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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION FILE NO. 333-32029
REGISTRATION FILE NO. 333-5733
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2/A
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)
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<S> <C> <C>
DELAWARE 5149 68-0110509
(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) 695-6007
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC FROM TIME TO TIME AFTER THE
---------------------------
EFFECTIVE DATE
- --------------
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
<PAGE>
CALCULATION OF REGISTRATION FEE
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=====================================================================================================================
Proposed Proposed
Maximum Maximum Amount of
Title of Securities to Amount to be Price Aggregate Registration
be registered Registered Per Share* Offering Price* Fee**
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock,
par value
$.0001 per
share 285,000 $.268 $76,375 $23.14
=====================================================================================================================
</TABLE>
* Based on the closing bid price of the common stock on the NASDAQ Electronic
Bulletin Board on December 17, 1997, 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).
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
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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>
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
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 December 19, 1997, the closing price bid for the Common Stock
on the OTC Electronic Bulletin Board was $0.875 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 JANUARY 14, 1998
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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 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
7,072,052 (1) 12,302,917 (1)
(1) Include 2,847,934 previously issued shares.
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 in their opinion as of
December 31, 1996 uncertainty reflecting the Company's ability to continue to
operate as a "going concern". This uncertainty may further erode its ability to
raise additional capital to fund future operations. Should it be unsuccessful in
raising capital, it
3
<PAGE>
may be forced to curtail and/or suspend operations. See "Note 2" to the
financial statements for the year ended December 31, 1996 for additional
information. The Company received $6,750,000 in full and complete settlement
from the Keebler arbitration on July 5, 1997. See Recent Financial Developments
on page 26 for an explanation of the total Keebler transaction.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
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<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------------------
1996 1995 1997 1996
------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue $ 5,285,149 $ 2,315,151 $ 1,497,223 $ 4,408,665
Costs and expenses:
Cost of sales 6,870,120 1,482,326 1,078,854 3,988,128
Selling, general and
administrative 2,721,321 1,741,424 1,894,114 1,603,775
Research and development 737,044 378,602 179,268 693,389
Marketing 3,029,480 1,417,645 996,242 1,690,024
Loss from operations (8,072,816) (2,704,846) (2,651,255) (3,566,651)
Other income (expenses) (46,840) (105,835) (85,686) (1,900)
Litigation recovery, net of costs 0 0 4,886,947 0
Net income (loss)
allocable to common shareholders $(8,122,815) $(2,812,281) $ 1,880,842 $(3,571,710)
Net income (loss) per share $ (1.59) $ (1.92) $ .33 $ (0.85)
Weighted average common shares 5,133,665 1,467,648 5,762,985 4,215,668
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $(1,217,296) $ 3,480,039
Total assets 2,036,514 5,288,076
Total liabilities 2,530,343 1,202,366
Stockholders' equity (deficit) (493,829) 4,085,710
</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.
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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 1995 and 1996. The Company's business
did not achieve profitability during 1995 or 1996.
CONTINUING LOSSES
The Company incurred losses from operations of $2,704,846 in 1995,
$8,072,816 in 1996, and $2,651,255 during the first nine months ended September
30, 1997. For the year ended December 31, 1996, the Company has negative
working capital of $1,217,296 and a net capital deficiency of $493,829. 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, 1996, indicating there is
substantial doubt regarding the Company's ability to continue as a going
concern. The Company anticipates losses from operations during the remainder of
1997. Although the Company generated a profit before income taxes in the quarter
ended September 30, 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 September 30, 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
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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. Through September 30, 1997, the Company derived approximately 57% of
its revenues from the sale of the Auburn Farms and Natures Warehouse lines of
products and approximately 43% 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 would have a material adverse effect on the Company.
The Company also competes with a number of manufacturers in the fat-free
and low-fat portion of the industry, including Health Valley Foods, Nabisco
(Snackwell's) and Pepperidge Farms (Greenfield). Additional competitors include
regional and private label snack companies. Potential entrants in the fat-free
and low-fat snack food market segment include the national competitors and
private label competitors.
DEPENDENCE ON KEY EXECUTIVE OFFICERS AND OTHER QUALIFIED PERSONNEL
The Company is highly dependent on certain key personnel, including Mark
Beychok, its President and Chief Executive Officer. 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. 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. While management believes that these proceedings
will not result in material adverse liabilities against the Company, an adverse
finding in certain of these proceedings could have a material adverse effect on
the Company.
MANAGEMENT OF POSSIBLE GROWTH
The Company intends to expand its operations during the latter part of
1997, 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 sometimes resulted, and
could in the future result, in additional expenses that materially increase the
cost of
7
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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 Fudgets and other of 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.
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.
PATENTS, 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.
The Company's success is also dependent upon the skills, knowledge and
experience (none of which is patentable) of its technical personnel. To help
protect its rights, the Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. There is no assurance, however, that
these agreements will provide adequate protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure.
GOVERNMENT REGULATION
The packaged food industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation, labeling
and marketing of food products. The Company is particularly affected by the
recently enacted Nutrition Labeling and Education Act ("NLEA"), which requires
specified nutritional information to be disclosed on all packaged foods. In
addition, the NLEA, which is administered by the Food and Drug Administration
("FDA"), strictly regulates the standards that must be met to make a claim that
a product is "fat-free" or "low-fat." In addition, the FDA standards could
conceivably be lowered further or reduced to zero. Changes in fat content could
adversely affect the taste and texture of the Company's products and their
acceptability to consumers, which could adversely affect the Company's sales and
results of operations. Labeling standards imposed by certain other countries
may vary from those in the United States. Were the Company to be found to have
violated any regulations applicable to it, such finding could materially
adversely affect its ongoing operations.
8
<PAGE>
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 August 31, 1997; (2) which are to
be offered hereunder; (3) which are to be owned by each such Selling Stockholder
assuming the sale of all shares offered hereunder; and (4) the percentage of
outstanding shares of Common Stock to be owned by each Selling Stockholder after
the sale of the shares to be offered hereunder. There can be no assurance that
any of the Selling Stockholders will offer for sale or sell any or all of the
Common Stock offered by them pursuant to this Prospectus.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF NUMBER OF PERCENTAGE OF
SHARES OWNED SHARES TO BE SHARES OWNED COMMON STOCK
PRIOR TO THE SOLD IN THE AFTER THE TO BE OWNED AFTER
NAME OF SELLING STOCKHOLDER OFFERING OFFERING OFFERING THE OFFERING
- -------------------------------------------- --------------- -------------------- ------------ ------------------
<S> <C> <C> <C> <C>
Credit Suisse 500,000 (1) 500,000 0 0
FT Trading 631,313 (1) 631,313 (1) 0 0
Sovereign Partners, L. P. 1,262,626 (1) 1,262,626 (1) 0 0
NET Financial International, Ltd. 52,500 (2) 52,500 (2) 0 0
Kurt Martin Consulting 125,000 (3) 125,000 (3) 0 0
Advest, Inc., Custodian FBO 5,000 (4) 5,000 (4) 0 0
Robert F. Chatfield-Taylor
Albertoni, Aldo A. & Lisa A. 5,000 (4) 5,000 (4) 0 0
Antley, Christopher W. 30,000 (4) 30,000 (4) 0 0
Ashcroft III, E. L. 6,250 (4) 6,250 (4) 0 0
Astorian, John & Virginia, 5,000 (4) 5,000 (4) 0 0
Trustees Astorian Family
Trust Dated October 6, 1993
Athorn, Blain, President/Memory 10,000 (4) 10,000 (4) 0 0
Training Institute
Bachmeier, Terry J. 5,000 (4) 5,000 (4) 0 0
Bellair Heating & Air Conditioning 10,000 (4) 10,000 (4) 0 0
Bernstein, Lewis & Rosalyn Samuel 5,000 (4) 5,000 (4) 0 0
Bernstein, Trustees, Lewis
Bernstein & Rosalyn Samuel
Bernstein Family Trust Dated
June 12, 1978
Berstein, Arnold 12,500 (4) 12,500 (4) 0 0
Bianchini, Frank 20,000 (4) 20,000 (4) 0 0
Bozarjian, Patricia 5,000 (4) 5,000 (4) 0 0
Brown, Robert K. 17,467 (4) 17,467 (4) 0 0
Cannan, George 20,000 (4) 20,000 (4) 0 0
Chau, Wing Hin 20,000 (4) 20,000 (4) 0 0
Cheng, Charles & Guadalupe 5,000 (4) 5,000 (4) 0 0
Choy, Kim 18,750 (4) 18,750 (4) 0 0
Christea, Richard 16,667 (4) 16,667 (4) 0 0
Chung M.D., Yong Wun 35,000 (4) 35,000 (4) 0 0
Codiga, Barton G. 10,000 (4) 10,000 (4) 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>
Codiga, Grant M. 10,000 (4) 10,000 (4) 0 0
Conanat, Marilee 18,333 (4) 18,333 (4) 0 0
Conant, Carson 11,667 (4) 11,667 (4) 0 0
Conant, Chappell 11,667 (4) 11,667 (4) 0 0
Conant, Victor 18,333 (4) 18,333 (4) 0 0
Dahl D.C., Wayne 20,000 (4) 20,000 (4) 0 0
Dauer, Carl J. 5,000 (4) 5,000 (4) 0 0
Davis, Eugene, Trustee 5,000 (4) 5,000 (4) 0 0
Davis Family Trust
DeBruycker, Lloyd 20,000 (4) 20,000 (4) 0 0
DeBruycker, Mark & Belva 5,000 (4) 5,000 (4) 0 0
Delaware Charter & Trust Co. IRA 5,000 (4) 5,000 (4) 0 0
FBO Ebrahim Talebi
Delaware Charter & Trust Co. IRA 5,000 (4) 5,000 (4) 0 0
FBO Jesse Miller
Ebbitt, Gregory 12,500 (4) 12,500 (4) 0 0
Figge, A. H. Donald 5,000 (4) 5,000 (4) 0 0
First Trust Corp., Trustee 5,000 (4) 5,000 (4) 0 0
Patrick E. McKibbon
IRA D604771
First Trust Corp., Trustee 5,000 (4) 5,000 (4) 0 0
Rossario Vallone IRA 138344
First Trust Corp., Trustee 5,000 (4) 5,000 (4) 0 0
Carmen J. Santa Maria
IRA D617561
Fletcher, Taylor/Southwest Marketing 12,500 (4) 12,500 (4) 0 0
Geller, Harley S. 10,000 (4) 10,000 (4) 0 0
Gottlieb, Max & Gracie, Trsts., 5,000 (4) 5,000 (4) 0 0
Gottlieb Living Trust
Government Capital Corp. 5,000 (4) 5,000 (4) 0 0
Guefen, Uri, Trustee, 5,000 (4) 5,000 (4) 0 0
Guefen Family Trust
Guyman, Tom 5,000 (4) 5,000 (4) 0 0
Heaton, Paul & Marietta 5,000 (4) 5,000 (4) 0 0
Hill, Tony 10,000 (4) 10,000 (4) 0 0
Himes, Keith 2,000 (4) 2,000 (4) 0 0
Hitzges, Norm 3,125 (4) 3,125 (4) 0 0
Hovland, Tim 5,000 (4) 5,000 (4) 0 0
Hunsaker, Shorland & Helen L. 5,000 (4) 5,000 (4) 0 0
Iannelli, Ronald P. 5,000 (4) 5,000 (4) 0 0
Illes, Steve G. 25,000 (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>
Imperial Valley Emergency Physicians 5,000 (4) 5,000 (4) 0 0
Inc. Money Purchase Pension
Plan FBO Uri Guefen
Jacobs, Herman (4) 100 (4) 100 (4) 0 0
Johnston, Lawrence K., Trustee 5,000 (4) 5,000 (4) 0 0
Kaplan, Abraham 5,000 (4) 5,000 (4) 0 0
Katcavage, George 5,000 (4) 5,000 (4) 0 0
Kaufman, Melvin I. 17,000 (4) 17,000 (4) 0 0
Kirshner, Edie 5,000 (4) 5,000 (4) 0 0
Kock, R. Logan & Caroline 5,000 (4) 5,000 (4) 0 0
Davidson-Kock
Konstant, Nicholas 30,000 (4) 30,000 (4) 0 4.40%
Koob, C. Albert 2,500 (4) 2,500 (4) 0 0
Korzeniowski, Josef F. & Roxanne 5,000 (4) 5,000 (4) 0 0
Lee, Mei-Ruey 15,000 (4) 15,000 (4) 0 0
Leyba, Frank L. & Kay D. 10,000 (4) 10,000 (4) 0 0
Lieberman, Lawrence 8,333 (4) 8,333 (4) 0 0
Linam, Paul 6,250 (4) 6,250 (4) 0 0
Lipman, Jerome H. & Linda 16,667 (4) 16,667 (4) 0 0
Lipman JTWROS
Loewenthal, M., Plan Administrator 10,000 (4) 10,000 (4) 0 0
RDA Trading Inc. Pension Plan
Loughlin, Thomas & Stella 10,000 (4) 10,000 (4) 0 0
Mandell, Arthur M. & Irma 10,000 (4) 10,000 (4) 0 0
Martinez, Roy A. 10,000 (4) 10,000 (4) 0 0
McEneely, Kevin 37,500 (4) 37,500 (4) 0 0
McEneely, Patrick 8,250 (4) 8,250 (4) 0 0
McEneely, Ryan 8,250 (4) 8,250 (4) 0 0
McMorris, Arthur & Marcia 5,000 (4) 5,000 (4) 0 0
Miller, Clarence & Ada, Trustees 37,500 (4) 37,500 (4) 0 0
Miller, Clarence E. & Ada M. Miller, 10,000 (4) 10,000 (4) 0 0
Trustees
Miller, Ernestine W. 10,000 (4) 10,000 (4) 0 0
Milyapatera, Henk & Benita 6,250 (4) 6,250 (4) 0 0
Montes, Charles & Molly 10,000 (4) 10,000 (4) 0 0
Mooney, John P. & Ivy 10,000 (4) 10,000 (4) 0 0
Nations Bank of Texas, William Haynes 12,500 (4) 12,500 (4) 0 0
IRA 3001100-3113719
Patch, Barbara & William 2,733 (4) 2,733 (4) 0 0
Patch, Barbara & William, Trustees 2,267 (4) 2,267 (4) 0 0
The Patch Family Trust
Piazza, Sam L. & Carol J, Trustees 5,000 (4) 5,000 (4) 0 0
Piazza Family Trust Dated 2/9/89
Popa, Radu 2,000 (4) 2,000 (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>
Powers, Stephen B. 10,000 (4) 10,000 (4) 0 0
Pro-Systems Fab, Inc. 10,000 (4) 10,000 (4) 0 0
Rapinchuk, Edward & Marilyn, Trustees 5,000 (4) 5,000 (4) 0 0
Rapinchuk Family Trust
RC Trading Co. Inc. 20,000 (4) 20,000 (4) 0 0
Salberg, Jeffrey D. 10,000 (4) 10,000 (4) 0 0
Salberg, Larry 50,000 (4) 50,000 (4) 0 0
Schear M.D., Harley 10,000 (4) 10,000 (4) 0 0
Schiller, Barbara V 30,000 (4) 30,000 (4) 0 0
Schiller, Walter C. 15,000 (4) 15,000 (4) 0 0
Schrager, Michael 2,500 (4) 2,500 (4) 0 0
Schultz, Walter 10,000 (4) 10,000 (4) 0 0
Simpson, Charles 6,250 (4) 6,250 (4) 0 0
Somsak, William J. & Linda A. 5,000 (4) 5,000 (4) 0 0
Southwest Securities, Inc., 6,250 (4) 6,250 (4) 0 0
John Mallory IRA #72589730
Stewart, Randy 10,000 (4) 10,000 (4) 0 0
Stratton, Hal & Nancy 6,250 (4) 6,250 (4) 0 0
Stuberg, Robert Carl 5,000 (4) 5,000 (4) 0 0
Thompson Living Trust, Richard 20,000 (4) 20,000 (4) 0 0
& Sharon
TP Holding Corp. 10,000 (4) 10,000 (4) 0 0
Transcorp FBO Alvin M. Gottlieb, M.D. 5,000 (4) 5,000 (4) 0 0
Voit, Marc 5,000 (4) 5,000 (4) 0 0
Waken, John K. & Gracie E, Cotrustees 20,000 (4) 20,000 (4) 0 0
UDT Dated 12-19-93, FBO
John K.& Gracie E. Waken Trust
Waters, John J. & Susan J. 10,000 (4) 10,000 (4) 0 0
Weindranz, Rochelle 50,000 (4) 50,000 (4) 0 0
Weinkranz, Susan 91,667 (4) 91,667 (4) 0 0
Whitted, Brooke R. 5,000 (4) 5,000 (4) 0 0
Wunderlich, Robert & Cynthia 5,000 (4) 5,000 (4) 0 0
Long, Anthony/IRA#36593027 0 (4) 6,250 (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>
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>
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>
14
<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
Anderson Chamberlain, Inc. 0 (4) 0 (4) 0 0
Haggarty Schwartz Dixon 0 (4) 0 (4) 0 0
Joe Dell Brokerage, Inc. 0 (4) 0 (4) 0 0
Chandler 0 (4) 0 (4) 0 0
Marketing Specialists, Inc. 0 (4) 0 (4) 0 0
Bromar, Inc. 0 (4) 0 (4) 0 0
Salesforce, Inc. 0 (4) 0 (4) 0 0
Service Brokerage Co. 0 (4) 0 (4) 0 0
PMI - Eisenhart 0 (4) 0 (4) 0 0
Shur-Good 0 (4) 0 (4) 0 0
Serve - U - Success 0 (4) 0 (4) 0 0
Atlas/SC - Atlas/NC 0 (4) 0 (4) 0 0
Choice Marketing 0 (4) 0 (4) 0 0
Service Brokerage Co. 0 (4) 0 (4) 0 0
Texas HF 0 (4) 0 (4) 0 0
Barnett Bros. Brokerage Co. 0 (4) 0 (4) 0 0
Galaxy Marketing 0 (4) 0 (4) 0 0
Brown, Moore & Flint, Inc. 0 (4) 0 (4) 0 0
Graham Food Brokerage 0 (4) 0 (4) 0 0
Luke Soules, Inc. 0 (4) 0 (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
Acosta Corporation 0 (4) 0 (4) 0 0
Berg, E.A. & Sons, Inc. 0 (4) 0 (4) 0 0
Liaison Marketing 0 (4) 0 (4) 0 0
Food Enterprises, Inc. 0 (4) 0 (4) 0 0
Snell, Albert 0 (4) 54,167 (4) 0 0
Damaske, Charles R. 0 (4) 20,000 (4) 0 0
</TABLE>
15
<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. If the preferred stock were
converted on the date of this Prospectus, _____ shares would be issued to the
Selling Stockholder. See "Description of Securities - 1997 Series A Preferred
Stock" for a discussion of the terms of the Conversion of the 1997 Series A
Preferred Stock.
