------- --------
Total $320,235 $606,199
======== ========
</TABLE>
NOTE 13 - LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
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 's losses might be as little as $15,000.
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, Auburn Farms and Mark
Beychok alleging various tort and contract claims. The litigation is in the
early stages and the Company intends to vigorously pursue the same, with trial
scheduled to begin September 14, 1998.
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 dismissed the complaint against Mark Beychok
without leave to amend. Mr. Ellis recently filed an amended complaint against
the Company. The Company is defending the action vigorously and trial is
scheduled for March 31, 1998.
The Company filed a counter-claim against Ellis charging violations of
Section 16(b) of the Securities Exchange Act of 1934 (short swing profits).
Ellis sold stock in violation of that section and, therefore, the profits,
estimated at $20,000, belong to the Company. In March 1998, the court ruled in
favor of the Company in this matter and awarded $21,260.
F-21
<PAGE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company has entered into related party transactions during 1996
and 1997. See Notes 9, 10, 11 and 16 for further detailed information.
NOTE 15 - SUBSEQUENT EVENTS
In March 1998, the Company entered into a subscription agreement in
the amount of $500,000 for 500 shares of Series A 1997 Preferred Stock. The
preferred stock has a cumulative dividend rate of 6% with no voting rights. The
conversion price is at a discount of 21.5% if the market price of the stock is
below $0.6875. If the market price is above $0.6875, the exercise price is the
fair market value on the day of exercise; however, the holder receives warrants
in sufficient quantity to achieve a profit equal to the computed 21.5% discount.
The holder has agreed not to convert before August 10, 1998 in exchange for
these terms.
The Company is currently negotiating the acquisition of Global International
Sourcing, Inc., ("Global") a Nevada corporation, by acquiring the stock of the
corporation from its sole shareholder. Global is a company with international
contacts to provide natural and low fat food products for Vitafort to sell into
the United States market at a cost significantly below those found in the United
States for similar products. The Company has advanced monies to Global as of
year end. In the event the acquisition is not completed, the Company feels
Global has the resources to repay the advances.
NOTE 16 - LITIGATION RECOVERY, NET OF COSTS
On 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"), in which Donald Wohl, a Director of the Company, is the general
partner, 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 Board of Directors, with Mr. Wohl
abstaining, considered two bids and found his to be the more reasonable of the
two.
On July 15, 1997, the Company received $6,750,000 in full and final
settlement. Of that amount, $1,055,608 was paid for legal fees and costs, plus
$1,236,885 to ATCOLP INVESTMENT PARTNERS under the existing agreement and
$300,000 to repay the loan. Also, the Company issued a warrant for 200,000
shares of common stock to ATCOLP INVESTMENT PARTNERS as additional
consideration. The Company recorded $138,000 as additional fees to ATCOLP for
the warrant, that amount being the estimated fair value of non-registered
securities on that day. Additionally, the Company was able to cancel $140,829 in
debt due to the Keebler Company. The amount of the award, $5,983,000, has been
reported as income, under the heading litigation, net of costs, while the
difference between the $6,750,000 award and the $5,983,000 recovery, or
$767,000, has been treated as a reimbursement of expenses in the general and
administrative expenses for the year ended December 31, 1997.
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<PAGE>
NOTE 17 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the
basic and diluted earnings per share computation:
<TABLE>
<CAPTION>
December 31,
1997 1996
----- -----
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ 473,031 $(8,122,815)
Deemed dividends (269,164) -
----------- -----------
Income (loss) available to common stockholders (numerator) $ 203,867 $(8,122,815)
=========== ===========
Weighted average common shares outstanding (denominator) 5,831,404 5,133,665
=========== ===========
Basic earnings (loss) per share $ 0.03 $ (1.58)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders (numerator) $ 203,867 $(8,122,815)
=========== ===========
Weighted average common shares outstanding 5,831,404 5,133,665
Weighted average options outstanding 2,511,516 -
Weighted average convertible preferred stock 6,667 -
Stock acquired with proceeds (2,006,190) -
----------- -----------
Weighted average common shares and
assumed conversions outstanding (denominator) 6,343,397 5,133,665
=========== ===========
Diluted earnings (loss) per share $ 0.03 $ (1.58)
=========== ===========
</TABLE>
Options and warrants to purchase 958,565 and 2,256,232 shares of
common stock at various prices per share, at December 31, 1997 and 1996,
respectively, were not included in the computation of diluted earnings (loss)
per share because the effect would be antidilutive.