(2) Issuable upon exercise of options with an exercise price of $1.00 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
16
<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. 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:
17
<PAGE>
<TABLE>
<CAPTION>
PERIOD COMMON STOCK WARRANTS UNITS
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 1995 $16.875 $11.250 $0.188 $0.063 $4.000 $1.500
2nd Quarter 1995 $13.750 $ 5.625 $0.125 $0.063 $4.000 $0.250
3rd Quarter 1995 $ 8.125 $ 3.750 $0.188 $0.188 $1.125 $0.250
4th Quarter 1995 $ 8.438 $ 1.875 $0.188 $0.188 $1.125 $0.250
1st Quarter 1996 $13.400 $ 6.000 $0.050 $0.010 $1.625 $0.250
2nd Quarter 1996 $ 7.000 $ 4.800 $0.010 $0.010 $1.000 $1.000
3rd Quarter 1996 $ 6.200 $ 3.000 $0.010 $0.010 $1.000 $0.500
4th Quarter 1996 $ 3.800 $ 0.875 $0.010 $0.010 $0.500 $0.500
1st Quarter 1997 $ 2.750 $ 0.875 $0.010 $0.010 $0.500 $0.500
2/nd/ Quarter 1997 $ 1.625 $ 0.625 $0.010 $0.010 $0.500 $0.500
3/rd/ Quarter 1997 $ 1.375 $ 0.813 $0.010 $0.010 $0.500 $0.500
4/th/ Quarter 1997 $ 1.688 $ 0.813 $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 December 16, 1997, the closing bid prices for the common stock,
redeemable warrants and units, as reported by the NASDAQ Electronic Bulletin
Board, were $1.19, $.01, and $.50, respectively.
At the close of business on December 19, 1997, there were approximately 400
holders of record of the common stock and approximately 40 holders of record of
the redeemable warrants.
The Company has not paid any dividends on the common stock since inception
and intends to retain any future earnings for the development of its business.
Future dividends on the common stock, if any, will be dependent upon the
Company's earnings, financial condition, the dividend priority of any preferred
shares and other relevant factors as determined by its Board of Directors.
No dividends were paid on Series B Convertible Preferred Stock during 1996
or through the date of this prospectus in 1997. Cumulative unpaid dividends on
the Series B Convertible Preferred Stock as of December 31, 1996 totaled
$25,000. During August 1996, the holder of 500 of the then 1,500 issued and
outstanding shares of Series B Convertible Preferred Stock converted his shares
and all accrued dividends thereon into 2,500 shares of Common Stock (as adjusted
for the reverse stock split effected in October 1996). The conversion of the
Series B Preferred Shares was in accordance with the formula set forth in the
Certificate of Designation for such security and the accrued dividends were
converted at the market price for the Common Stock at the date of the
conversion. In March 1996, the 672.5 shares of Series D Convertible Preferred
Stock and all accrued dividends thereon were converted to Common Stock at $.375
per share ($7.50 as adjusted for the reverse stock split). All unpaid dividends
on the preferred stock must be paid before dividends can be paid on the Common
Stock.
18
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for each of the two years in the
period ended December 31, 1995 and 1996 are derived from, and should be read in
conjunction with the Company's audited financial statements, including the notes
thereto, included elsewhere in this Prospectus. The selected financial data for
the nine months ended September 30, 1996 and 1997 have been derived from
unaudited financial statements that are included elsewhere in this Prospectus.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------------------- ----------------------------
1996 1995 1997 1996
------------------ ------------- ----------- --------------
UNAUDITED
<S> <C> <C> <C> <C>
Net sales $ 5,285,149 $ 2,315,151 $1,497,223 $ 4,408,665
Gross profit (loss) (1,584,971) 832,825 418,369 420,537
Net income (loss) (8,122,815) (2,812,281) 2,150,006 (3,571,710)
Net income (loss) allocable to common $(8,122,815) $(2,812,281) $1,880,842 $(3,571,710)
shareholders
Net income (loss) per share $ (1.59) $ (1.92) $ 0.33 $ (0.85)
Weighted average common shares 5,133,665 1,467,648 5,762,985 4,215,668
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
(UNAUDITED)
<S> <C> <C>
Working capital (deficit) $(1,217,296) $3,480,039
Total assets 2,036,514 5,288,076
Total liabilities 2,530,343 1,202,366
Stockholder's equity (deficit) (493,829) 4,085,710
</TABLE>
19
<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, 1996 AND 1995
- --------------------------------------
The Company expanded its line of products in early 1996, and reduced the
concentration of sales from an almost single product organization in 1995. This
expansion of products assisted the Company's growth into more organizations and
improved the market penetration into already established channels of
distribution. The problem associated with the poor manufacturing at Vitafort's
Caketts co-packer, The Keebler Company, as well as serious problems related to
the manufacture of Fudgets at Michel's Bakery, dislocated and almost destroyed
the distribution channels that the Company had expended both significant time
and cash resources on during this strong expansion year. This problem
contributed greatly to not only the decline in sales in the latter part of 1996,
but also to the increase in costs of manufacturing and storing, sales and
marketing, and general and administration expense levels. Additionally, this
factor played a major role in exhausting the Company's liquidity and forcing it
into the capital market to raise additional capital at prices unfavorable to the
Company.
SALES
Net sales for the year ended December 31, 1996 were $5,285,149 compared to
$2,315,151 from the same period in 1995, an increase of $2,969,998 or 128.3%.
This increase is due primarily to the increase in the new products available to
the Company resulting from the acquisition of the Auburn Farms family of
products and the significant investment in the sales area to establish the
distribution network. Net sales for the first six months of 1996 were
$2,304,352, which was almost the sales volume for the entire year of 1995.
Sales volume in the last six months of 1996 continued to increase until November
1996. At this time, sales declined significantly as a result of the return of
product by our distributors, retailers, and other customers due primarily to the
problems associated with the faulty Caketts product manufactured by The Keebler
Company and to a lesser extent Fudgets product at Michel's.
The expansion of the product mix in 1996 is reflected in the sales
composition. In 1996, Fudgets comprised 36% of total 1996 sales while in 1995
they comprised 97% of sales. Caketts comprised approximately 36% while Auburn
Farms and Natures Warehouse branded products represented 25% of total sales in
1996.
GROSS PROFIT (LOSS)
Gross profit for the year ended December 31, 1995 was $832,825 compared to
a gross loss of ($1,584,971) for the year ended December 31, 1996. The loss in
profitability in 1996 is due to: the significant increase in the inventory
reserve accounts, as a result of the declining customer interest due to the
problems related to the Keebler-produced Caketts and to a lesser extent,
Michel's produced Fudgets; the related return of significant product and the
lack of reorders and loss of volume. In addition, the decline in volume forced
the company to pay higher per unit costs than those originally calculated in
determining price. This led to further erosion in gross profit margin. As the
sales continued to slow down, the pattern continued and gross profit continued
to fall. The problem with the manufacturer of the product also manifested
itself in the Company's inability to sustain shipments on an ongoing basis,
creating additional
20
<PAGE>
product that was nearing its expiration date and requiring the Company to sell
these products as prices which generated little, if any, profit further reducing
the profit margin of the business.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1996 were $6,487,845
compared to $3,537,671 for the same period in 1995, an increase of $2,950,174;
or approximately 84%. Research and development expenses increased from $378,602
to $737,044, an increase of $358,442 or 95%. The increase in research and
development is primarily in the development of new products and packaging for
both new and existing products. Approximately $310,000 of the increase in
research and development between 1995 and 1996 is the result of this sustained
effort as the Company began the implementation of the roll-out program developed
in the marketing and sales strategic plan. Marketing expenses also reflect the
strong effort expended by the Company in positioning its products into various
distribution channels. The Company estimates it has spent approximately
$1,400,000 in product introductory costs during 1996, from which it now believes
it will derive no benefit as a result of the mold problem associated with the
co-packer products delivered to the Company's distributors, retailer, and
consumers by the Company. In addition, during the first part of 1996 the
Company increased its travel expenditures, staff, and commission costs as it
accelerated the introduction programs across the country. The approximately $
980,000 increase in selling, general & administration expenses is due primary to
the increase in legal ($175,000) and consulting ($587,000) fees caused, for the
most part, by the effort expended in locating and identifying the problems
associated with the manufacture of the product by The Keebler Company, the co-
packer for the Caketts product, and to a lesser extent Michel's, the co-packer
for the Fudgets product, and attempting to secure compensation for the costs
associated with repairing the damage done not only to its distributors,
retailers, and consumers but also to the Company's financial condition as a
direct result of the capital depletion which occurred during the year.
INCOME TAXES
As of December 31, 1996, the Company had unused net operating loss carry-
forwards of approximately $19,600,000 and $6,400,000 available to offset future
Federal taxable income and future California taxable income. In addition, the
Company had unused research and experimental credits of $44,000 and $26,000 for
Federal and California state purposes. The unused net operating loss and credit
carry-forwards expire in various amounts through the year 2011. In contrast to
Federal net operating losses, only 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward. The California
net operating losses will expire in various amounts through the year 2000.
Due to restrictions imposed by the Internal Revenue Service Code sections
regarding substantial changes in ownership of companies with loss carry-
forwards, the utilization of the above-mentioned net operating losses may be
limited as a result of changes in stock ownership. The annual utilization of
these losses is limited to an amount equal to the estimated fair value (for
income tax purposes) of the Company at the point of stock ownership change,
multiplied by the long-term tax-exempt rate then in effect. The annual
limitation has not been quantified at this time.
Deferred tax assets of approximately $6,736,000 for the net operating
losses and other credits have been offset by a valuation allowance since
management cannot determine whether it is more likely than not such assets will
be recovered.
INTEREST EXPENSE
Interest expense was $50,509 in 1996 and $126,290 in 1995. The decline in
interest expense results primarily from the conversion and/or retirement of the
indebtedness of the Company and the reduction of general interest rates.
21
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- ------------
<S> <C> <C>
Net Cash for Operations $(5,523,462) $(2,264,440)
Net Cash Used for Investing Activities (172,896) (92,767)
Net Cash Provided by Financing Activities 4,568,819 3,342,636
Working Capital (Deficit) (1,217,296) 1,296,769
</TABLE>
The Company's net cash used in operations increased from $2,264,440 in
1995, to $5,523,462 in 1996. This increase results primarily from the loss in
1996 and reflects the significant amount of resources expended in introducing
the new line of company products to the market and to build the inventory levels
that the Company believed were obtainable given the product responses at trade
shows. These expenditures were wasted when the mold problem forced product
returns, order cancellations, and eliminated follow-through orders for the
product.
The Company continues to utilize strategic capital exchanges to minimize,
to the extent possible, the cash requirements of the business from an on-going
basis. This strategy has included exchanging debt or services with service
providers, consultants, employees and other organizations, thereby, conserving
cash. The Company intends to continue this practice in the future when it is in
the best interest of the Company. The losses, which the Company believes have
caused the stock price to decline, have therefore made the utilization of such a
method of compensation more costly to the Company, but continues to be an
alternative.
The Company continues to seek additional capital through private placements
on an on-going basis, although the future ability of the Company to raise such
capital in its current condition in amounts satisfactory to allow the Company to
continue to operate is not assured. The Company realized net proceeds of
approximately $900,000 from private placements of its securities completed
during the first four months of 1997. See "Note 13" to the financial statements
for the year ended December 31, 1996 for additional information.
The Company's independent certified public accountants have included a
modification to their opinion, which indicates there is substantial doubt about
the Company's ability to continue as a going concern. See "Note 2" to the
financial statements for the year ended December 31, 1996 for additional
information. The Company received $ 6,750,000 in full and complete settlement
from the Keebler arbitration on July 15, 1997. See Recent Financial
Developments on Page 26 for an explanation of the Keebler settlement.
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.
Nine Months and Three Months Ended September 30, 1997 and 1996
- --------------------------------------------------------------
Results of Operations:
The net proceeds from the damage award in the Keebler Company arbitration
has eliminated, at least in the short term, the liquidity problem that has
plagued the Company over the past year. Currently, the Company is
negotiating payout terms with certain vendors and reestablishing credit
terms with its current co-packers to improve its inventory levels to meet
customer requirements while at the same time prolonging its current cash
position.
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. FINALLY, THE
COMPANY WILL BE CHANGING THE VITAFORT TRADE NAME AND THE FUDGETS AND CAKETTS
PRODUCT NAMES DUE TO THE PROBLEMS IN 1996. 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.
Although the cash position has improved, the problems associated with the
lack of resources in the past continue to hamper customer relations through
the impact of returned products on the ability of the Company to collect
its trade accounts receivable in full, the position of some customers who
will continue to do business with the Company only after the past amounts
due them for advertising and returns are settled in full, and other
customers who are waiting to see new products introduced by the Company
before agreeing to continue to be a customer of the Company.
Since the cash infusion, the Company has focused on continuing to repair
the relationships with its customers and vendors by insuring that the
records of both organizations are in agreement, establishing a payment
schedule, if necessary, agreeable to both parties, and using this
communication to open the relationship to future business. In addition,
the Company is using its resources to prepare for the new products that it
will need to launch to maintain its position in the market and improve its
visibility with the ultimate customer, the consumer.
Net Sales:
For the three month period ended September 30, 1997, net sales were
$322,116 compared to $2,104,314 for the same period in 1996, a decrease of
$1,782,198 from the previous year. The lack of customer confidence in some
of the products, mainly Fudgets and Caketts, is reflected in the decline in
sales of those products from $1,342,334 for the three months ended
September 30, 1996 to $151,989 for the same period in 1997. Additionally,
the cash flow constraints imposed upon the Company during the first part of
1997 has contributed to the reduction of sales for the nine month periods
from $4,408,665 in 1996 to $1,497,223 in 1997, a decrease of $2,911,442.
The Toast'N Jammers brand of low fat toaster pastries continues to
represent almost one-half of the total net
23
<PAGE>
sales for the three months ended September 30, 1997 and over one-third for
the nine month period ended September 30, 1997.
Gross Profit:
Gross profit increased from 9.1% of net sales for the three months ended
September 30, 1996 to 39.1% for the same three-month period in 1997.
Absolute dollar amounts, however, declined from $191,580 to $125,890 for
the three-month periods ending September 30, 1996 and 1997 respectively.
The overall increase in the Company's gross profit margin reflects the
continued effort to maintain overall profit targets without major discounts
and allowances. For the nine months ended September 30, 1996 the gross
profit margin was $420,537 or 9.5% of net sales compared to $418,369 or
27.9% for the same period ended September 30, 1997. This increase in gross
margin as a percent of net sales continues to reflect the Company's effort
toward improving this area.
Operating Expenses:
Overall expenses have been reduced due to the cost control procedures
implemented by the Company. In addition, the reimbursement of $767,000 in
this quarter of legal fees and costs associated with the Keebler
arbitration award is reflected in the reduction in general and
administrative expenses. The reduction in both product development and
sales and marketing expenses reflects the effort by the Company in these
areas to increase performance without significant expenditures of
resources. The reduction in general and administrative expenses would have
been greater had the final legal fees and associated costs relating to the
Keebler arbitration not been included. Since the award, the Company is
beginning to both refocus its efforts in the product development area to
introduce new products and in the sales and marketing area as it
reestablishes its customer, broker, and support organizations.
Product Development (Research and Development):
During 1997, the Company has been forced to substantially reduce its
expenditures in this area due to the financial constraints in the first
half of the year. This has resulted in a drop in expenditures of $514,121
for the nine months ended September 30, 1997 compared to the same period of
1996. The drop in expenses are primarily in salaries, travel, and
laboratory research and development where the expenses in 1996 were
$137,665 for the three months ended September 30, 1996 compared to $0 for
the same period in 1997. This was partially offset, however, by the
increase in consulting expenses during the three month period in 1997 which
were $57,925 more than the same period of 1996. As a result of the
Keebler award, the Company is again starting to apply resources to this
area both to improve or modify existing products and to introduce new
products during the end of 1997 and 1998 and 1999. However, in keeping
with its new strategies, it will seek to utilize co-packers and their
resources to improve and develop products so that the Company's costs may
be minimized.
Sales and Marketing:
The Company's expense levels in these disciplines continues to be reduced
as a result of both lower net sales volume and concerted effort by
management to continue to eliminate expenses where appropriate. For the
nine months ended September 30, 1997 expenses were $996,242 compared to
$1,690,024 for the same nine month period in 1996, a decrease of $693,782
from 1997 to 1996. The majority of these cost reductions are in salaries,
consultants and travel, $361,500; freight of $59,335; sales promotions,
$242,708; commissions and royalties of $101,020; and postage and
24
<PAGE>
communication costs of $52,463. These reductions were offset by the
increase in product introduction cost of $197,008. For the three month
period ended September 30, 1997, the total sales and marketing expenses
were $257,016 compared to $580,798 for the same period of 1996, a decrease
of $323,782. The reduction was primarily in the areas directly related to
volume of net sales, such as commissions and royalties, freight out, sales
promotions, and travel. The Company is beginning to reenter the
distribution network by reestablishing relationships with existing
customers, adding new brokers and customers as appropriate, and starting
the process of improving its customer relations with all customers.
General and Administrative:
For the nine months ended September 30, 1997, expenses were $1,894,114
compared to $1,603,775 for the nine months ended September 30, 1996, an
increase of $290,339. The majority of the increase in expenses are in the
professional services area, particularly legal expenses totaling $1,055,608
less the Keebler arbitration reimbursement of $767,000. The professional
services increase is almost directly related to the litigation defenses of
the Company, primarily for the Keebler arbitration. For the three months
ended September 30, 1997 general and administrative expenses were $770,227
before the award of $767,000 which resulted in a balance of $3,227
compared to $573,929 for the three month period ended September 30, 1996.
The increases in 1997 over 1996 of $192,298 are in the areas of
amortization and depreciation of $30,564; an increase in bad debts of
$45,000 from an employee due to the filing of personal bankruptcy; and the
increase in insurance cost of $65,666.
Other income (expense) including interest and litigation recovery, net of
expenses:
Interest expense reflects the continuing cost of the line of credit with
Coast Business Credit, the primary lender. Upon receipt of the Keebler
arbitration, the Company immediately invested the proceeds in short-term
government securities, with the approval of the Board of Directors. The
interest income for the three months ended September 30, 1997 reflects the
receipts from these short-term investments.
Upon the Keebler arbitration award, the Company has recorded the $5,983,000
as income under the heading "litigation recovery, net of costs." In
addition, the Company was able to cancel outstanding debt in the amount of
$140,829 due to the Keebler Company and incurred and paid $1,236,882 to
ATCOLP INVESTMENT PARTNERS under the existing agreement with them for the
advancement of certain funds to pay the litigation expenses.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
------------- --------------
<S> <C> <C>
Net Cash Generated (Used) for Operations $1,413,139 $(5,502,020)
Net Cash Used for Investing Activities (6,912) (405,648)
Net Cash Provided by Financing Activities 2,002,849 5,775,583
Working Capital (Deficit) 3,480,039 (875,965)
</TABLE>
The Keebler award has eliminated the short-term cash requirements of the
Company and has allowed the Company the time to begin increasing its
efforts in the areas of product development and sales and marketing. In
addition, the Company has negotiated long term payment schedules
25
<PAGE>
with certain of its old vendors, which will allow it to further conserve
cash. Although the cash position has improved, the long-term financial
viability still remains in doubt due to the lack of customer acceptance of
the Fudgets and Caketts and the loss of distribution and shelf space due to
the past inability to ship product in a timely manner. While the Company is
now able to ship product timely, the rebuilding of the customer
relationship and the continuing effort in the product development function
will continue to adversely impact the Company's liquidity in the near
term.
IMPACT OF NEW ACCOUNTING STANDARDS
On March 3, 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 "Earnings Per Share" (SFAS No. 128). This pronouncement
provides a different method of calculating earnings per share than is currently
used in accordance with APB No. 15, "Earnings Per Share." SFAS No. 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 shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar to fully
diluted earnings per share. This pronouncement is effective for fiscal years
and interim periods ending after December 15, 1997; early adoption is not
permitted. The Company has not determined the effect, if any, of adoption on
its earnings per share computations.
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company has not determined the
effect on its financial position or results of operations, if any, from the
adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131) issued by the
FASB is effective for financial statements beginning after December 15, 1997.
The new standard requires that public business enterprises report certain
information about operating segments in complete sets of financial statements of
the enterprise and in condensed financial statements of interim periods issued
to shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic areas in
which they operate and their major customers. The Company does not expect
adoption of SFAS No. 131 to have a material effect, if any, on its Results and
Operations.
RECENT FINANCIAL DEVELOPMENTS
On June 20, 1997, the Company received notice of the interim award under
the arbitration with the Keebler Company. The award was for $5,983,000 as well
as compensation for all legal fees and costs associated with the arbitration
proceedings. Based on the agreement with ATCOLP INVESTMENT PARTNERS (the
"Lender"), the Company agreed to pay the Lender a sliding percentage of the
proceeds from the settlement in exchange for advancing $300,000 to the Company
to meet the litigation expenses.
On Tuesday, 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 $1,236,882 to ATCOLP INVESTMENT PARTNERS under the existing agreement.
Additionally, the Company was able to cancel $140,829 in debt due to the Keebler
Company.
26
<PAGE>
THE BUSINESS OF THE COMPANY
GENERAL
Vitafort International Corporation (the "Company" or "Vitafort") was formed
as a California corporation in 1986, and reincorporated as a Delaware
corporation in 1989. Prior to May of 1993, Vitafort was in the business of
formulating and developing value-added foods and beverages for third parties.
In addition, the Company was also marketing branded seafood. In May of 1993,
these businesses were discontinued due to lack of revenues and profit and later
in the year the Company disposed of them. In the fall of 1993, the Company
installed new management, who selected a new direction for the Company.
Vitafort would begin developing fat free and low fat bakery snacks that would be
marketed under Company owned trademarks. Vitafort, however, did not own any
production facilities, so established contract manufacturers (co-packers) would
be utilized to manufacturer these branded products developed by the
Company.
In the spring of 1994, at the Natural Food Expo in Anaheim, California,
Vitafort introduced its first branded product called Fudgets(TM), a single-serve
fat free brownie with icing. Four flavors of Fudgets were marketed throughout
1994 and 1995, while Vitafort research and development continued to develop
additional low fat and fat free snacks. During this period Fudgets were sold at
retailers such as: Price 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 (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.
27
<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 product produced by
Keebler (Caketts) and quality problems associated with product produced by
Michel's (Fudgets) continued. By December the Company learned that the damage
to the consumer acceptance of these brands caused by the previously shipped
defective product was greater than previously realized. This quality problem
created hundreds of consumer complaints that led to both loss of distributor
goodwill and a significant loss of shelf space in the supermarkets. In
addition, product had to be withdrawn from the marketplace. As a result, fourth
quarter sales were significantly adversely affected and costs relating to this
problem were much greater than previously anticipated.
A new co-packer manufactures both Caketts and Fudgets for the Company with
acceptable quality control. The Company continues to ship Fudgets, but has
substantially curtailed shipments of Caketts due to damage done to the brand.
The Company is formulating a revised marketing plan for Fudgets.
The Company attributes its poor 1996 and 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.
The Company introduced a new brand called Hollywood Partners in late 1997.
The purpose was to use motion picture studios 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
28
<PAGE>
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 the final
three quarters of 1997, $17,775 of deferred payments were made under the
FPA.
The Company is using co-packers to produce products bearing the acquired
trademarks.
CREDIT FACILITY
In August 1996, the Company entered into a revolving credit facility with
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, located in Ontario,
California. The amount of inventory advances under the facility cannot exceed
$500,000. The initial term of the facility ends August 1997, with automatic
renews thereafter. Advances under the facility bear an interest rate at the
Bank of America NT plus 3%, and are secured by a first priority lien on all of
the Company's assets. Minimum interest charges after the first three months of
the term are $10,000 per month for the next three months, and $15,000 per month
thereafter. The Company paid $40,000 to the institution upon execution of the
agreement, and $40,000 to a facilitator in connection with the placement of the
loan.
The Company is using the proceeds of advances under the facility to meet
its current working capital requirements. The amount due, under this credit
facility, was $440,022 on December 31, 1996, and $13,339 on September 30, 1997.
The reduction results from the Company's decision not to borrow all funds
available.
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.
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. See "Liquidity
and Capital Resources" under "Management's Discussion and Analysis or Plan of
Operation". No assurance is given that the Company will not be in violation of
any covenants in the future.
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
29
<PAGE>
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.
Since December 1992, the Company has used another co-packer, located on
Long Island, New York, as the primary supplier of Trim Slice and Vegicatessen
brand products. This co-packer operates under strict kosher guidelines.
Management believes that this co-packer has the capacity to produce sufficient
quantities of the Company's products to supply projected needs at least through
the end of 1997.
The Company is in the process of negotiating co-packing agreements with
other established firms to act as co-packers for various other products.
Management believes that, if the research and development of the products is
completed 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. During 1996, K-Mart
comprised 11% of the Company's net revenues and, during 1995, Price Club
comprised 25% of the Company's net revenues.
MARKETING
Vitafort developed a phased strategic marketing plan in the latter part of
1995, which continued into 1996, involving the development and expansion of the
Fudgets Fat Free Brownies and Juliette's Low Fat Chocolate Creams brands while
staging the rebuilding of the more mature Auburn Farms and Natures Warehouse
brands. The mold problem associated with the co-packers of Caketts and Fudgets
during 1996 has had a serious impact on the distribution channels of the
products. In addition, the liquidity problems caused by the same production
issues, has severely hampered the Company's ability to increase the distribution
of its products through the increase in product introduction costs. The Company
has arrangements with distributors, which are the primary customers of the
Company, which are not contractual in nature other than under normal 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 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.
30
<PAGE>
CRYSTAL GEYSER
The Company developed a vitamin pre-mix, which was licensed to the Crystal
Geyser Water Company. The pre-mix was added to a fruit juice - sparkling mineral
water product distributed as "juice squeeze". Under the agreement, Crystal
Geyser is obligated to purchase the necessary pre-mix from the Company. There
are no minimum purchase or royalty requirements under the agreement. The
licensing agreement expired in January, 1995, subject to the licensee's right to
renew for an additional 20 years. The licensee did not renew and the Company
does not anticipate any further revenues from the licensee. During 1995, the
Company realized revenues from the sale of pre-mix totaling $2,300. There were
no revenues from this source in 1996 or anticipated in 1997.
FOREIGN LICENSE - MEXICO, CENTRAL & SOUTH AMERICA, AND THE CARIBBEAN
The Company has granted an exclusive license to its products and program
for Mexico, Central and South America and the Caribbean to Vitafort Latin
America, Inc. ("VLA"). VLA, a Puerto Rico corporation, became a successor to
VLA, a Delaware corporation. VLA is owned equally by the Company and Puerto Rico
Supplies Co., Inc., a corporation owned by members of the Pasarell family.
Stanley J. Pasarell is a former director of the Company. This license is
royalty free and the Company will derive revenue and profit, if any, from its
50% interest in the licensee. No efforts were made in VLA during 1996 or, to
date, in 1997.
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 may be one of the key food products with distribution in a number of
supermarkets throughout the U.S. Quality problems encountered in 1996 may have
severely limited the realization of this mark.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
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. This product line is slated for a repositioning
which should further enhance its value to the company.
7-GRAINERS A snack cracker brand within the health food class of trade. This brand also
holds a shelf position within the specialty grocery class of trade.
AVENUE OF THE STARS A new mark used for products which shall be part of motion
picture licensing agreements.
</TABLE>
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 $737,044 and $378,602 on research and development in 1996
and 1995, respectively. The Company spent $179,268 on research and development
during the first nine months of 1997. The Company intends to create new
products using the above strategy and to launch products in the marketplace in
1997 and 1998. 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.
32
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VITAFORT BRAND CLASS OF TRADE PRINCIPAL COMPETITION MARKET NICHE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Caketts Main grocery cookie Snackwell's snack cakes Caketts line may be the only
section and food shelf stable snack cake line
sections of discount offered in the cookie section
drug however the co-packer mold
problem has severely
curtailed its past
competitive advantage.
- ---------------------------------------------------------------------------------------------------------------
Juliette's Low Fat Main grocery sections, There is no known direct Appeal to those consumers who
Chocolate Creams natural food stores competition for boxed low are not willing to sacrifice
and discount drug fat chocolate cream the taste of real chocolates,
stores within the U.S. candies. but demand a nutritional
profile that provides lower
fat than traditional
chocolates.
- ---------------------------------------------------------------------------------------------------------------
Fudgets Main grocery cookie 1. Snackwell's Brownies Fudgets may be the only fat
section 2. Pepperidge Farms free frosted brownie line
Brownies offered in the cookie
3. Greenfield's Brownies section, however the 1996
4. Frookies Brownies production problems has
limited its advantage.
- ---------------------------------------------------------------------------------------------------------------
Toast 'N Jammers Low Specialty Food Health Valley Healthy Toast 'N Jammers may have a
Fat Toaster Pastries sections of Tarts, and Natures' competitive edge.
supermarkets and Choice Toaster Pastries
specialty stores.
- ---------------------------------------------------------------------------------------------------------------
Jammers Fat Free Health food stores and Health Valley Cookies, The company is repositioning
Cookies and Brownies health food sections Westbrae Cookies, Heaven the brand to strengthen its
of supermarkets Scent Cookies, Barbara's future franchise.
Cookies, Pamela's
Cookies, Frookies Cookies
& Brownies, Greenfield's
Brownies
- ---------------------------------------------------------------------------------------------------------------
7-Grainers Fat Free Health food stores and Health Valley Crackers, Vitafort plans to reposition
Crackers health food sections Hain Crackers, Barbara's the brand with unique new
within supermarkets Crackers. product entries.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL REGULATION AND SEASONALITY
Management believes that the costs associated with compliance with
environmental regulations do not impose a significant burden upon the Company's
operations. Management does not believe that the Company's business is seasonal
to any significant extent.
EMPLOYEES
As of December 19, 1997, the Company had 10 employees of whom 3 were
executive officers, 3 were engaged in sales and marketing, and 4 were clerical
and administrative.
33
<PAGE>
PROPERTIES
The Company's principal executive office consists of 3,921 rentable square
feet located at 1800 Avenue of the Stars, Los Angeles, California, which is
leased pursuant to a three-year lease 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 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
$6,250.00 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
company's 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 could recoup his entire investment and realize a profit on
his $75,000 investment.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-packer
and against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims. The litigation is in the early stages and the Company intends
to vigorously pursue the same.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other similar
claims arising out of the consulting relationship that previously existed
between the Company and Mr. Ellis. The Complaint seeks damages in an
unspecified amount. The court has sustained, without leave to amend, a demurrer
to the claims against Mark Beychok and sustained the demur, with leave to amend,
against the Company. Mr. Ellis recently filed an amended complaint against the
Company. The Company is in the process of document discovery and is defending
the action vigorously.
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 40 President, CEO and a Director
Donald Wohl 61 Director
Paul Hermis 30 Director
Benjamin Tabatchnick 44 Director
John Coppolino 37 Executive Vice President
Jack Spencer 52 Chief Operating Officer, Chief Financial
Officer
</TABLE>
34
<PAGE>
Mark Beychok was elected President and a Director of the Company in
September of 1993, and has been Chief Executive Officer since February 1995.
Mr. Beychok is a private investor with fifteen years experience in the food
industry as an owner and operator of various food manufacturing marketing and
distribution companies.
Donald Wohl was elected a Director of the Company in November of 1993. Mr.
Wohl is a private investor and financial consultant who has been advising small
growth companies for over 30 years. Mr. Wohl is also on the board of Koo Koo
Roo, Inc., a NASDAQ listed company which operates a chain of restaurants.
Paul S. Hermis was elected a Director of the Company in February 1997. Mr.
Hermis is a co-creator, owner and founder of The Personal Edge, Body Friendly
Program and has over ten years experience in the wellness and nutritional
management industry. Mr. Hermis received a doctorate in education and
institutional management from Pepperdine University.
Benjamin Tabatchnick was elected a Director of the Company in February
1997. Since January 1990, Mr. Tabatchnick has owned and operated Tabatchnick's
Fine Foods (and predecessors), a privately held concern, which manufactures and
distributes its own trademarked line of frozen soups, and manufactures frozen
and refrigerated foods for others on a contract basis.
John Coppolino became Executive Vice President during September 1997. Mr.
Coppolino has over ten years experience in the food industry, including
experience as a food broker and in product manufacture. Mr. Coppolino graduated
from the Pennsylvania State University School of Business in 1983 with a degree
in Business Logistics.
Jack Spencer became Chief Financial Officer and Chief Operating Officer in
June 1997. Mr. Spencer has owned and operated Sunrise Consulting, Ltd., a
private concern specializing in restructuring, reorganizing, and rehabilitating
companies. Mr. Spencer has a BA in Economics from DePauw University (Indiana)
and an MBA from Washington University (Missouri).
COMPENSATION
Mr. Westlund, a former officer and director of the Company, signed an
employment agreement with the Company on December 1, 1993. The terms of that
employment agreement are described below. Such employment agreement was
terminated upon Mr. Westlund's resignation as an officer of the Company in March
1995. Mr. Westlund and the Company entered into a consulting agreement, dated
as of March 1, 1995, where under Mr. Westlund was engaged as a consultant to the
Company through November 30, 1995, with monthly fees of $12,500; and, provided
for offsets against such consulting fees equal to Mr. Westlund's outstanding
obligations to the Company. Among other things, the consulting agreement
provided that, if the new Chief Executive Officer of the Company deferred a
portion of his compensation under his employment agreement, then Mr. Westlund
would also defer the same portion of his consulting fees under the agreement.
On November 30, 1995, the Company and Mr. Westlund executed a letter agreement
settling their respective obligations under Mr. Westlund's consulting agreement,
modifying Mr. Westlund's remaining stock options to delete certain anti-dilution
provisions and releasing each other from all prior obligations. The Company has
fulfilled all of its obligations to Mr. Westlund under such letter agreement.
Mr. Benz, a former officer and director of the Company, signed an
employment agreement with the Company on December 1, 1993. The terms of that
employment agreement are described below. Effective April 1, 1994, Mr. Benz
resigned as an officer and a director of the Company and during 1994 the Company
and Mr. Benz executed a Separation and Release Agreement, dated as of December
1, 1994 (the "Separation Agreement"). The Separation Agreement provided that
the remaining 80,000 options at $5.00 (as adjusted for the reverse stock split
effected in 1996) granted to Mr. Benz under his employment agreement would
immediately vest and the exercise price of 25,000 of such options would be
reduced from $5.00 to $2.00 (as adjusted for the reverse stock split effected in
1996). The revision to the exercise price
35
<PAGE>
was reflected as expense in the Company's financial statements for the year
ended December 31, 1994. In addition, the 25,000 options granted to Mr. Benz in
September 1993, were amended to provide that the inherent value of the option,
based on the then market price of the common stock, could be utilized to
exercise such options. Mr. Benz was to receive a lump sum of $15,000 in
settlement of his employment agreement and was retained as a consultant at the
rate of $3,500 per month for a period of seven months. During 1995, the Company
and Mr. Benz executed a letter agreement where under the moneys owed to the
Company by Mr. Benz were offset against amounts owed to Mr. Benz under the
consulting arrangement and the balance was applied to the exercise of certain
options held by Mr. Benz.
On December 1, 1993, the Company entered into a three-year employment
agreement with each of Steven Westlund, Peter Benz and Mark Beychok. The
aggregate total of these agreements provides for an annual base salary of
$150,000 in the case of each of Mr. Westlund and Mr. Beychok; and, $120,000 in
the case of Mr. Benz plus a bonus in an amount equal to 25% of the Company's
pre-tax profits, but not more than 20% of the base salary. The agreements
provide that they shall automatically renew for successive three year terms
unless terminated by either party six months prior to the expiration of their
term. Except for cause, as defined in the agreements, the Company may not
terminate the agreements during the first eighteen months of their initial term
and, upon any termination after the initial eighteen months, must pay the
employee six months salary. Each agreement provided for the grant to the
employee of an option to purchase 100,000 shares of common stock at $5.00 per
share (as adjusted for the reverse stock split effected in 1996). The option
was vested as to 50,000 shares upon grant and vested as to an additional 25,000
shares on December 31, 1994, and as to the final 25,000 shares on June 30, 1995,
conditioned only on continued employment by the Company. Each agreement
provides that the Company will obtain $1,000,000 of life insurance on the
employee, the proceeds of which will be split equally between the employee's
beneficiary and the Company.