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
F-23
<PAGE>
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
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.
F-24
<PAGE>
(e) Expenses (including attorneys' fees) incurred by an officer or
director in defending any civil, criminal, administrative or investigative
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.
(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.
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<PAGE>
(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.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
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 $ *
* 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.
During February 1995, the Registrant issued $500,000 principal amount
of its secured promissory notes and 450,000 options to purchase its common stock
at a price of $.07 per share (22,500 options to purchase shares at $1.40 as
adjusted for a reverse stock split effected October 4, 1997) in a private
placement pursuant to Regulation D under the Securities Act to six accredited
investors. The notes were sold for $500,000 and the options for $10,000. The
Company paid a commission of 7% to a broker dealer in connection with such
notes.
During June 1995, the Registrant issued 107,486 shares of its common
stock (5,374 shares as adjusted for the reverse stock split effected October 4,
1996) to a note holder in exchange for the accrued principal and interest on a
note. The note had been issued for cash consideration equal to its face value.
The conversion price was $.40 per share ($8.00 as adjusted for a reverse stock
split effected October 4, 1996). The transaction was exempt from registration
under the Securities Act by reason of Section 4(2) thereof and the Registrant
obtained representations with respect to investment intent from the note holder.
During July 1995, the Registrant issued 90,000 shares of its common
stock (2,250 shares as adjusted for the reverse stock split effected October 4,
1996) for $.07 per share ($1.40 per share as adjusted for the reverse stock
split effected October 4, 1996) upon the exercise of an option granted in
connection with the
F-26
<PAGE>
February 1995 private placement described above. The transaction was exempt
from registration under the Securities Act by reason of Section 4(2) thereof and
the Registrant obtained representations with respect to investment intent from
the option holder. The Company did not pay any commission with respect to such
exercise.
During October 1995, the Registrant issued 4,320,000 shares of its
common stock (216,000 shares as adjusted for a reverse stock split effected
October 4, 1996) to a note holder upon conversion of a note. $500,000 principal
amount of note and $40,000 of accrued interest were converted in such
transaction. The conversion price was $.125 per share ($2.50 as adjusted for the
reverse stock split effected October 4, 1996). The issuance of the note was
exempt from registration by reason of Regulation S promulgated under the
Securities Act. The sale was to a non-US person located outside the United
States.
During November 1995, the Registrant issued 5,208,333 shares of its
common stock (260,417 shares as adjusted for the reverse stock split effected
October 4, 1996) at $.125 per share ($2.50 as adjusted for the reverse stock
split effected October 4, 1996) in a private placement pursuant to Regulation D
under the Securities Act to accredited investors. The Registrant realized net
proceeds of $563,960 from this private placement. For each share purchased in
the private placement, the investors also received 1/2 warrant at $.225 ($4.50
as adjusted for the reverse split effected on October 4, 1996) and 1/2 warrant
at $.30 ($6.00 as adjusted for the reverse stock split effected on October 4,
1996).
During December 1995, the registrant issued 64,284 shares of its
common stock (3,214 shares as adjusted for a reverse stock split effected on
October 4, 1996) to an investor in exchange for 50 shares of its Series B
Convertible Preferred Stock and all of the dividends thereon. The transaction
was exempt from registration under the Securities Act by reason of Section
3(a)(9) thereof as a transaction with an existing security holder.
During June and December 1995, the Registrant issued an aggregate of
475,680 shares of its common stock (18,410 shares as adjusted for a reverse
stock split effected October 4, 1996) to note holders in exchange for the
accrued principal and interest on a note. The note had been issued for cash
consideration equal to its face value. The principal amount of the notes was
$162,500 and accrued interest was $________. The transaction was exempt from
registration under the Securities Act by reason of Section 4(2) thereof and the
Registrant obtained representations with respect to investment intent from the
note holder.