In December, 1995, in recognition of Mr. Beychok's deferral of his
compensation during 1995, and his assuming additional responsibilities within
the company, Mr. Beychok's employment agreement was amended to grant him an
additional 62,500 five-year options with an exercise price of $3.00 (as adjusted
for the reverse stock split effected in 1996), a price equal to the offering
price in the Company's then on-going private placement. In November, 1995,
certain employees and consultants to the Company, including Mr. Beychok, agreed
to convert their accrued salary, accrued consulting fees and accrued expense
reimbursements to stock and options on the same terms as the Company's on-going
equity bridge financing. The Company's Board of Directors approved this
transaction in December 1995. In such connection, Mr. Beychok converted $45,821
of accrued salary into 19,092 shares; 9,547 options with an exercise price of
$4.50; and, 9,547 options with an exercise price of $6.00. In 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 $1.062 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 August 1996, the Company entered into an employment agreement with John
Coppolino, which was dated January 1, 1996. Under his agreement, which is for a
one year term, two one year renewal terms at the option of the Company, Mr.
Coppolino received an initial salary of $102,000; and, is entitled to annual
increases of 5-6% based on increases in the cost of living. Mr. Coppolino's
employment agreement provided for the grant of 225,000 options, expiring
December 31, 2000 for the purchase of common stock at $3.00 (as adjusted for the
reverse stock split effected in October 1996). Of these options: (i) 56,250
have vested (ii) 56,250 have lapsed and (iii) 56,250 will vest on each of
January 1, 1998 and January 1, 1999, subject to the Company meeting certain
performance criteria. In September 1997 the Board of Directors reduced the
option price of all unlapsed options to $1.062 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 $1.062 per share.
Such options vest 75,000 each on September 3, 1997, March 3, 1998, September 3,
1998, and March 3, 1999.
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<PAGE>
In June 1997, the Company entered into a two year employment agreement with
Jack B. Spencer under which Mr. Spencer will serve the Company as its Chief
Operating Officer and Chief Financial Officer. The agreement provides for
compensation to Mr. Spencer in the amount of $125,000 per annum and the grant of
an aggregate of 300,000 five year incentive stock options with an exercise price
of $ 0.91 per share (such being the market price of the common stock on the date
the agreement was executed). The options vest as to 109,890 shares on September
15, 1997 as to 109,890 shares on June 16, 1998, as to 80,220 shares on June 16,
1999. Mr. Spencer's employment agreement provides that if Mr. Spencer's
employment by the Company is terminated without cause after September 15, 1997,
then Mr. Spencer shall be entitled to six months severance pay. Mr. Spencer's
employment agreement also provides that upon the occurrence of certain events
constituting a change in control of the Company, as defined therein, followed by
certain changes in Mr. Spencer's duties, Mr. Spencer shall be entitled to
receive a severance equal to one and one half times his then current salary plus
certain other benefits designed, in part, to offset any special taxes that might
be imposed upon Mr. Spencer in connection with such payments.
The following table sets forth certain information with respect to the
compensation paid by the Company to Messrs. Beychok and Coppolino (the "named
individuals") during 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
PRINCIPAL POSITION
& NAME YEAR SALARY OTHER ALL OTHER COMP.
<S> <C> <C> <C> <C>
CEO
Mark Beychok 1996 $137,500 $12,500 (1) $8,864 (2)
Vice President
John Coppolino 1996 72,000 14,500 (3) 9,000 (4)
</TABLE>
(1) A portion of Mr. Beychok's salary was deferred in 1996 and was applied as
an offset against a note receivable in 1997.
(2) Comprised of $8,204 car allowance and $660 in medical insurance benefits
(3) Mr. Coppolino deferred a portion of his salary and exercised stock options
in 1996.
(4) Comprised of $9,000 car allowance.
STOCK OPTION PLAN
The Company adopted its 1989 Stock Option Plan (the "1989 Plan") pursuant
to which 12,500 shares of common stock (as adjusted for the reverse stock split
effected in 1996) were reserved for issuance upon the exercise of options.
Options granted under the 1989 Plan may, at the discretion of the Board, be
incentive stock options ("ISO's") within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended ("Code"), or non-incentive stock
options. In June 1991, the Board of Directors approved an increase in the
number of options available for grant under the 1989 Plan to 50,000 (as adjusted
for the reverse stock split effected in 1996). No options are outstanding under
this plan.
In 1995, the Company adopted a the 1995 Stock Option Plan pursuant to which
2,000,000 shares of Common Stock (as adjusted for the reverse stock split
effected in 1996) were reserved for issuance upon the exercise of options (the
"1995 Plan"). The 1995 Plan is similar to the 1989 Plan in many respects and in
the discussion below, each is referred to as a "Plan" and they are collectively
referred to as the "Plans".
Under the terms of the Plans, all directors, officers and key employees of,
and consultants to, the Company and all its subsidiaries are eligible for option
grants. The Board determines, at its discretion, which persons will receive
option grants, the number of shares subject to each option, the exercise price,
which may not be less than the par value of the shares subject to the option,
except that in the case of ISO's, the exercise price must be at least one
hundred percent (100%) of the fair market value of the optioned shares on the
date of grant, or one hundred and ten percent (110%) of such fair market value
if the optionee
37
<PAGE>
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 excessive price of these options was
reduced to $0.91 in May, 1997 (the current price of these options).
The following chart sets certain information with respect to option
exercises during 1996 by the named individuals:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name Shares Value Number of Value of Unexercised
Acquired on Realized Securities In-the-Money
Exercise Underlying Options/SAR's at
Unexercised FY-End
Options/SAR's at Exercisable/
FY-End Exercisable/ Unexercisable
Unexercisable
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Beychok -0- $ -0- 430,969/699,719 $ -0-
- ---------------------------------------------------------------------------------------------------------------
John Coppolino 11,834 $ -0- 59,000/221,833 $ -0-
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership of the common stock by each
director and by entities or persons known to the Company to own beneficially in
excess of 5% of such stock and by all officers and directors as a group, as of
July 21, 1997. Except as otherwise indicated, all stockholders have sole voting
and investment power with respect to the shares listed as beneficially owned by
them, subject to the rights of spouses under applicable community property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK BENEFICIAL
IDENTITY OF GROUP BENEFICIALLY OWNED OWNERSHIP
- ------------------- ------------------- --------------
<S> <C> <C>
Mark Beychok (1) 857,353 (2) 12.0 %
Donald Wohl (1) 250,000 (3) 3.5 %
Paul S. Hermis (1) 100,000 (4) 1.4 %
Benjamin Tabatchnick (1) 100,000 (4) 1.4 %
John Coppolino (1) 271,500 (5) 3.8 %
Jack Spencer (1) 0 (6) 0.0 %
ALL DIRECTORS AND OFFICERS AS A GROUP.
(5 persons) (2)(3)(4) and (5) 1,578,853 22.1 %
</TABLE>
38
<PAGE>
(1) The address of these persons is 1800 Avenue of the Stars, Suite 480, Los
Angeles, California 90067.
(2) Includes (i) 62,500 shares underlying a currently exercisable option with
an exercise price of $0.91 per share, which expires on December 16, 2000; (ii)
15,000 shares underlying a currently exercisable option with an exercise price
of $0.91 per share which expires on September 29, 1998; (iii) 100,000 shares
underlying a currently exercisable option with an exercise price of $0.91 per
share which expires on November 15, 1998; (iv) 150,000 shares underlying the
currently exercisable portion of a stock option, expiring December 16, 2000,
which has an exercise price of $0.91 per share; (v) 9,547 shares underlying a
currently exercisable option with an exercise price of $4.50 per share which
expires January 7, 1998; (vi) 9,547 shares underlying a currently exercisable
option with an exercise price of $6.00 per share which expires July 7, 1998;
(vii) 3,703 shares underlying a currently exercisable option with an exercise
price of $4.50 per share which expires January 7, 1998; (viii) 3,703 shares
underlying a currently exercisable option with an exercise price of $6.00 per
share which expires July 7, 1998; (ix) 268,750 shares underlying the currently
exercisable portion of a stock option, expiring December 16, 2000, which has an
exercise price of $0.91 per share; (x) 100,000 shares underlying a currently
exercisable option with an exercise price of $0.91 which expires on June 16,
2002; (xi) 100,000 shares underlying a currently exercisable option with an
exercise price of $.875 which expires on December 31, 2002; and (xii) 450,000
shares underlying a currently exercisable option with an exercise price of
$1.062 which expires September 1, 2002.
(3) Includes (i) 150,000 shares underlying the currently exercisable portion a
stock option, expiring December 16, 2000, which has an exercise price of $0.91
per share; and (ii) 100,000 shares underlying a presently exercisable option
with an exercise price of $.0875 which expires on December 31, 2002. Does not
include any shares owned by ATCOLP INVESTMENT PARTNERS, a California limited
partnership in which Mr. Wohl is the general partner.
(4) Each of Messrs. Tabatchnick and Hermis holds a currently exercisable option
for the purchase of 50,000 shares at $.875 and has entered into a consulting
agreement which provides for the issuance of 50,000 shares, subject to
forfeiture if certain performance standards relating to sales into certain
markets are not met.
(5) Includes (i) 1,375 shares underlying a currently exercisable option with an
exercise price of $4.50, which expires January 7, 1998; (ii) 1,375 shares
underlying a currently exercisable option with an exercise price of $6.00, which
expires July 7, 1998; (iii) 168,750 shares underlying a currently exercisable
option with an exercise price of $0.91 per share, which expires on December 16,
2000; (iv) 100,000 shares underlying a currently exercisable option with an
exercise price of $0.91 which expires on June 16, 2002; and (v) 350,000 shares
underlying a currently exercisable option with an exercise price of $1.062 which
expires on September 1, 2002.
(6) Does not include an option for the purchase of 300,000 shares at $0.91,
which is not currently exercisable and expires on June 16, 2002.
CERTAIN TRANSACTIONS
In September of 1993, Mr. Westlund, Mr. Beychok and Mr. Benz (who was then
an officer and a director) each purchased 12,500 shares of the Company's common
stock at $.10 per share ($2.00 per share after the 20 to 1 reverse stock split).
Payment for such shares was made by each of Messrs. Westlund, Beychok and Benz
delivering a promissory note in the amount of $24,975 and paying $25 in cash.
The notes bore interest at 8% per annum and were callable at the option of the
Company during the period August 15 to September 15 in each year. Such notes
were offset against moneys due to Messrs. Benz and Westlund under their
settlement agreements with the Company relating to their employment agreements.
Mr. Beychok's note was offset against accrued salary at about the same time.
See, "Management - Executive Compensation."
39
<PAGE>
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 principal with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald Wohl,
a Director of the Company, is the general partner, for a loan in the amount of
$300,000 (the "Loan"), to fund the payment of legal fees in connection with the
Company's arbitration against The Keebler Company. 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. Upon settlement
of the Keebler litigation, this loan was repaid and an additional $1,236,883 was
paid in accordance with the terms of this agreement.
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 be 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
40
<PAGE>
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 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
41
<PAGE>
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.
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; (iii) 3,333 options with an exercise
price of $4.50; and (iv) 3,333 options with an exercise price of $6.00.
EXPERTS
The consolidated financial statements of Vitafort International Corporation
for the year ended December 31, 1996, included in this Registration Statement on
Form SB-2 have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the period set forth in their report, which
contains an explanatory paragraph regarding the Company's ability to continue as
a going concern, and are included herein in reliance upon such report given upon
the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Vitafort International Corporation
for the year ended December 31, 1995, included in this Registration Statement on
Form SB-2 have been audited by KPMG Peat Marwick, LLP, independent auditors, to
the extent and for the period set forth in their report and are included herein
in reliance upon such report given upon the authority of said firm as experts in
auditing and accounting.
CHANGE OF ACCOUNTANTS
On February 5, 1997, the Registrant dismissed the firm of KPMG Peat
Marwick, LLP ("KPMG") as the Registrant's independent auditor, effective
immediately. The Registrant then selected BDO Seidman, LLP ("BDO") to act as
the Company's independent auditor for the fiscal year ending December 31, 1996.
The foregoing actions of the Registrant were ratified by its Board of Directors.
The 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.
42
<PAGE>
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.
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.
43
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants-BDO Seidman, LLP F-2
Independent Auditors' Report-KPMG Peat Marwick LLP F-3
Consolidated Balance Sheet - December 31, 1996 F-4
Consolidated Statements of Operations -
Years Ended December 31, 1996 and 1995 F-6
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended December 31, 1996 and 1995 F-7
Consolidated Statements of Cash Flows -
Years Ended December 31, 1996 and 1995 F-8
Summary of Accounting Policies F-10
Notes to Consolidated Financial Statements F-13
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Los Angeles, California
We have audited the accompanying consolidated balance sheet of Vitafort
International Corporation and Subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vitafort
International Corporation and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered from recurring losses from
operations, including a net loss of $8,122,815 for the year ended December
31, 1996, and has negative working capital of $1,217,296 as of December 31,
1996, and a net capital deficiency of $493,829. The Company has also been
slow and is delinquent in paying its accounts payable and other
obligations. These factors raise substantial doubt about its ability to
continue as a going concern. There is no assurance that the Company will
be able to realize its recorded assets and liquidate its liabilities in the
normal course of business. Management's plans in regard to these matters
are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Los Angeles, California
April 14, 1997 BDO SEIDMAN, LLP
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES:
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficit), and cash flows of Vitafort International
Corporation and subsidiaries for the year ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Vitafort International Corporation and subsidiaries for the year ended December
31, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
February 16, 1996
F-3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
ASSETS (Notes 1 and 4)
Current assets:
Cash and cash equivalents $ 188,867
Accounts receivable - trade, net of allowance for
doubtful accounts of $79,994 430,789
Notes receivable 56,000
Other receivables 4,464
Inventory 361,196
Prepaid and other current assets 271,731
----------
Total current assets 1,313,047
----------
Fixed assets (Note 5):
Manufacturing equipment 290,912
Furniture and office equipment 105,160
Computer equipment 173,294
----------
569,366
Less accumulated depreciation (231,592)
----------
Net fixed assets 337,774
----------
Intangible assets 481,254
Less accumulated amortization (95,561)
----------
Net intangible assets 385,693
----------
$2,036,514
==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT DECEMBER 31, 1996
-----------------
<S> <C>
Current liabilities:
Notes payable (Note 4) $ 440,022
Accounts payable - trade 1,263,250
Accrued expenses (Note 3) 789,212
Current maturities of long-term debt (Note 5) 37,859
------------
Total liabilities, all current 2,530,343
------------
Commitments and contingencies (Notes 10 and 12)
Stockholders' deficit (Notes 7, 8 and 13):
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued
and outstanding 1,000 ; aggregate liquidation
preference of $50,000 10
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50
shares; aggregate liquidation preference of $50,000 1
Common stock, $.0001 par value, authorized 9,000,000
shares; issued and outstanding 4,908,664 8,686
Additional paid-in capital 20,547,953
Accumulated deficit (21,050,479)
------------
Total stockholders' deficit (493,829)
------------
$ 2,036,514
============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Net revenues $ 5,285,149 $ 2,315,151
Cost of sales 6,870,120 1,482,326
----------- -----------
Gross profit (loss) (1,584,971) 832,825
----------- -----------
Operating expenses:
Research and development 737,044 378,602
Marketing 3,029,480 1,417,645
Selling, general and administrative 2,721,321 1,741,424
----------- -----------
Total operating expenses 6,487,845 3,537,671
----------- -----------
Loss from operations (8,072,816) (2,704,846)
Interest income 49,319 19,778
Interest expense (50,509) (126,290)
Other income (expense) (45,650) 677
----------- -----------
Loss before income taxes (8,119,656) (2,810,681)
State income taxes (Note 6) 3,159 1,600
----------- -----------
Net loss $(8,122,815) $(2,812,281)
=========== ===========
Net loss per common share $ (1.59) $ (1.92)
=========== ===========
Weighted average common shares 5,133,665 1,467,648
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Series B
Cumulative Series C Series D
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- --------------- Subscribed
Shares Amount Shares Amount Shares Amount Stock
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 2,500 $20 50 $1 673 $ 7 $ 74,925
Common stock issued for cash
in bridge offering, net of
commissions and offering costs - - - - -
Common stock subscribed in private
placement, net of commissions
and offering costs - - - - - 1,530,249
Conversion of debt to equity - - - - 1,416,447
Conversion of preferred stock to
common stock (500) (5) - - (673) (7) 372,500
Exercise of stock options - - - - - 24,075
Net loss - - - - -
----- --- -- -- --- --- -----------
Balance, December 31, 1995 1,500 $15 50 $1 - $ 0 $ 3,418,196
Common stock issued from subscriptions - - - - - (3,418,196)
Common stock issued in private placement,
net of commissions and offering costs - - - - - -
Conversion of debt to equity - - - - - -
Conversion of preferred stock to
common stock (500) (5) - - - -
Common stock-consulting - - - - - -
Exercise of stock options - - - - - -
Net loss - - - - - -
----- --- -- -- --- --- -----------
Balance, December 31, 1996 1,000 $10 50 $1 - $ 0 $ 0
===== === == == === === ===========
<CAPTION>
Notes
Receivable on Common Stock Additional
Subscribed Paid-in Accumulated
Common Stock Shares Amount Capital Deficit Total
------------- --------- ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 (74,925) 1,201,305 $2,403 $ 9,722,557 $(10,115,383) $ (390,395)
Common stock issued for cash
in bridge offering, net of
commissions and offering costs - 260,417 521 563,439 - 563,960
Common stock subscribed in private
placement, net of commissions
and offering costs - - - - - 1,530,249
Conversion of debt to equity 74,925 381,014 762 1,418,399 - 2,910,533
Conversion of preferred stock to
common stock - 48,014 96 (372,584) - -
Exercise of stock options - 20,435 41 50,309 - 74,425
Net loss - - - - (2,812,281) (2,812,281)
-------- --------- ------ ----------- ------------ -----------
Balance, December 31, 1995 $ 0 1,911,185 $3,823 $11,382,120 $(12,927,664) $ 1,876,491
Common stock issued from subscriptions - 1,129,474 1,992 3,116,204 - (300,000)
Common stock issued in private placement,
net of commissions and offering costs - 1,020,000 2,040 3,497,801 - 3,499,841
Conversion of debt to equity - 80,000 8 399,992 - 400,000
Conversion of preferred stock to
common stock - 2,500 5 59,694 - 59,694
Common stock-consulting - 579,957 447 1,377,197 - 1,377,644
Exercise of stock options - 185,548 371 714,945 - 715,316
Net loss - - - - (8,122,815) (8,122,815)
-------- --------- ------ ----------- ------------ -----------
Balance, December 31, 1996 $ 0 4,908,664 $8,686 $20,547,953 $(21,050,479) $ (493,829)
======== ========= ====== =========== ============ ===========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (8,122,815) $ (2,812,281)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating activities:
Depreciation and amortization 119,459 75,385
Operating expenses paid with common stock 1,377,644 -
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade, net (391,366) 111,514
Inventory 319,680 (490,126)
Other (55,760) -
Prepaid and other assets 93,386 52,125
Notes receivable (36,222) (19,778)
Other receivables 143,510 (147,974)
Increase (decrease) in:
Accounts payable - trade 1,026,324 (42,937)
Accrued expenses 152,698 859,632
Other current liabilities (150,000) 150,000
------------ ------------
Cash and cash equivalents used in operating activities (5,523,462) (2,264,440)
------------ ------------
Cash flows from investing activities:
Purchase of fixed assets (172,896) (92,767)
------------ ------------
Cash and cash equivalents used in investing activities (172,896) (92,767)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable 599,715 1,818,911
Repayment of notes payable (75,000) -
Repayment of long-term debt (171,053) (644,909)
Proceeds from stock subscription - 1,530,249
Proceeds from issuance of common stock 3,499,841 563,960
Exercise of stock options 715,316 74,425
------------ ------------
Cash and cash equivalents provided by financing activities 4,568,819 3,342,636
------------ ------------
Increase (decrease) in cash and cash equivalents (1,127,539) 985,429
Cash and cash equivalents at beginning of year 1,316,406 330,977
------------ ------------
Cash and cash equivalents at end of year $ 188,867 $ 1,316,406
============ ============
</TABLE>
F-8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 50,509 $ 128,978
Income taxes 2,854 1,600
========== ==========
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock for:
Conversion of debt to equity $ 400,000 $1,715,551
Conversion of accrued interest 59,694 29,427
Conversion of preferred stock to common stock 14,999 372,488
Payment of expenses - 490,630
Payment of consulting contract (300,000) 600,000
Settlement of Notes Receivable from shareholders
by liquidation of accounts payable - 74,925
Prepayment of insurance with note payable - 90,303
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company, Nutrifish Corporation (90.5% owned as of December 31, 1996 and 1995)
and Crystal Clear Farms. All material inter-company accounts and transactions
have been eliminated.
Vitafort Latin America, a 50%-owned subsidiary, has had no operations since its
incorporation.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, at the date, of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INVENTORIES
Inventories consist of merchandise available for sale and packaging supplies,
and are stated at the lower cost (first-in, first-out) or market. Included in
cost of sales for the year ended December 31, 1996 are charges of approximately
$1,220,000 relating to the Keebler Company manufacturing issue (see Note 12).
FIXED ASSETS
Fixed assets are comprised of manufacturing equipment, furniture, office
equipment and computer equipment and are recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful life of five years.
PREPAID AND OTHER CURRENT ASSETS
Prepaid assets include product introduction expenses, which are recorded at cost
and amortized over the economic life thereof, but not in excess of twelve
months.
OTHER INTANGIBLE ASSETS
Intangible assets are composed of acquisition costs of Auburn Farms and Natures
Warehouse trademarks, debt issuance costs and prepaid professional services
contracts 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, or the life of the loan, if debt.
These costs are reviewed by management periodically and written down to the
value of the future benefit expected to be derived.
F-10
<PAGE>
REVENUE
Product sales and related costs are recognized when the Company's products are
shipped from the contract manufacturer to the customer.
Royalty revenue is recognized as earned upon the sale of the end product to
which the royalty relates.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on long-
lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.
LOSS PER SHARE
Loss per share of common stock is computed based on the weighted average number
of shares of common stock outstanding of 5,133,665 and 1,467,648 in 1996 and
1995, respectively. Common stock equivalents, consisting of stock options and
warrants, are anti-dilutive for 1996 and 1995. Dividends on Cumulative
Preferred Stock are not material.
During the years ended December 31, 1996 and 1995, the Company satisfied certain
obligations by issuing 507,500 and 894,189 shares of common and subscribed
stock, respectively. In addition, during 1996 and 1995, 500 shares of Series B
Preferred stock were converted to 49,998 and 64,284 shares of common stock,
respectively. In 1995 the 673 shares of Series D Preferred stock that were
previously outstanding were converted to 896,000 shares of common stock in
negotiated conversions.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided when management
cannot determine whether or not it is more likely that the net deferred tax
asset will be realized. The effect on deferred tax assets and liabilities of a
change in the rates is recognized in income in the period that includes the
enactment date.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers cash and
cash equivalents to include cash on hand and cash equivalents with original
maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's debt instruments is based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.
F-11
<PAGE>
STOCK COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123). FASB
123 allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), but requires pro forma disclosures of net earnings and
earnings per share as if the fair-valued-based method of accounting had been
applied. In accordance with FASB 123, the Company elected to continue to
measure compensation cost under APB No. 25, "Accounting for Stock Issued to
Employees," and comply with the pro forma disclosure requirements.
F-12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY
Vitafort International Corporation (the Company) was incorporated on September
28, 1990 in the State of Delaware to succeed to the business of a California
corporation of the same name which was organized on February 7, 1986. The
Company is presently engaged in formulating and marketing fat-free foods.
NOTE 2 - LIQUIDITY AND GOING CONCERN
The Company has 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. Finally, the
Company will be changing the Vitafort trade name and the Fudgets and Caketts
product names due to the problems in 1996. 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.
The Company has suffered recurring losses from operations and has a negative
working capital and net capital deficit as of December 31, 1996. While the
Company has raised additional capital after year-end 1996, (see Note 13), it has
not generated sufficient revenue-producing activity to sustain its operations.
Accordingly, there is substantial doubt regarding the Company's ability to
continue as a going concern. The Company is attempting to raise additional
capital to meet the working capital deficiency, but may not be able to do so.
Should the Company not be able to raise additional capital, it may have to
severely curtail operations.
NOTE 3 - ACCRUED EXPENSES
Accrued expenses as of December 31, 1996 consist of the following:
<TABLE>
<S> <C>
Accrued compensation $ 90,753
Accrued interest payable 436
Accrued legal fees 120,811
Accrued consulting fees 13,500
Other accrued expenses 115,980
Accrued advertising and promotion 447,732
--------
Total accrued expenses $789,212
========
</TABLE>
NOTE 4 - NOTES PAYABLE
In August 1994, the Company issued a $500,000, 5% convertible note due in
February 1995. On November 12, 1995, the note and accrued interest on the note
was converted into 216,000 shares of the Company's common stock using a $2.50
stock price.
During 1995, the Company issued, as interim financing, and subsequently
converted into subscribed stock, approximately $1,200,000 of notes payable. The
notes were converted into common stock at $3.00 per share,
F-13
<PAGE>
plus options at the same values as those shares and options issued under the
Private Placement in January and February of 1996, on December 29, 1995.
In August 1996, the Company entered into a revolving credit facility with a
financing institution, that provides a credit line of up to $4,000,000 subject
to certain covenants. Advances made to the Company under the facility are based
on a certain percentage of eligible accounts receivable, as defined, and a
certain percentage of eligible inventory, as defined, located in Ontario,
California. The amount of inventory advances under the facility cannot exceed
$500,000. The initial term of the facility ends August 1997, with automatic
renews thereafter. Advances under the facility bear an interest rate at the
Bank of America NT plus 3%, and are secured by a first priority lien on all of
the Company's assets. Minimum interest charges after the first three months of
the term are $10,000 per month for the next three months, and $15,000 per month
thereafter. The Company paid $40,000 to the institution upon execution of the
agreement, and $40,000 to a facilitator in connection with the placement of the
loan. The Company is in violation of certain covenants with respect to working
capital and tangible net worth requirements, and is under negotiation with the
lender to modify the covenants. The Company classified the entire loan as a
current liability.
NOTE 5 - LONG-TERM DEBT
The Company's long-term debt, which approximates fair value, as of December 31,
1996 consists of a 14% note payable in the amount of $37,859, due in monthly
installments of $4,033, including, interest through October 1997, secured by
certain of the Company's fixed assets.
NOTE 6 - INCOME TAXES
As the Company has incurred significant operating losses since inception, its
current tax provision has been limited to minimum California and Delaware tax
payments.
The difference between the Federal income tax rate and the effective income tax
rate on net loss from continuing operations is as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------- ----------------------
<S> <C> <C> <C> <C>
Expected Federal income tax rate (35.0)% $(2,843,000) (35.0)% $(983,738)
State income taxes, net of Federal
income tax benefit (6.1) (495,000) (6.1) (171,451)
Change in valuation allowance to
income tax expense 40.1 3,249,000 32.0 899,000
Expiration of state NOL's - - 1.8 50,000
Adjustment of deferred tax assets - - 5.3 150,000
Other, net 1.0 86,000 2.0 54,590
----- ----------- ----- ---------
- % $ (3,000) - % $ (1,600)
===== =========== ===== =========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Deferred income tax assets:
Net operating loss carry-forwards $6,700,000
Tax credit carry-forwards 36,000
----------
Total gross deferred income tax assets 6,736,000
Less valuation allowance 6,685,000
----------
Deferred income tax assets, net of
valuation allowance 51,000
Deferred income tax liabilities (51,000)
----------
Net deferred income taxes $ -
==========
</TABLE>
F-14
<PAGE>
As of December 31, 1996, the Company had unused net operating loss carryforwards
of approximately $19,600,000 and $6,400,000 available to offset future Federal
taxable income and future California taxable income. In addition, the Company
had unused research and experimental credits of $44,000 and $26,000 for Federal
and California state purposes. The unused net operating loss and credit carry-
forwards expire in various amounts through the year 2011. In contrast to
Federal net operating losses, only 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward. The California
net operating losses will expire in various amounts through the year 2000.
Due to restrictions imposed by the Internal Revenue Code regarding substantial
changes in ownership of companies with loss carry-forwards, the utilization of
the above-mentioned net operating losses may be limited as a result of changes
in stock ownership. The annual utilization of these losses is limited to an
amount equal to the estimated fair value (for income tax purposes) of the
Company at the point of stock ownership change, multiplied by the long-term tax-
exempt rate then in effect. The annual limitation has not been quantified at
this time.
Deferred tax assets of approximately $6,736,000 for the net operating losses and
other credits have been offset by a valuation allowance since management cannot
determine whether it is more likely than not such assets will be recovered.
NOTE 7 - STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
Each share of Series B 10% Cumulative Convertible Preferred stock is convertible
into 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 $40,000 at December 31, 1996
and 1995, respectively.
During 1995 and 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 December 1995, the
holder of 500 shares of Series B Cumulative Convertible Preferred Stock
exchanged his shares and accumulated unpaid dividends for 3,214 shares of
common, and 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.
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 but before
Series D Cumulative Preferred Stock, and to holders of common stock.
Each share of Series D Convertible Preferred Stock was convertible into 68
shares of common stock. Noncumulative dividends of $80 per share per annum are
payable semiannually. The Series D Convertible Preferred Stock has a
liquidation preference of $1,000 per share plus all accrued dividends after
payment of preferences on the Series B 10% Cumulative Convertible Preferred
Stock.
F-15
<PAGE>
In an effort to encourage the holders of the Series D Convertible Preferred
Stock to convert their shares to common stock, the Company offered these holders
more favorable conversion rates. As a result, in December 1995, the holders of
the Series D Convertible Preferred stock exchanged their shares and accumulated
unpaid dividends for 100,426 shares of common stock. In 1995, 44,800 shares of
common stock were issued and 55,626 shares were included in subscribed stock.
In 1996, the 55,626 shares were issued.
The shares of Series B and Series C Preferred stock are not currently registered
under the Securities Exchange Act of 1934.
COMMON STOCK
In January 1996, the Company completed 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.
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.
These shares were issued pursuant to an agreement, which allowed the Company to
reduce the amount owed to these individuals only by the amount they actually
realized by them through sales of the shares. At December 31, 1996, a
significant portion of the shares had not been sold. Thus, the actual amount
realized from the issuance of the shares cannot be determined. The Company has
recorded these shares based upon the market value of the shares at the dates of
issuance.
During August 1993, three officers of the Company subscribed to purchase 37,500
shares of common stock at $2.00 per share. Notes aggregating $74,925 were
received from three officers in consideration for this subscription. During
1995, these notes were offset against amounts due two of the officers under
settlement agreements and against accrued salaries due the third of these
officers.
In August 1995, the Board of Directors unanimously agreed to authorize 7,000,000
more shares of common stock, bringing the total to 9,000,000, and stockholder
approval was obtained.
During September 1995, pursuant to a contractual agreement, the Company issued
100,000 shares of its common stock to a public relations/financial consulting
firm and authorized an additional 100,000 shares to be issued to the consulting
firm upon performance under the contract for $600,000 or prepaid consulting
fees. 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.
Additionally, during 1995, the Company issued in a private placement 281,014
shares of common stock at $2,235,608 per share prices ranging from $2.50 to
$8.00 as payment for services and satisfaction of certain of its
liabilities.
F-16
<PAGE>
During the same period, the Company issued 260,417 shares of its common stock at
per share prices ranging from $1.40 to $5.00, which was the market value at time
of issuance, with net proceeds to the Company of approximately $563,960.
During 1995, options to purchase 20,435 shares of the Company's common stock
were exercised at per share prices ranging from $1.40 to $5.00, which was the
market value at time of issuance, with net proceeds to the Company of
$74,425.
In December 1995, the Company committed to issuing 36,509 shares of common
stock, at per share price of $2.40, which was fair market value, to certain of
its employees and 6,666 shares of common stock at per share price of $3.00,
which was fair market value, to an attorney in payment of deferred salary and
consulting services. As of December 31, 1995, the shares had not been issued
and, accordingly, are accounted for as subscribed stock.
On October 7, 1996, a 1 for 20 reverse stock split was effected. All share
amounts in this report have been retroactively adjusted to reflect this stock
split.
NOTE 8 - STOCK OPTIONS
The 1989 Stock Option Plan, as amended (the Plan) reserved 1,000,000 shares of
common stock to grant either nonqualified or incentive stock options. All
directors, officers, key employees and consultants to the Company or its
subsidiaries are eligible under the terms of the Plan. Such options may not be
granted at less than 100% of the fair market value at the date of grant (110%
for an owner of 10% or more of the outstanding stock). Upon termination of
service, the options, which an individual was entitled to exercise at the date
of termination may be exercised at any time within six months of such
termination. If an employee is terminated with cause, the options are canceled
upon termination. As of December 31, 1995, no options are outstanding under
this plan.
During 1994, the Company entered into various Option Agreements with executive
officers and consultants which granted options to purchase 17,000 shares of
common stock from between $15.00 to $25.00 per share for a period of two to five
years from the date of grant. Due to the lack of significant trading volume in
the Company's shares, the options were granted, at fair market value, determined
by the Board of Directors based on private placement stock transactions with
independent third parties.
During 1995, the Company entered into various Option Agreements with executive
officers and consultants which granted options to purchase 7,583 shares of
common stock at $10.00 per share for a period of two to five years from the date
of grant. The options were granted at prices determined to approximate fair
market value.
During 1995, the Company granted options to purchase 36,750 shares of common
stock at prices of $3.00 to $13.00 per share as part of various settlement
agreements and conversions of notes payable. The options were granted at prices
determined to approximate fair market value.
In November 1995, the Company granted options to purchase 279,356 shares of
common stock, at prices of $3.30 to $6.00 in conjunction with the bridge
financing. . The options were granted at prices determined to approximate fair
market value.
During 1995, the Company granted options to purchase 22,500 shares of common
stock at prices of $2.80 to $13.00 to two of its consultants for services to be
rendered. The options were granted at prices determined to approximate fair
market value.
F-17
<PAGE>
The 1995 Stock Option Plan is intended to award stock options to directors,
management and employees of the Company based on performance. The options vest
over periods of three to four years.
The Company has also granted stock options outside the stock plans at fair
market value to other individuals in consideration for services performed. The
following summarizes all option activity for the years ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price Range
------------ ------------ -------------
<S> <C> <C> <C>
Outstanding as of
January 1, 1995 - 555,189 1.40 to 47.50
Granted 2,000,000 1,731,063 2.80 to 13.00
Exercised - (47,440) 1.40 to 5.00
Canceled - - -
Outstanding as of
December 31, 1995 2,000,000 2,238,812 1.40
Granted 0 10,000 3.825
Exercised (65,058) (120,490) 1.40 to 47.50
Canceled (480,025) (1,521,360)
--------- ----------
Outstanding as of
December 31, 1996 1,454,917 606,962 1.40 to 47.50
========= ==========
Exercisable as of
December 31, 1996 451,041 606,962 1.40 to 47.50
========= ==========
</TABLE>
The weighted average prices for options outstanding and exercisable at December
31, 1996 are primarily at the lower end of the range.
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 1996 and fiscal 1995: dividend yield of zero percent; expected volatility
of 33 percent; risk-free interest rate of seven percent; and expected lives
ranging between three and five years. Under the accounting provisions of FASB
Statement 123, the Company's net loss and loss per share for 1996 and 1995 would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net Loss 1996 1995
------------------- ---------- ----------
<S> <C> <C>
As reported $8,122,815 $2,812,281
Pro forma $8,122,815 $3,062,281
Loss per share
--------------
As reported $ 1.59 $ 1.92
Pro forma $ 1.59 $ 2.09
</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 1995 and
1996.
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
Options Options Exercisable
Outstanding -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercisable Prices At 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- ------------------ ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 - $ 2.80 37,635 2 yrs $ 2.13 37,635 $ 2.13
$ 3.00 1,426,000 4 yrs $ 3.00 422,124 $ 3.00
$3.30 - $ 7.50 475,244 2.5 yrs $ 4.70 475,244 $ 4.70
$10.00 - $20.00 123,000 2 yrs $17.30 123,000 $17.30
--------- ---------
Totals 2,061,879 1,058,003
========= =========
</TABLE>
The weighted average fair value of options granted during 1995 was $0.11. No
options to employees were granted during 1996.
NOTE 9 - LICENSING AGREEMENTS
In 1990, the Company entered into an agreement with Vitafort Latin America
(VLA), whose president was a director and stockholder of the Company. The
agreement grants VLA an exclusive ten-year license to use the "Vitafort"
trademark and to manufacture and sell the Company's products in certain Latin
American countries, royalty free. In consideration for this license, the
Company received a 50% ownership interest in VLA. VLA had not commenced
operations as of December 31, 1996.