During December 1995, the Registrant exchanged 300 shares of its
Series D Preferred Stock for 896,000 shares of its common stock (44,800 shares
as adjusted for a reverse stock split effected October 4, 1996) in a privately
negotiated transaction which was exempt from registration under the Securities
Act by reason of Section 4(2) thereof and the Registrant obtained
representations with respect to investment intent from the shareholder.
During January 1996, the Registrant issued 357,143 shares of its
common stock (17,856 as adjusted for a reverse stock split effected October 4,
1996) to a consultant in connection with the exercise of an option with an
exercise price of $.10 ($2.00 as adjusted for a reverse stock split effected
October 4, 1996). The transaction was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and the Registrant obtained
representations with respect to investment intent from the exercising option
holder.
During November 1995 to February 1996, the Registrant sold an
aggregate of 22,433,334 shares of its common stock (1,201,667 shares as adjusted
for the reverse stock split effected October 4, 1996) at $.15 per share ($3.00
as adjusted for the reverse stock split effected October 4, 1996) in a private
placement pursuant to Regulation D under the Securities Act to accredited
investors. The Registrant realized net proceeds of $3,028,500 from these
private placement and paid the placement agent commissions of $336,500. For
each share purchased in these private placements, the investors also received
1/2 warrant at $.225 ($4.50 as
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<PAGE>
adjusted for the reverse split effected on October 4, 1996) and 1/2 warrant at
$.30 ($6.00 as adjusted for the reverse stock split effected on October 4,
1996).
During March 1996, the Registrant exchanged 1,112,533 shares of its
common stock (55,627 shares as adjusted for the reverse stock split effected
October 4, 1996) for 372.5 shares of its Series D Preferred Stock, including all
accrued dividends thereon. The effective price of the exchange was $.375 per
share ($7.50 as adjusted for the reverse stock split effected October 4, 1996).
The transaction was exempt from the registration requirements of the Securities
Act by reason of section 3(a)(9) thereof as a transaction with existing security
holders.
During March 1996, the Registrant issued 5,000,000 shares of its
common stock (250,000 shares as adjusted for the reverse stock split effected
October 4, 1996) pursuant to the exemption from registration afforded by
Regulation S promulgated under the Securities Act for transactions with non-US
persons which transactions occur outside the United States. The Registrant
received appropriate representations from the investor. Registrant realized net
proceeds of $1,350,000 from this private placement and paid the placement agent
a commission of $150,000.
During April 1996, the Registrant issued 5,666,667 shares of its
common stock (283,333 shares as adjusted for the reverse stock split effected
October 4, 1996) pursuant to the exemption from registration afforded by
Regulation S promulgated under the Securities Act for transactions with non-US
persons which transactions occur outside the United States. The Registrant
received appropriate representations from the investor. Registrant realized net
proceeds of $651,590 from these private placements and paid placement agents
commissions of $118,410.
During May 1996, in connection with the private placement in November
1995 to February 1996, the Company issued an aggregate of 4,733,332 shares of
its common stock (236,667 shares as adjusted for a reverse stock split effected
October 4, 1996) upon conversion of indebtedness of $710,000. The transaction
was with accredited investors and was exempt from the registration requirements
of the Securities Act pursuant to Regulation D promulgated thereunder. The
Registrant obtained the required investment representations from the investors
and otherwise complied with the requirements of Regulation D.
During July 1996, the Registrant sold 30,000 shares of its common
stock (1,500 shares as adjusted for the reverse stock split effected October 4,
1996) upon exercise of an option with an exercise price of $.07 ($1.40 as
adjusted for the reverse stock split effected October 4, 1996) in a transaction
exempt from the registration requirements of the Securities Act by reason of
Section 4(2) thereof. The Registrant obtained representations with respect to
investment intent from the exercising option holder.
During August 1996, the registrant issued 49,998 shares of its common
stock (2,500 shares as adjusted for a reverse stock split effected on October 4,
1996) to an investor in exchange for 50 shares of its Series B Convertible
Preferred Stock and all of the dividends thereon. The transaction was exempt
from registration under the Securities Act by reason of Section 3(a)(9) thereof
as a transaction with an existing security holder.
During October 1996, the Registrant issued 80,000 shares of its common
stock at $5.00 per share to eight accredited investors in a transaction exempt
from the registration requirements of the Securities Act pursuant to Regulation
D promulgated thereunder.