NOTE 10 - COMMITMENTS
LEASE AGREEMENT
The Company is obligated under a lease agreement for its executive offices
through August 1997. Amounts due under the lease for the period ending August
5, 1997 is $46,875.
Rent expense for the years ended December 31, 1996 and 1995, included in
selling, general and administrative expenses, was $75,743 and $72,562,
respectively.
EMPLOYMENT AGREEMENTS
As of December 31, 1995, the Company held an employment agreement with one
senior executive of the Company. The agreement calls for annual aggregate
compensation of $150,000 plus bonuses of 25% of pretax profits, but not more
than 20% of the base salary for the executive. The agreement expired on
November 30, 1996. Certain payments amounting to $110,000 during 1995 were
deferred. A portion of this amount was converted into the Company's common
stock at $.15 per share on October 30, 1995. The balance was converted into
common stock on January 31, 1996. The agreement was extended by the Company on
the same terms for three additional years. Certain payments of $12,500 during
1996 were deferred. As of
F-19
<PAGE>
December 31, 1996, the Company held an employment with another senior executive
of the Company. The agreement commenced on January 1, 1996 and is for one year,
with two annual renewals. The agreement calls for annual aggregate compensation
of $102,000 plus the higher of 5% or cost of living (COLA) increase each
subsequent year. In addition, the senior executive received options to purchase
225,000 shares of common stock at $3.00 per share. 25% of these options vested
during 1996, 25% lapsed in early 1997 and the remainder vest in 1998 and 1999
based on performance criteria.
AUBURN FARMS TRADEMARK ACQUISITION
The Company entered into a purchase agreement in 1996 whereby it acquired the
Auburn Farms trademarks and other related trademarks. Deferred payments, which
will be accounted for as royalties, under the agreement include 3-1/2% of gross
sales of products sold using these trademarks during the 30 months beginning May
1, 1996 with gradually reducing percentages over the next successive three
thirty-month periods. Deferred payments under the agreement made in 1996 were
$45,612 and were expensed as royalties during the year.
F-20
<PAGE>
NOTE 11 - MAJOR CUSTOMERS
The Company derived the following revenue from major customers, each of which
provided 10% or more of total revenues during the year ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
K-Mart $606,199 $ -
Price Club - 579,144
-------- --------
Total $606,199 $579,144
======== ========
</TABLE>
NOTE 12 - LITIGATION
The Company is subject to pending claims and litigation, the most significant of
which are discussed below.
On November 1, 1995, Keebler Company (Keebler) and the Company entered into a
co-packer agreement (the Agreement) to manufacture Caketts. In 1996, the
Company suffered losses and terminations of business relationships by a number
of the Company's distributors, retailers and brokers due to mold in the Cakett
products. In August 1996, Keebler gave the Company thirty (30) days notice of
termination of the Agreement between the parties, and indicated that it had
discontinued further production of the Company's product. The Agreement between
Keebler and the Company provides for the binding arbitration of disputes. On
August 15, 1996, the Company filed a demand for arbitration, seeking
compensatory damages, which is scheduled to be heard during May 1997. The
Company is seeking damages in excess of $5,000,000. Keebler has filed a
counterclaim against the Company for breach of contract, which alleges damages
in excess of $300,000. The Company believes that Keebler breached the agreement
by ailing to meet its warranties to Vitafort to manufacture the products in an
acceptable process manner, improperly terminating the agreement; and made
intentional misrepresentations regarding the cause of the mold problems.
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in certain
of the Company's private placements, initiated an action in Superior Court,
Orange County, California against his stockbroker, two national brokerage firms,
several companies in which he had invested; and, certain of those company's
officers. Included among the defendants was the Company and its then Chief
Executive Officer. The complaint seeks damages in an unspecified amount in
excess of $500,000 and punitive damages in an unspecified amount in excess of
$5,000,000. The Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration. The Plaintiff has appealed that
ruling. The Company denies any liability to the plaintiff and intends to
vigorously defend this action. The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment and realize a profit on
his $75,000 investment.
In February 1996, Cottage Bakery, Inc., a former co-packer of Fudgets, initiated
a lawsuit against the Company in Superior Court, San Joaquin County, California.
The Complaint alleges breach of contract and fraud against the Company and seeks
damages in an unspecified amount in excess of $150,000. The Company disputes
this liability and filed a cross complaint against Cottage Bakery. The parties
have reached an agreement in principle with respect to the settlement agreement
has not bee executed; and, if such settlement is consummated, the Company will
not be subjected to any materials liability. If the action is not settled, the
Company will vigorously defend the action.
F-21
<PAGE>
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI) under
the FPA, the Company acquired certain rights of AFI against its co-packer and
against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims. The litigation is in the early stages and the Company intends
to vigorously pursue the same.
In October 1996, Michel's Bakery, Inc., a former co-packer of Fudgets, initialed
an action in the Federal District Court for the Eastern District of Pennsylvania
seeking damages in excess of $140,000 under various contract and tort theories.
The Company has filed a counterclaim alleging breach of contract and other
claims relating to the product manufactured by Michel's. The parties have
agreed to a mediation session, scheduled to be held in April 1997. If, however,
the matter is not resolved through mediation, the Company intends to vigorously
prosecute this lawsuit.
On October 9, 1996, a complaint was filed in Superior Court, the County of Los
Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a Delaware
Corporation; Mark Beychok and Does 1-50 inclusive." The complaint alleges
Breach of Oral Contract, Breach of Written Contract, and other similar claims
arising out of the consulting relationship that previously existed between the
Company and Mr. Ellis. The Complaint seeks damages in an unspecified amount.
The court has sustained, without leave to amend, a demurrer to the claims
against Mark Beychok. Mr. Ellis recently filed an amended complaint against the
Company. The Company is in the process of document discovery and is defending
the action vigorously.
NOTE 13 - RELATED PARTY TRANSACTIONS
The company has entered into related party transactions during 1995 and 1996.
See Notes 7, 8 and 10 for further detailed information.
NOTE 14 - SUBSEQUENT EVENTS
The Company entered into a subscription agreement in February 1997, with an
investor who purchased 500,000 shares of common stock at $1.00 per share. At
funding, a 10% fee was paid to a facilitator and warrants were given to that
same facilitator to purchase 125,000 shares of common stock at a price of $1.375
per share.
The Company entered into a second subscription agreement in April 1997, with
another investor for $500,000 of Preferred 1997 Series "A" Stock. The preferred
stock has a cumulative dividend rate of 6% percent with no voting rights. The
conversion price is either the lower of $1.25 per share or 30% discount
to the market price at the time of conversion. The preferred stock is
convertible at any time. The facilitator received a 10% fee from proceeds, as
well as warrants to purchase 35,000 shares of common stock at an exercise price
of $1.00 per share.
The Company entered into a subscription agreement in May 1997 with another
investor for $250,000 of Preferred 1997 Series "A" 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. 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.
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,
F-22
<PAGE>
for a loan in the amount of $300,000 (the "Loan"), to fund the payment of legal
fees in connection with the Company's arbitration against the Keebler Company.
See Note 12. The loan will be evidenced by a note which bears interest at the
lesser of 15% per annum or the highest rate allowed by law with recourse solely
to the net proceeds of the arbitration, if any. If the Company does not realize
any net proceeds from the arbitration, the Loan will be canceled and the Lender
will receive a warrant for the purchase of 400,000 shares of the Company's
Common Stock at $.01 per share. If the Loan is repaid through the application of
the net proceeds of the arbitration, the Lender will receive warrants for the
purchase of 200,000 shares of common stock at $.01 per share and a percentage of
net proceeds of the arbitration equal to 15% of the first $1,000,000 of net
proceeds; 20% of the net proceeds greater than $1,000,000 and less than
$3,000,000; and, 25% of net proceeds above $3,000,000. The Loan was approved by
the disinterested members of the Company's Board of Directors, and was on terms
no less favorable to the Company than were available from non-affiliated
lenders.
F-23
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
Consolidated Financial Statements:
<TABLE>
<S> <C>
Balance Sheets - September 30, 1997 (unaudited) and
December 31, 1996....................................................... F-25
Statements of Operations -
Three Month Periods Ended September 30, 1997 and 1996 (unaudited) and
Nine Month Periods Ended September 30, 1997 and 1996. (unaudited)....... F-27
Statement of Stockholders' Equity (Deficit) -
Nine Month Period Ended September 30, 1997.(unaudited).................. F-28
Statements of Cash Flows -
Nine Month Periods Ended September 30, 1997 and 1996.................... F-29
Notes to the Financial Statements....................................... F-30
</TABLE>
F-24
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,597,943 $ 188,867
Accounts receivable-trade, net of allowance for doubtful
accounts of $67,743 at September 30, 1997 and
$79,994 at December 31, 1996 508,852 430,789
Notes receivable 10,000 56,000
Other receivables 33,894 4,464
Inventory, net 268,989 361,196
Prepaid expenses and other assets 262,727 271,731
---------- ----------
Total Current Assets 4,682,405 1,313,047
Fixed Assets:
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,539 105,160
Computer equipment 179,827 173,294
---------- ----------
Total Fixed Assets 576,278 569,366
Less accumulated depreciation and amortization (316,997) (231,592)
---------- ----------
Net Fixed Assets 259,281 337,774
Other Assets:
Intangible and other assets 411,254 481,254
Less accumulated amortization (64,864) (95,561)
---------- ----------
Net Other Assets 346,390 385,693
========== ==========
Total Assets $5,288,076 $2,036,514
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-25
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
---------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- -----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Notes payable $ 243,349 $ 440,022
Accounts payable 312,727 1,263,250
Accrued expenses 608,431 789,212
Note payable to shareholders 37,859 37,859
---------- ----------
Total Current Liabilities 1,202,366 2,530,343
Stockholders' Equity(Deficit):
Series A, 6% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 750 shares authorized,
750 shares issued and outstanding at September 30, 1997
and none at December 31, 1996; aggregate liquidation
preference of $750,000 at September 30, 1997 8 0
Series B, 10% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 110,000 shares authorized,
1,000 shares issued and outstanding at September 30, 1997
and December 31, 1996; aggregate liquidation
preference of $50,000 at September 30, 1997 and
December 31, 1996 10 10
Series C, Convertible Preferred stock, $0.01 par value,
450 shares authorized, 50 shares issued and outstanding
as of September 30, 1997 and December 31, 1996;
aggregate liquidation preference of $50,000 at September 30,
1997 and December 31, 1996 1 1
Common stock, $.0001 par value. Authorized
9,000,000 shares at September 30, 1997 and 9,000,000 at
December 31, 1996, issued and outstanding
6,741,050 shares at September 30, 1997 and
4,908,664 at December 31, 1996, respectively. 8,870 8,686
Additional paid-in capital 23,246,457 20,547,953
Accumulated deficit (19,169,636) (21,050,479)
------------ ------------
Total Stockholders' Equity(Deficit) 4,085,710 (493,829)
============ ============
Total Liabilities and Stockholders' Equity(Deficit) $ 5,288,076 $ 2,036,514
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-26
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 322,116 $ 2,104,314 $ 1,497,223 $ 4,408,665
Cost of sales 196,226 1,912,734 1,078,854 3,988,128
---------- ----------- ----------- -----------
Gross profit 125,890 191,580 418,369 420,537
Operating expenses:
Product development 123,137 247,061 179,268 693,389
Sales and Marketing 257,016 580,798 996,242 1,690,024
General and administrative 3,227 573,929 1,894,114 1,603,775
---------- ----------- ----------- -----------
Total operating expenses 383,380 1,401,788 3,069,624 3,987,188
---------- ----------- ----------- -----------
Operating loss (257,490) (1,210,208) (2,651,255) (3,566,651)
Other income (expense) (3,409) 2,758 19,710 11,793
Interest expense (53,585) (4,423) (153,138) (13,693)
Interest income 47,742 0 47,742 0
Litigation recovery, net of costs 4,886,947 0 4,886,947 0
---------- ----------- ----------- -----------
Income(Loss) before provision
for income taxes 4,620,205 (1,211,873) 2,150,006 (3,568,551)
Provision for income taxes 0 1,105 0 3,159
---------- ----------- ----------- -----------
Net Income(Loss) 4,620,205 (1,212,978) 2,150,006 (3,571,710)
Deemed dividends to preferred shareholders 0 0 (269,164) 0
---------- ----------- ----------- -----------
Net Income (Loss) allocable to
common shareholders $4,620,205 $(1,212,978) $ 1,880,842 $(3,571,710)
========== =========== =========== ===========
Net Income(Loss) per share $ 0.68 $ (0.28) $ 0.33 $ (0.85)
========== =========== =========== ===========
Weighted Average Shares
of Common Stock 6,759,575 4,339,878 5,762,985 4,215,668
========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-27
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Nine Months ended September 30, 1997
(Unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Preferred Preferred Preferred Subscribed
Stock Stock Stock Stock
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ - $ 10 $ 1 $ -
Common stock issued in private
placement, net of commissions -
Exercise of stock options -
Common stock issued as settlement
of contract dispute
Exercise of stock options
Series A Preferred issued in
connection with private
placement, net of commissions
and expenses 8
Conversion of Debt to Equity
Exercise of stock options
Preferred Stock Dividends
Net income
---------- ---------- ---------- ----------
Balance, September 30, 1997 $ 8 $ 10 $ 1 $ -
========== ========== ========== ==========
<CAPTION>
Common Stock
------------------- Additional Accumulated
Shares Amount Paid In Capital Deficit Total
--------- ------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 4,908,664 $8,686 $20,547,953 $(21,050,479) $ (493,829)
Common stock issued in private
placement, net of commissions 500,000 50 449,950 450,000
Exercise of stock options 183,100 18 183,082 183,100
Common stock issued as settlement
of contract dispute 70,000 7 78,743 78,750
Exercise of stock options 185,600 19 162,381 162,400
Series A Preferred issued in
connection with private
placement, net of commissions
and expenses 672,992 673,000
Conversion of Debt to Equity 803,686 81 796,401 796,482
Exercise of stock options 90,000 9 85,791 85,800
Preferred Stock Dividends (269,164) (269,164) -
Net income 2,150,007 2,150,007
--------- ------ ----------- ------------ ----------
Balance, September 30, 1997 6,741,050 $8,870 $22,708,129 $(19,169,636) $4,085,710
========= ====== =========== ============ ==========
</TABLE>
F-28
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1997 1996
<S> <C> <C>
Increase (Decrease) In Cash and Cash
Equivalents (unaudited):
Cash flows from operations:
Net Income(Loss) $2,150,006 $(3,571,710)
Adjustments to reconcile net income(loss)
to net cash used in operating activities:
Depreciation and amortization 124,708 94,998
Allowance for doubtful accounts (12,250) 0
Inventory reserves (832,296) 0
(Increase) decrease in:
Inventory 924,502 (1,516,839)
Accounts receivable (69,640) (1,150,328)
Prepaids and other current assets 29,403 (477,613)
Increase (decrease) in:
Accounts payable 75,969 1,325,140
Accrued expenses (180,781) (205,668)
---------- -----------
Net cash provided by (used in)
operating activities 2,209,621 (5,502,020)
---------- -----------
Cash flows from investing activities:
Purchase of short-term investment 0 (41,000)
Purchase of property and equipment (6,912) (180,741)
Cash paid for acquisition 0 (183,907)
---------- -----------
Net cash provided by (used in)
investing activities (6,912) (405,648)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock, net 1,633,050 5,118,501
Repayment of notes payable (576,683) (75,000)
Proceeds from notes payable 150,000 896,587
Repayment of long-term debt 0 (164,505)
---------- -----------
Net cash provided by financing
activities 1,206,367 5,775,583
---------- -----------
Net increase(decrease) in cash 3,409,076 (132,085)
---------- -----------
Cash and cash equivalents at
beginning of period 188,867 1,316,406
---------- -----------
Cash and cash equivalents at end of period $3,597,944 $ 1,184,321
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 45,000 $ 5,632
========== ===========
Supplemental disclosures of non-cash
investing and financing activities:
Issuance of common stock for conversion of debt $ 796,482 $ 973,207
========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-29
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) General:
The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the
periods presented. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal
years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and related footnotes have been and do not contain certain
information that will be included in the Company's annual consolidated
financial statements and footnotes thereto. For further information, refer
to the consolidated financial statements and related footnotes for the year
ended December 31, 1996 included in this prospectus.
The Company is presently engaged in formulating, marketing and distributing
fat-free, low fat and reduced fat foods.
(2) Summary of significant accounting policies:
(a) The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated. The
subsidiaries have had no operations since 1994.
(b) Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
(c) Prepaid assets include product introduction expenses, which are
recorded at cost and amortized over the economic life thereof, but not
in excess of twelve months, consulting and other prepaids.
(d) Fixed assets are composed of manufacturing equipment, furniture,
office equipment, and computer equipment and are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated
useful life, generally five years or less.
(e) Intangible assets are composed of debt issuance costs and acquisition
costs of Auburn Farms and Natures Warehouse trademarks, prepaid
professional services contracts 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.
(f) For the purpose of cash flow, the Company considers all highly liquid
investments purchased with an original maturity of three months or
less to be cash equivalents.
(g) Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
(h) For the three and nine months ended September 30, 1997, earnings per
share has been computed using the average number of common shares
outstanding during the period and
F-30
<PAGE>
common stock equivalents, consisting of stock options, calculated by
using the treasury stock method.
Common stock equivalents are anti-dilutive for the three and nine
months ended September 30, 1996. Dividends on cumulative preferred
stock are not material.
(3) Inventories:
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Market-based valuations are based upon estimates and assumptions,
and are generally limited to slow moving product offerings. Inventory
consisted of the following:
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
Finished Goods $ 68,390 $ 979,153
Packaging and Raw Material 551,427 472,960
Less: Reserves for slow moving and spoilage (350,828) (1,183,124)
--------- -----------
$ 268,989 $ 268,989
========= ===========
</TABLE>
During the three and nine months ended September 30, 1997 and during the
three and nine months ended September 30, 1996, charges included in cost of
sales related to inventory reserves were $427,345 and $863,109, and $0, and
$0, respectively.
(4) Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets as of September 30, 1997 and
December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Deposits $ 1,600 $ 10,000
Product introduction costs 15,653 177,865
Insurance 45,253 14,897
Consulting 151,194 -0-
Other prepaids 49,027 68,969
-------- --------
Total Prepaid and Other Current Assets $262,727 $271,731
======== ========
</TABLE>
(5) Accrued Expenses
Accrued expenses and other current liabilities as of September 30, 1997 and
December 31, 1996 are detailed as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Accrued Compensation $ 0 $ 65,570
Accrued Interest Payable 0 436
Accrued Legal Fees 43,000 70,811
Accrued Consulting Fees 0 22,500
Accrued Commissions 89,276 -0-
Accrued Advertising/Promotion 272,716 407,359
Other Accrued Expenses 203,439 222,536
-------- --------
$608,431 $789,212
======== ========
</TABLE>
F-31
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(6) Notes Payable - Bank:
The Company is no longer in default with respect to certain financial
covenants under the terms of its agreement with the secured lender. For
financial statement purposes, the entire amount is classified as a current
liability, however, due to the financial uncertainty of the business.
(7) Note Payable to Shareholders:
Note payable to shareholders consists of a $37,859 14% note payable, due in
monthly installments of $4,033, including interest, through October 1997,
secured by certain of the Company's fixed assets.
(8) Stockholders' Equity:
During the nine-month period ended September 30, 1997, the following common
stock transactions occurred, all of which were valued at fair market:
a. The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
b. The Company issued 20,000 shares at a value of $1.125 per share upon
the exercise of an option granted to a former employee as compensation
for consulting services and past unpaid accrued vacation.
c. The Company issued 183,100 shares at $1.00 per share 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.
d. The Company entered into a subscription agreement in February, 1997
with an investor who purchased 500,000 shares of common stock at $1.00
per share. At funding, a 10% fee was paid to a facilitator and
warrants were given to that same facilitator to purchase 125,000
shares of common stock at a price of $1.375 per share. During the
period ended September 30, 1997, the Company reduced the exercise
price of these options to $1.00.
e. The Company entered into a subscription agreement in April 1997 with
an unrelated investor for $500,000 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.
F-32
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
f. The Company issued 185,600 shares at $0.875 per share upon the
exercise of options granted under the Non-Incentive Stock Option Plan.
Non-officers of the Company exercised such options through the
application of accrued payroll and other various expenses.
g. The Company entered into a subscription agreement in May 1997 with
another investor for $250,000 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.
h. The Company issued 10,000 shares of common stock at a value of $1.06
per share upon the exercise of an option granted to a former employee
as compensation for consulting services and related expenses.
i. 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.
j. The Company issued 418,086 shares of common stock at $1.25 per share
to various providers of services under an S-8 filing.
k. 100,000 shares of common stock at $.93 per share was issued to a
professional firm for previous services rendered.
l. On August 28, the Company issued 255,600 shares of common stock at
$.93 per share in compensation for services rendered.
m. The Company issued a cashless option of 60,000 shares of common stock
valued at $.93 per share for consulting services.
(9) Going Concern:
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. Although the
Company received $6,750,000 as proceeds from the Keebler arbitration, it
must realize a satisfactory level of profitability from its current and
future operations in order to remain a viable entity. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of any uncertainty.
F-33
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(10) 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 company's 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 could recoup his entire investment on his $75,000
investment.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-
packer and against Barbara's Bakery. The Company is pursuing these rights,
and in May 1996, initiated an action alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition and related claims.
The defendants have filed counterclaims against the Company and Auburn
Farms alleging various tort and contract claims. Counsel for Vitafort is
reviewing the case to determine the best course of action to continue
forward.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other
similar claims arising out of the consulting relationship that previously
existed between the Company and Mr. Ellis. The Complaint seeks damages in
an unspecified amount. The court has sustained, without leave to amend, a
demurrer to the claims against Mark Beychok and sustained the demur, with
leave to amend, against the Company. Mr. Ellis has filed an amended
complaint against the Company. The Company is in the process of document
discovery and is defending the action vigorously.
(11) Recent Financial Developments
On Friday, June 20, 1997, the Company received notice of the interim award
under the arbitration with the Keebler Company. The award was for
$5,983,923 as well as compensation for all legal fees and costs associated
with the arbitration proceedings. Based on the agreement with ATCOLP
INVESTMENT PARTNERS (the "Lender"), the Company agreed to pay the Lender a
sliding percentage of the proceeds from the settlement in exchange for
advancing $300,000 to the Company to meet the litigation expenses.
On Tuesday, July 15, 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 $1,236,882 to ATCOLP INVESTMENT PARTNERS under the existing agreement.
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
F-34
<PAGE>
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 three month period ended, September 30,
1997.
F-35
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article Seventh of the Company's Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware ("DGCL").
SECTION 145 of the DGCL, as amended, applies to the Company and the
relevant portion of the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding,
had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable
cause to believe that his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he is or
was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery
or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of
a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections
(a) and (b) of this
II-1
<PAGE>
section, or in defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties
to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.
(e) Expenses (including attorneys' fees) incurred by an officer
or director in defending any civil, criminal, administrative or
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.
II-2
<PAGE>
(i) For purpose of this section, references to "other
enterprises" shall include employee benefit plans; references to
"fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at
the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee,
or agent with respect to an employee benefit plan, its participants,
or beneficiaries; and a person who acted in good faith and in a manner
he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of expenses provided by,
or granted pursuant to, this section shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to
be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
The Company maintains insurance for the benefit of its directors and
officers and the directors and officers of its subsidiaries, insuring such
persons against certain liabilities, including liabilities arising under the
securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable. Furthermore, the Company has given certain
undertakings with respect to indemnification in connection with this
Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee $ 768.77
National Association of Securities Dealers, Inc. filing fee $ 753.69
Transfer Agent's and Registrar's Fees $ *
Legal fees and expenses $ *
Accounting fees and expenses $ *
Miscellaneous $ *
--------
TOTAL $ *
</TABLE>
* To be provided by amendment
All amounts estimated except for Securities and Exchange Commission and National
Association of Securities Dealers, Inc. filing fee.
(1) As required by agreements between the Company and the Selling Stockholders,
all of these expenses of issuance and distribution will be paid by the Company.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
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.
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
II-3
<PAGE>
principal and interest on a note. 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 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.
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. 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 December 1995, the Registrant issued 368,194 shares of its common
stock (18,410 shares as adjusted for a reverse stock split effected October 4,
1996) to a note holder in exchange for the accrued principal and interest on a
note. 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.
II-4
<PAGE>
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 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.
II-5
<PAGE>
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.
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.
ITEM 27. EXHIBITS.
<TABLE>
<C> <S>
3.l Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
3.3 Agreement and Plan of Merger between the Registrant and
Vitafort International Corporation, a California corporation*
3.4 Certificate of Designation - Series A Preferred Stock*****
3.5 Certificate of Designation - Series B Preferred Stock*****
3.6 Certificate of Amendment to the Certificate of Incorporation,
November 1991*****
3.7 Certificate of Designation - Series C Preferred Stock*****
3.8 Certificate of Amendment to the Certificate of Incorporation, filed
February 8, 1994 ******
3.9 Certificate of Designation - Series D Preferred Stock******
3.10 Certificate of Amendment to the Registrant's Certificate of
Incorporation, filed November, 1995. Incorporated by reference to
Exhibit 4.10 filed with the Registrant's Registration Statement on
Form S-8 filed January 25, 1996 File Number 33-300435 (the " January
1996 S-8").
3.11 Certificate of Elimination - Series A Preferred Stock. Incorporated
by reference to Exhibit 4.24 to the Registrant's Registration
Statement on Form S-8 Filed May 22, 1996 File Number 333-04271 (the
"May 1996 S-8").
3.12 Certificate of Elimination - Series D Preferred Stock. Incorporated
by reference to Exhibit 4.25 to the May 1996 S-8.
3.13 Certificate of Amendment to the Registrant's Certificate of
Incorporation, filed October 4, 1996. Incorporated by reference to
Exhibit 4.29 to the Registrant's Registration Statement on Form S-8
Filed December 12, 1996, File Number 333-17763 (the "December 1996
S-8").
3.14 Amended Certificate of Designation of the Registrant's 1997 Series A
Preferred Stock
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*
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S>
4.3 Form of Warrant Agreement*
4.4 Proposed form of Underwriters Warrant Agreement*
4.5 ????
4.6 Warrant Extension Agreement, December 18, 1992*****
4.7 Warrant Extension Agreement, December 18, 1994******
4.8 Warrant Extension Agreement, January 18, 1995******
4.9 Warrant Extension Agreement, April 3, 1995******
4.10 Warrant Extension Agreement, May 3, 1995. Incorporated by reference
to Exhibit 4.18 to the January 1996 S-8.
4.11 Warrant Extension Agreement, June 15, 1995. Incorporated by
reference to Exhibit 4.19 to the January 1996 S-8.
4.12 Warrant Extension Agreement, July 17, 1995. Incorporated by
reference to Exhibit 4.20 to the January 1996 S-8.
4.13 Warrant Extension Agreement, August 16, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.15 Warrant Extension Agreement, April 30, 1996. Incorporated by
reference to Exhibit 4.23 to the May 1996 S-8.
4.16 Warrant Extension Agreement, July 31, 1996. Incorporated by
reference to Exhibit 4.26 to the December 1996 S-8.
4.17 Warrant Extension Agreement, September 30, 1996. Incorporated by
reference to Exhibit 4.27 to the December 1996 S-8.
4.18 Warrant Extension Agreement, November 11, 1996. Incorporated by reference
to Exhibit 4.28 to the December 1996 S-8.
4.19 Warrant Extension Agreement, April 15, 1997. Incorporated by reference to
Exhibit 4.19 to the 1996 10K-SB.
4.20 Warrant Extension Agreement, October 31, 1997. Filed herewith.
5.1 Opinion of Frank J. Hariton, Esq. To be filed by amendment.
10.1 Loan Agreement, dated August 19, 1988, between the Registrant and Bishop
Capital, L.P. and promissory note in the principal amount of $150,000*
10.2 License Agreement, dated April 25, 1986, between the Registrant and Crystal
Geyser Water Registrant and amendment, dated January 7, 1988*
10.3 Demand Promissory Note, dated July 10, 1987, from Registrant to Joseph R.
Daly in the principal amount of $300,000 and Modification, dated
October 11, 1989*
10.4 License Agreement, dated as of October 9, 1987, between the Registrant and
Good Health Beverage, Inc. and amendment, dated November 23, 1988*
10.5 Product Development Agreement, dated as of January 21, 1988, between the
Registrant and International Multifoods, Inc.*
10.6 Beverage Agreement, dated as of October 31, 1988, between the Registrant
and PowerBurst Corporation*
10.7 Amended and Restated Agreement, dated August 2, 1989, between the
Registrant and Vitafort Far East Co., Ltd.*
10.8 Agreement, dated August 11, 1989, between Barry Saltzman, MD. and Yoshio
Tanaka*
10.9 Lease, dated June 13, 1988, between Registrant and Shelterpoint Equities,
Ltd. for offices at 591 Redwood Highway, Mill Valley, California*
10.10 Agreement, dated July 25, 1989, between Nutrifish Corporation and Mt.
Lassen Trout Farms*
10.11 Salmon Rondelles Joint Development and Marketing Agreement, dated as of
September 18, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.*
10.12 Whole Salmon Joint Development and Marketing Agreement, dated as of
September 26, 1989, between Nutrifish Corporation and Norwegian
Seafoods, Inc.*
10.13 Employment Agreement, dated September 13, between the Registrant and
Barry K. Saltzman*
10.14 Employment Agreement, dated September 13, between the Registrant and
Jeffrey Lewenthal*
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S>
10.15 The Registrant's 1989 Stock Option Plan*
10.16 Stock Option Agreement, dated as of July 17, 1989 between the Registrant
and Jeffrey Lewenthal*
10.17 Secrecy Agreement, dated as of May 2, 1986, between the Registrant and
Hoffman-LaRoche, Inc.*
10.18 Joint Venture Agreement, dated September 29, 1989, between the Registrant
and Agrolife Technologies, Inc.*
10.19 Consulting Agreement, dated September 13, 1989, between the Registrant
and Randall S. Reis*
10.20 Loan Agreement, dated June 15, 1989, between Union Bank and Joseph R.
Daly*
10.21 Form of Employee Confidentiality Agreement.**
10.23 Form of Escrow Agreement by and among the Registrant, Gilford Securities
Corp., and certain stockholders of Registrant*
10.24 Promissory Note, made November 21, 1989, by Nutrifish Corporation and
payable to Joseph R. Daly*
10.25 Right of First Refusal Agreement, dated November 21, 1989, between
Nutrifish Corporation and Joseph R. Daly*
10.26 Production License Agreement for Nutrifish Norwegian Salmon, dated
February 2, 1990, between Nutrifish Corporation and Norwegian
Seafoods, Inc.**
10.27 Test Market Agreement, dated December 19, 1989, between International
Multifoods Corporation and the Registrant.**
10.28 Amendment, dated as of December 19, 1989, to the Product Development
Agreement between International Multifoods Corporation and the
Registrant.**
10.29 Consulting Agreement, dated February 21, 1990, between the Registrant and
Joseph R. Daly.**
10.30 License Agreement between the Registrant and Nulaid Foods, Inc., dated
April 30, 1990.**
10.31 License Agreement between the Registrant and Vitafort Latin America,
dated July 30, 1990.**
10.32 Termination Agreement between the Registrant and Jeffrey D. Lewenthal,
dated September 12, 1990.**
10.33 Settlement Agreement and Full Release between Nicholas J. Caputo and
Registrant, dated October 4, 1990.**
10.34 Employment Agreement between the Registrant and Stephen D. Clow, dated
December 1, 1990.**
10.35 Employment Agreement between the Registrant and Frank A. Corsini, dated
January 2, 1991.**
10.36 Stock Option Agreement between the Registrant and Stephen D. Clow, dated
January 2, 1991.**
10.37 Stock Option Agreement between the Registrant and Frank A. Corsini, dated
January 2, 1991.**
10.38 Letter Agreement, dated February 1, 1991, amending Consulting Agreement
between the Registrant and Joseph R. Daly.**
10.39 Letter Agreement, dated March 12, 1991, between the Registrant and Joseph
R. Daly regarding debt reorganization.**
10.40 Consulting Agreement between Norman Kretchmer, MD., Ph.D., and the
Registrant, dated December 20, 1988.**
10.41 Settlement Agreement between the Registrant and PowerBurst Corporation,
dated September 23, 1991.**
10.42 Subscription Agreement between the Registrant and Societe Anonyme
Financier Industrielle et Garantie, dated November 1, 1991.
Incorporated by reference to Exhibit 1 to the Registrant's Report on
Form 8-K dated November 1, 1991.
10.43 Exclusive Distribution Agreement between Registrant and Chicago Fish
House, dated June 13, 1991.**
10.44 Larry Lucas Settlement Agreement, dated March 25, 1993.*****
10.45 Frank Corsini, Separation Agreement, dated May 18, 1993.*****
</TABLE>
II-8
<PAGE>
<TABLE>
<C> <S>
10.46 Agreement dated October 5, 1993 between the Registrant and Second Nature
Technologies, Inc.***
10.47 Food and Beverage Technology Agreement***
10.48 Asset Purchase and Sale Agreement, dated as of June 7, 1993 by and among
Clear Farms, Inc., a Maine corporation, the Registrant and
Salmon Distribution Subsidiary, Inc. a Maine corporation which was
formerly known as Crystal Clear Farms, Inc.****
10.49 Temporary Operating Agreement dated June 7, 1993 by and among Samuel L.
Thompson & Associates, Inc., a Maine corporation, the Registrant and
Crystal Clear Farms, Inc. a Maine corporation (now known as Salmon
distribution Subsidiary, Inc.)****
10.50 Non-Competition Agreement dated July 27, 1993 by and between the
Registrant and Crystal clear farms, Inc., a Maine corporation.****
10.51 Employment Agreement dated as of November 29, 1993, between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.01 to Form S-8 filed by the Registrant on March 4, 1994 (the "1994
S-8").
10.52 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.02 to the 1994 S-8.
10.53 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to exhibit
99.03 to 1994 S-8.
10.54 Employment Agreement dated as of November 29, 1993 between the Registrant
and Peter Benz. Incorporated by reference to exhibit 99.04 to 1994 S-8.
10.55 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit 99.05
to 1994 S-8.
10.56 Employment Agreement dated as of November 29, 1993 between the Registrant
and Mark Beychok. Incorporated by reference to exhibit 99.06 to the
1994 S-8.
10.57 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.07 to the 1994 S-8.
10.58 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.08 to the 1994 S-8.
10.59 Consulting Agreement dated as of November 29, 1993 between the Registrant
and Herman Jacobs. Incorporated by reference to exhibit 99.09 to the
1994 S-8.
10.60 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Herman Jacobs. Incorporated by reference to exhibit
99.10 to the 1994 S-8.
10.61 Vitafort International Corporation 90 Day Operating Plan. Incorporated by
reference to exhibit 99.21 to the 1994 S-8.
10.62 Stock Option Agreement, dated September 15, 1993, between the Registrant
and Stanley J. Pasarell. Incorporated by reference to exhibit 99.22
to the 1994 S-8.
10.63 Separation and Release Agreement, dated as of December 1, 1994, between
the Registrant and Peter Benz.******
10.64 Letter Agreement, dated September 14, 1995, between the Registrant and
Peter T. Benz. Incorporated by reference to the like numbered exhibit
to the Registrant's Form 10-KSB for the year ended December 31, 1995.
10.65 Consulting Agreement and Mutual Release, dated as of March 1, 1995,
between the Registrant and Steven R. Westlund. Incorporated by
reference to the like numbered exhibit to the Registrant's Form 10-KSB
for the year ended December 31, 1995.
10.66 Letter Agreement, dated November 30, 1995, between the Registrant and
Steven Westlund. Incorporated by reference to the like numbered
exhibit to the Registrant's Form 10-KSB for the year ended December
31, 1995.
10.67 The Vitafort International Corporation 1995 Stock Option Plan.
Incorporated by reference to exhibit 99.01 to the January 1996 S-8.
10.68 Form of Option granted to directors under The Vitafort International
Corporation 1995 Stock Option Plan and schedule of grants to
directors. Incorporated by reference to exhibit 99.02 to the January
1996 S-8.
10.69 Employee Option granted to Mark Beychok under The Vitafort International
Corporation 1995 Stock Option Plan. Incorporated by reference to
exhibit 99.03 to the January 1996 S-8.
</TABLE>
II-9
<PAGE>
<TABLE>
<C> <S>
10.70 Amendment, dated December 16, 1995, to the Employment Agreement between
the Registrant and Mark Beychok. Incorporated by reference to exhibit
99.10 to the January 1996 S-8.
10.71 Option Agreement, dated December 16, 1995, between the Registrant and
Mark Beychok. Incorporated by reference to exhibit 99.11 to the
January 1996 S-8.