During February 1997, the Registrant sold 500,000 shares of its common
stock to an accredited investor for $1.00 per share. The transaction was exempt
from registration under the Securities Act by reason of Regulation D promulgated
thereunder.
F-28
<PAGE>
During April 1997, the Registrant sold 500 shares of its 1997 Series A
Preferred Stock to an accredited investor for $1,000 per share. The transaction
was exempt from registration under the Securities Act by reason of Regulation D
promulgated thereunder.
During May 1997, the Registrant sold 250 shares of its 1997 Series A
Preferred Stock to an accredited investor for $1,000 per share. The transaction
was exempt from registration under the Securities Act by reason of Regulation D
promulgated thereunder.
During July 1997, the Registrant issued 30,000 shares upon the partial
exercise of an option with an exercise price of $1.00 per share. The
transaction was exempt from registration under the Securities Act by reason of
Section 4(2) thereof and the Registrant obtained representations with respect to
investment intent from the exercising option holder.
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<PAGE>
ITEM 27. EXHIBITS.
<TABLE>
<S> <C>
(a) The following exhibits are submitted herewith:
3.l Certificate of Incorporation of Registrant(i)
3.2 By-laws of Registrant(i)
3.3 Agreement and Plan of Merger between the Registrant and
Vitafort International Corporation, a California corporation(i)
3.4 Certificate of Designation - Series A Preferred Stock(v)
3.5 Certificate of Designation - Series B Preferred Stock(v)
3.6 Certificate of Amendment to the Certificate of Incorporation,
November 1991(v)
3.7 Certificate of Designation - Series C Preferred Stock(v)
3.8 Certificate of Amendment to the Certificate of Incorporation, filed
February 8, 1994 (vi)
3.9 Certificate of Designation - Series D Preferred Stock(vi)
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").
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
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").
3.14 Amended Certificate of Designation of the Registrant's 1997 Series A
Preferred Stock filed May 1997
3.15 Amended Certificate of Designation of the Registrant's 1997 Series A
Preferred Stock filed March 1998 (filed herewith)
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(i)
4.3 Form of Warrant Agreement(i)
4.4 Proposed form of Underwriters Warrant Agreement(i)
4.6 Warrant Extension Agreement, December 18, 1992(v)
4.7 Warrant Extension Agreement, December 18, 1994(vi)
4.8 Warrant Extension Agreement, January 18, 1995(vi)
4.9 Warrant Extension Agreement, April 3, 1995(vi)
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.
4.20 Warrant Extension Agreement, October 31, 1997.(x)
5.1 Opinion of Frank J. Hariton, Esq. (filed herewith)
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(i)
10.2 License Agreement, dated April 25, 1986, between the Registrant and
Crystal Geyser Water Registrant and amendment, dated January 7,
1988(i)
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(i)
10.4 License Agreement, dated as of October 9, 1987, between the Registrant
and Good Health Beverage, Inc. and amendment, dated November 23,
1988(i)
10.5 Product Development Agreement, dated as of January 21, 1988, between
the Registrant and International Multifoods, Inc.(i)
</TABLE>
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<PAGE>
<TABLE>
<C> <S>
10.6 Beverage Agreement, dated as of October 31, 1988, between the
Registrant and PowerBurst Corporation(i)
10.7 Amended and Restated Agreement, dated August 2, 1989, between the
Registrant and Vitafort Far East Co., Ltd.(i)
10.8 Agreement, dated August 11, 1989, between Barry Saltzman, MD. and
Yoshio Tanaka(i)
10.9 Lease, dated June 13, 1988, between Registrant and Shelterpoint
Equities, Ltd. for offices at 591 Redwood Highway, Mill Valley,
California(i)
10.10 Agreement, dated July 25, 1989, between Nutrifish Corporation and Mt.
Lassen Trout Farms(i)
10.11 Salmon Rondelles Joint Development and Marketing Agreement, dated as
of September 18, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.(i)
10.12 Whole Salmon Joint Development and Marketing Agreement, dated as of
September 26, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.(i)
10.13 Employment Agreement, dated September 13, between the Registrant and
Barry K. Saltzman(i)
10.14 Employment Agreement, dated September 13, between the Registrant and
Jeffrey Lewenthal(i)
10.15 The Registrant's 1989 Stock Option Plan(i)
10.16 Stock Option Agreement, dated as of July 17, 1989 between the
Registrant and Jeffrey Lewenthal(i)
10.17 Secrecy Agreement, dated as of May 2, 1986, between the Registrant and
Hoffman-LaRoche, Inc.(i)
10.18 Joint Venture Agreement, dated September 29, 1989, between the
Registrant and Agrolife Technologies, Inc.(i)
10.19 Consulting Agreement, dated September 13, 1989, between the Registrant
and Randall S. Reis(i)
10.20 Loan Agreement, dated June 15, 1989, between Union Bank and Joseph R.
Daly(i)
10.21 Form of Employee Confidentiality Agreement.(ii)
10.23 Form of Escrow Agreement by and among the Registrant, Gilford
Securities Corp., and certain stockholders of Registrant(i)
10.24 Promissory Note, made November 21, 1989, by Nutrifish Corporation and
payable to Joseph R. Daly(i)
10.25 Right of First Refusal Agreement, dated November 21, 1989, between
Nutrifish Corporation and Joseph R. Daly(i)
10.26 Production License Agreement for Nutrifish Norwegian Salmon, dated
February 2, 1990, between Nutrifish Corporation and Norwegian
Seafoods, Inc.(ii)
10.27 Test Market Agreement, dated December 19, 1989, between International
Multifoods Corporation and the Registrant.(ii)
10.28 Amendment, dated as of December 19, 1989, to the Product Development
Agreement between International Multifoods Corporation and the
Registrant.(ii)
10.29 Consulting Agreement, dated February 21, 1990, between the Registrant
and Joseph R. Daly.(ii)
10.30 License Agreement between the Registrant and Nulaid Foods, Inc., dated
April 30, 1990.(ii)
10.31 License Agreement between the Registrant and Vitafort Latin America,
dated July 30, 1990.(ii)
10.32 Termination Agreement between the Registrant and Jeffrey D. Lewenthal,
dated September 12, 1990.(ii)
10.33 Settlement Agreement and Full Release between Nicholas J. Caputo and
Registrant, dated October 4, 1990.(ii)
10.34 Employment Agreement between the Registrant and Stephen D. Clow, dated
December 1, 1990.(ii)
10.35 Employment Agreement between the Registrant and Frank A. Corsini,
dated January 2, 1991.(ii)
</TABLE>
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<TABLE>
<C> <S>
10.36 Stock Option Agreement between the Registrant and Stephen D. Clow,
dated January 2, 1991.(ii)
10.37 Stock Option Agreement between the Registrant and Frank A. Corsini,
dated January 2, 1991.(ii)
10.38 Letter Agreement, dated February 1, 1991, amending Consulting
Agreement between the Registrant and Joseph R. Daly.(ii)
10.39 Letter Agreement, dated March 12, 1991, between the Registrant and
Joseph R. Daly regarding debt reorganization.(ii)
10.40 Consulting Agreement between Norman Kretchmer, MD., Ph.D., and the
Registrant, dated December 20, 1988.(ii)
10.41 Settlement Agreement between the Registrant and PowerBurst
Corporation, dated September 23, 1991.(ii)
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.(ii)
10.44 Larry Lucas Settlement Agreement, dated March 25, 1993.(v)
10.45 Frank Corsini, Separation Agreement, dated May 18, 1993.(v)
10.46 Agreement dated October 5, 1993 between the Registrant and Second
Nature Technologies, Inc.(iii)
10.47 Food and Beverage Technology Agreement(iii)
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.(iv)
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.)(iv)
10.50 Non-Competition Agreement dated July 27, 1993 by and between the
Registrant and Crystal clear farms, Inc., a Maine corporation.(iv)
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.
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.
</TABLE>
F-33
<PAGE>
<TABLE>
<C> <S>
10.63 Separation and Release Agreement, dated as of December 1, 1994,
between the Registrant and Peter Benz.(vi)
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 dated June 16, 1997 between Jack Spencer and the
Registrant. Incorporated by reference to Exhibit 10.12 of the
Registrant's Form SB-2 filed July 23,1997
10.83 Agreement, dated April 1997, between the Registrant and ATCOLP
Investment Partners, a California Limited Partnership. Incorporated
by reference to the Registrant's Form SB-2 filed July 23, 1997
</TABLE>
F-34
<PAGE>
<TABLE>
<C> <S>
10.84 Employment Agreement dated September 1997 between the Registrant
and Mark Beychok. (x)
10.85 Employment Agreement dated September 1997 between the Registrant
and John Coppolino.(x)
11. Computation of Earnings (Loss) per Common Share. (ix)
16. Letter on change in certifying accountant. (ix)
22. Subsidiaries of the Registrant:
The Registrant does not have any significant subsidiaries.
23.1 Consent of BDO Seidman, LLP (filed herewith)
23.3 Consent of Frank J. Hariton, Esq. (included as part of Exhibit 5)
</TABLE>
(i) Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form S-18, file number 33-31883.
(ii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1990 and 1989 Form 10-K's.
(iii) Incorporated by reference to exhibits 1 & 2 to the Registrant's September
30, 1993 Form 10-QSB.
(iv) Incorporated by reference to exhibits 1 through 4 to the Registrant's
August 7, 1993 Form 8-K.
(v) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1993 Form 10-KSB.
(vi) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1994 Form 10-KSB.
(vii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1995 Form 10-KSB.
(viii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1996 Form 10-KSB.
(ix) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1997 Form 10-KSB.
(x) Incorporated by reference to the same numbered exhibit to the
Registrant's January 14, 1998 Form SB-2/A.
F-35
<PAGE>
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.
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.
F-36
<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 May 6, 1998.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
------------------------------
Mark Beychok, President
F-37
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark Beychok and Jack B. 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:
<TABLE>
<S> <C> <C>
Director, Chief Executive
Officer and President
/s/ Mark Beychok (Principal Executive) May 6, 1998
- ------------------------
Mark Beychok
Chief Operating Officer /
Chief Financial Officer
(Principal Accounting
/s/ Jack B. Spencer and Financial Officer) May 6, 1998
- -------------------------
Jack B. Spencer
/s/ Donald Wohl Director May 6, 1998
- -------------------------
Donald Wohl
/s/ Benjamin Tabatchnick Director May 6, 1998
- -------------------------
Benjamin Tabatchnick
/s/ Paul G. Cowen Director May 6, 1998
- -------------------------
Paul G. Cowen
</TABLE>
F-38
<PAGE>
EXHIBIT 5.1
May 5, 1998
Securities and Exchange Commission
450 Fifth Street N.W.
Washington D.C. 20549
RE: Vitafort International Corporation (the "Company")
Registration Statements on Form SB-2 Number 333-5733 and
33-3209 Relating to an aggregate of 6,129,267 shares (the "Shares")
of the Company's Common Stock, par value $.0001 per share
Gentlemen:
I have been requested by the Company, a Delaware corporation, to furnish
you with my opinion as to the matters hereinafter set forth in connection with
the above captioned Registration Statement (the "Registration Statement")
covering the 6,129,267 Shares. All of the 6,129,267 Shares will be offered by
the Selling Shareholders who acquired the shares under various agreements or
will be acquired by the Selling Shareholders upon the conversion of preferred
stock or the exercise of options.
In connection with this opinion, I have examined the Registration Statement
(as amended through the date hereof), the Certificate of Incorporation and By-
Laws of the Company, each as amended to date, copies of the records of corporate
proceedings of the Company, and copies of such other agreements, instruments an
documents as I have deemed necessary to enable me to render the opinion
hereinafter expressed.
Based upon and subject to the foregoing, I am of the opinion that all of
the 6,129,267 Shares, when sold in the manner described in the Registration
Statements, will be legally issued fully paid and non-assessable.
I render no opinion as to the laws of any jurisdiction other than the
internal laws of the State of New York, the internal corporate laws of the State
of Delaware. I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the caption "Legal
Opinions" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Frank J. Hariton
Frank J. Hariton
<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 this
Registration Statement on Form SB-2/A2 of our report dated March 30, 1998,
relating to the audit of the consolidated financial statements of Vitafort
International Corporation for the year ended December 31, 1997, which are
contained in that Prospectus. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
BDO Seidman, LLP
Los Angeles, California
May 6, 1998