10.72 Conversion Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.20 to the January 1996 S-8.
10.73 Class A Option Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.21 to the January 1996 S-8.
10.74 Class B Option Agreement, dated as of December 30, 1995, between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.22 to the January 1996 S-8.
10.75 Conversion Agreement, dated as of March 26, 1996, between the Registrant
and John Coppolino. Incorporated by reference to Exhibit 9.18 to the
May 1996 S-8.
10.76 Class A Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to Exhibit
9.19 to the May 1996 S-8.
10.77 Class B Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to Exhibit
9.20 to the May 1996 S-8.
10.78 Employment Agreement, between the Registrant and John Coppolino.
Incorporated by reference to Exhibit 10.78 to the 1996 Form 10-KSB.
10.79 Foreclosure Purchase Agreement related to the Acquisition of assets of
Auburn Farms, Inc. Incorporated by reference to Exhibit 1 to the
Registrant's Form 8-K, dated May 2, 1996.
10.80 Loan and Security Agreement, dated August 15, 1996, between the
Registrant and Coast Business Credit, a division of Southern Pacific
Thrift & Loan Association. Incorporated by reference to Exhibit 1 to
the Registrant's Form 8-K, dated August 15, 1996.
10.81 Agreement, dated as of July 10, 1996, between the Registrant and Second
Nature Technologies, Inc. Incorporated by reference to Exhibit 10.81
to the 1996 Form 10-KSB.
10.82 Employment Agreement between Jack Spencer and the Registrant.
10.83 Agreement, dated April 1997, between the Registrant and ATCOLP Investment
Partners, a California Limited Partnership.
10.84 Employment Agreement dated September 1997 between the Registrant and Mark
Beychok. (Filed Herewith)
10.85 Employment Agreement dated September 1997 between the Registrant and John
Coppolino. (Filed Herewith)
11. Computation of Earnings (Loss) per Common Share. (Filed Herewith)
16. Letter on change in certifying accountant.
22. Subsidiaries of the Registrant:
The Registrant does not have any significant subsidiaries.
23.1 Consent of BDO Seidman LLP. (Filed Herewith)
23.2 Consent of KPMG Peat Marwick LLP. (Filed Herewith)
23.3 Consent of Frank J. Hariton, Esq. (To be included in Exhibit 5)
</TABLE>
* Incorporated by reference to the same numbered exhibit to the Registrant's
Registration Statement on Form S-18, file number 33-31883.
** Incorporated by reference to the same numbered exhibit to the Registrant's
December 31, 1990 and 1989 Form 10-K's.
*** Incorporated by reference to exhibits 1 & 2 to the Registrant's September
30, 1993 Form 10-QSB.
**** Incorporated by reference to exhibits 1 through 4 to the Registrant's
August 7, 1993 Form 8-K.
II-10
<PAGE>
***** Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1993 Form 10-KSB.
****** Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1994 Form 10-KSB.
ITEM 29. UNDERTAKINGS.
A. Rule 415 Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement or the most recent
post-effective amendment thereof which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
B. INDEMNIFICATION UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-11
<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 January 14, 1998.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
--------------------------------------
Mark Beychok, President
II-12
<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>
/s/ Mark Beychok Director, Chief Executive
- ----------------------------- Officer and President
Mark Beychok (Principal Executive) January 12, 1998
/s/ Jack B. Spencer Chief Operating Officer /
- ----------------------------- Chief Financial Officer
Jack B. Spencer (Principal Accounting
and Financial Officer) January 12, 1998
/s/ Donald Wohl Director January 12, 1998
- -----------------------------
Donald Wohl
/s/ Benjamin Tabatchnick Director January 12, 1998
- -----------------------------
Benjamin Tabatchnick
/s/ Paul S. Hermis Director January 12, 1998
- -----------------------------
Paul S. Hermis
</TABLE>
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<PAGE>
EXHIBIT 4.20
FIFTEENTH EXTENSION AGREEMENT
FIFTEENTH EXTENSION AGREEMENT, dated as of October 31, 1997, by and between
VITAFORT INTERNATIONAL CORPORATION, a Delaware corporation, and CONTINENTAL
STOCK TRANSFER & TRUST COMPANY.
WHEREAS, the parties hereto are the parties to a Warrant Agency Agreement
(the Warrant Agency Agreement"), dated as of December 19, 1989, as amended by an
Extension Agreement (the "Extension Agreement"), dated as of December 18, 1992,
as further amended by a Second Extension Agreement (the "Second Extension
Agreement"), dated as of December 18, 1994, as further amended by a Third
Extension Agreement, dated as of January 18, 1995 (the "Third Extension
Agreement"), as further amended by a Fourth Extension Agreement, dated as of
April 3, 1995 (the "Fourth Extension Agreement"), as further extended by a Fifth
Extension Agreement, dated as of May 3, 1995 (the "Fifth Extension Agreement"),
as further extended by a Sixth Extension Agreement, dated as of June 15, 1995,
as further extended by a Seventh Extension Agreement, dated as of July 17, 1995
(the "Seventh Extension Agreement), as further extended by an Eighth Extension
Agreement, dated as of August 16, 1995 (the "Eighth Extension Agreement"), as
further extended by a Ninth Extension Agreement, dated as of December 31, 1995
(the "Ninth Extension Agreement"), as further extended by a Tenth Extension
Agreement, dated as of April 30, 1996 (the "Tenth Extension Agreement"), as
further extended by an Eleventh Extension Agreement, dated as of July 31, 1996
(the "Eleventh Extension Agreement"), as further extended by a Twelfth
Extension Agreement, dated as of September 30, 1996 (the "Twelfth Extension
Agreement"), as further extended by the Thirteenth Extension Agreement, dated as
of November 15, 1996 (the "Thirteenth Extension Agreement"), and as further
extended by the Fourteenth Extension Agreement, dated as of April 15, 1997 (the
Warrant Agency Agreement, the Extension Agreement, the Second Extension
Agreement, the Third Extension Agreement, the Fourth Extension Agreement, the
Fifth Extension Agreement, the Sixth Extension Agreement, the Seventh Extension
Agreement, the Eighth Extension Agreement, the Ninth Extension Agreement, the
Tenth Extension Agreement, the Eleventh Extension Agreement, the Twelfth
Extension Agreement, the Thirteenth Extension Agreement, and the
<PAGE>
Fourteenth Extension Agreement are collectively referred to as the "Amended
Warrant Agency Agreement") and now desire to further amend the same;
NOW, THEREFORE, it is agreed as follows:
1. All defined terms shall have the meaning given them in the Amended
Warrant Agency Agreement unless otherwise defined herein.
2. Section 5 of the Warrant Agency Agreement is amended to provide that
the period during which the Warrants may be exercised shall expire at 5:00 P.M.
New York City Time on October 31, 1998. The period from October 31, 1997 to
October 31, 1998 shall be referred to as the Fifteenth Extension Period. The
Warrant Agent is authorized to affix a stamp to certificates for the Warrants
indicating the Fifteenth Extension Period.
3. The Warrant Price during the Fifteenth Extension Period shall be
$2.375, subject to adjustment as set forth in Section 4 of the Extension
Agreement. (The parties acknowledge that due to a reverse stock split, effected
October 4, 1996, each Warrant is exercisable into one twentieth of a share and
the exercise price of the Warrants is $47.50 per share.)
4. This Fifteenth Extension Agreement may only be changed by an instrument
in writing executed by the parties hereto. This Fifteenth Extension Agreement
shall be governed by the laws of the State of New York as they are applied to
contracts to be performed entirely within the State of New York.
5. Except as specifically amended hereby the Amended Warrant Agency
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of
the day and year first above written.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
--------------------
Mark Beychok, President and Chief
Executive Officer
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By: /s/ Steven Nelson
--------------------
Steven Nelson, Chairman
<PAGE>
EXHIBIT 10.84
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made by and between Vitafort
International Corporation., a Delaware Corporation ("Company") and Mark Beychok,
an individual ("Executive"), as of September 3, 1997 (the "Effective Date"), who
agree as follows:
1. Recitals. This Agreement is made with reference to the following
--------
material facts:
1.1 Executive is presently employed by Company pursuant to an oral
agreement, a previous written employment agreement having expired on December
31, 1996.
1.2 The parties desire to continue Executive's employment with the
Company pursuant to the written agreement set forth herein.
2. Employment.
----------
2.1 Company hereby engages and employs Executive in the capacity of
President and Chief Executive Officer as of the Effective Date (the
"Employment"). The Company's Board of Directors (the "Board") may also provide
such additional designations of title to Executive as the Board, in its
discretion, may deem appropriate. Executive agrees to perform the executive
duties and functions customarily associated with the offices of President and
Chief Executive Officer, and as specified from time to time by the Board.
2.2 Except for legal holidays, vacations and absences due to
temporary illness or as otherwise permitted pursuant to company policy,
Executive shall devote his time, attention and energies to the business of the
Company on a full-time basis. Executive represents and warrants to the Company
that he is under no restriction, limitation or other prohibition to perform his
duties as described herein.
3. Term. The term of this Agreement (the "Term"), shall commence on the
Effective Date hereof and shall continue for a period of three (3) years
thereafter unless terminated earlier as provided hereinafter.
4. Compensation.
------------
4.1. Base Salary. Executive's initial salary shall be $150,000 per
-----------
annum. This salary level will be reviewed at least annually by the Board, but
will not be reduced without Executive's prior written consent.
4.2. Bonus. Any and all bonus payments shall be in the discretion
-----
of the Board. If the Company establishes a written bonus plan applicable to
Executive, he shall
<PAGE>
be entitled to receive bonus payments in accordance therewith. Such plan, if
adopted, shall be affixed to each original of this Agreement as Exhibit A.
4.3 Incentive Stock Options. Any and all grants of Incentive
-----------------------
Stock Options or other options shall be in the discretion of the Board. If the
Board establishes a written option plan applicable to Executive, he shall be
entitled to receive Incentive Stock Options in accordance therewith. Such plan,
if adopted, shall be affixed to each original of this Agreement as Exhibit B.
4.4 Retirement Benefits. Company shall provide Executive with the
-------------------
opportunity to participate in all of Company's qualified defined benefit and
defined contribution retirement plans, subject to the eligibility and
participation requirements of such plans.
4.5 Employee Benefits.
-----------------
(a) The Company shall, at its expense, provide Executive and
his immediate family with comprehensive medical insurance coverage at least
comparable to the coverage provided to the Company's other executive officers.
The Company shall also maintain Directors and Officers (D&O) insurance which
shall cover Executive with reasonable coverages and policy limits. The Company
shall further provide, at its expense, "key-man" Accidental Death Insurance with
a face value of One Million Dollars ($1,000,000) to be divided equally between
the Company, on the one hand, and Executive's designated beneficiary or estate,
on the other hand. Executive represents and warrants that, for purposes of
securing such "key-man insurance", he is not aware of any medical condition that
would cause the insurance premiums to be materially higher than for a normal
male of his age.
(b) During the term of this Agreement, and as otherwise
provided within the provisions of each of the respective plans, Company shall
provide Executive all benefits to which other executives and employees of
Company are generally entitled to receive, as commensurate with Executive's
position. Such benefits shall include, but not be limited to, group term life
insurance, travel insurance, dental insurance, vision insurance, and short-term
and long-term disability coverage. Executive shall likewise participate in any
additional benefits as may be established during the term of this Agreement, by
standard written policy of Company.
4.6 Vacation. Executive shall receive four (4) weeks paid
--------
vacation each year which shall be taken in accordance with the Company's
vacation policy. Executive shall also receive all the paid holidays observed by
the Company, and any other paid absence days established by Company policy.
4.7 Perquisites. Company shall provide Executive, at Company's
-----------
cost, all perquisites to which other executives of Company are entitled to
receive in accordance with Company policy. Such perquisites, if established,
shall include, but not be limited
<PAGE>
to, coverage of cost for auto allowance, cellular telephone, and pager, provided
that pursuant to this Agreement it is agreed that Executive shall receive a
monthly auto allowance of not less than $1,300.00 to defray the cost of business
automobile expense.
4.8 Expenses. Company shall pay, or reimburse Executive, for all
--------
ordinary and necessary expenses, in reasonable amounts, which Executive incurs
in performing his duties under this Agreement, including, but not limited to,
travel, entertainment, professional dues and subscriptions, and all dues, fees
and expenses associated with membership in various professional business and
civic associations and societies of which Executive's participation is in the
best interests of Company, subject, however, to any limitations, rules and
procedures adopted by Company and which are applicable to executives generally.
4.9 Indemnification. The Company shall indemnify Executive, to the
---------------
maximum extent then permitted by applicable law, from and against any and all
claims, actions, suits, losses, fines, judgments, interest, costs and expenses
(including without limitation actual attorney's fees and disbursements) arising
out of or relating to Executive's actions or omissions as an officer, director
(if ever applicable) or employee of the Company and/or any affiliate of the
Company and/or as a trustee or fiduciary of any plan, trust or other program
established by the Company. This Section 4.9 shall survive termination or
expiration of this Agreement.
5. Termination and Compensation Upon Termination.
---------------------------------------------
5.1 Notice and Date of Termination
------------------------------
(a) Any termination of Executive's Employment by Company or
Executive shall be communicated by a written notice to the other party (the
"Notice of Termination"). The Notice of Termination shall indicate the specific
termination provision in this Agreement that is applicable and is being relied
upon, and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Employment under the provision so
indicated.
(b) "Date of Termination" shall mean:
(i) In the case of termination under sections 5.2
(retirement) or 5.3 (death), the date of retirement or death,
as may be applicable.
(ii) In the case of termination initiated by the
Executive under section 5.5 (voluntary resignation) or 5.8
(termination for Good Reason), the date specified in the
applicable Notice of Termination, or such earlier date, if any,
determined by the Company.
(iii) In all other situations, the date specified in
the applicable Notice of Termination.
<PAGE>
5.2. Termination Due to Retirement.
-----------------------------
(a) In the event Executive's employment is terminated,
while this Agreement is in force, by reason of Normal Retirement (as defined
under the then established rules of Company's tax-qualified retirement plan),
Executive's benefits shall be determined in accordance with Company's
retirement, survivor's benefits, insurance and other applicable programs then in
effect.
(b) Upon the effective date of such termination, Company
shall pay to Executive his full Base Salary, at the rate then in effect as
provided in section 4.1 herein, through the effective date of termination, and
Executive shall receive all other benefits to which he has a vested right at
that time, including, but not limited to, the retirement benefits as described
in section 4.4 herein. Company's obligation to pay and provide to Executive the
Base Salary as provided for in section 4.1 shall immediately thereafter expire
and, with the exception of the any covenants which by their terms survive
termination, Company and Executive thereafter shall have no further obligations
under this Agreement.
5.3 Termination Due to Death. In the event of Executive's death
------------------------
during the term of this Agreement, or during any period of Disability (as
defined herein) during which Executive is receiving compensation pursuant to
section 5.4 herein, Company shall pay to Executive's beneficiary as so
designated by Executive during his lifetime, or to his estate, as appropriate,
all benefits to which Executive had a vested right pursuant to this Agreement,
including, but not limited to, the retirement benefits described in section 4.4
above. Company's obligation to pay and provide to Executive Base Salary as
provided for in section 4.1 shall immediately thereafter expire and, with the
exception of the any covenants which by their terms survive termination, Company
and Executive thereafter shall have no further obligations under this Agreement.
5.4 Termination Due to Disability.
-----------------------------
(a) In the event Executive becomes Disabled during the term
of this Agreement and is, therefore, unable to perform his duties under this
Agreement for a period of more than 60 calendar days in the aggregate, during
any period of 120 consecutive days, or in the event of the Board's reasonable,
good faith determination that Executive's Disability is likely to last for more
than a period of 60 consecutive calendar days, Company shall have the right to
terminate Executive's active Employment upon the delivery to Executive of a
Notice of Termination stating Company's intent to terminate for Disability at
least 30 calendar days prior to the effective date of such termination.
(b) Upon the Date of Termination (as defined by section
5.1), Company shall pay to Executive his full Base Salary, at the rate then in
effect, as provided in section 4.1 herein, through the effective date of
termination. Company's obligation to pay and provide to Executive Base Salary
shall immediately thereafter
<PAGE>
expire, however, Executive shall receive all rights and benefits in which he is
vested, including, but not limited to, short and long-term disability benefits,
retirement benefits and options as described herein.
(c) The term "Disability" shall mean, for all purposes of
this Agreement, the incapacity of Executive due to injury, illness, disease, or
bodily or mental infirmity, to engage in the performance of substantially all of
the usual duties of employment with Company as contemplated by section 2 herein,
such Disability to be determined by the Board of Directors of Company upon
receipt of and reliance on competent medical advice from one or more
individuals, selected by the Board, who are qualified to give such professional
medical advice.
5.5 Voluntary Termination by Executive.
----------------------------------
(a) This section is applicable only to the voluntary
resignation by Executive, as opposed to resignation arising in the context of
"Termination for Good Reason," which is governed by section 5.8, below.
(b) Executive may terminate this Agreement at any time by
giving the Board of Directors of Company a Notice of Termination. The
termination shall automatically become effective upon the expiration of the
period of notice specified, or at anytime sooner at the discretion of Company.
During such notice period Company shall make no changes adverse to Executive
with respect to his compensation, benefits and perquisites in effect as of the
time such notice was given, and upon such termination, Company shall pay to
Executive all compensation due through the date of termination. Thereafter,
Executive shall retain all benefits which vested prior to termination in
accordance with the rules and procedures then in effect with respect to vesting,
including, without limitation all vested retirement benefits, insurance,
options, warrants and deferred compensation benefits. Otherwise, with the
exception of the any covenants which by their terms survive termination,
Executive and Company shall thereafter have no further obligations under this
Agreement.
5.6 Involuntary Termination by Company.
----------------------------------
(a) Company may terminate Executive's Employment at any time
for any reason other than death, Disability, Retirement, or for Cause (as
defined in section 5.7), by giving Executive a Notice of Termination.
(b) Upon the Date of Termination, Company shall pay to
Executive his Base Salary through the effective date of termination, plus all
other benefits to which Executive has a vested right at the time.
(c) In the event of termination pursuant to this section
5.6, Executive shall be entitled to the "Severance Payment" (as defined in
section 6.5) and "Additional Benefits" provided for in section 6.6.
<PAGE>
(d) With the exception of the payments and benefits
described in this section 5.6, and any covenants which by their terms survive
termination, Company and Executive thereafter shall have no further obligations
under this Agreement.
5.7 Termination for Cause.
---------------------
(a) The Company may, at any time, discharge Executive
"for Cause", whereupon his employment shall terminate in accordance with the
Company's Notice of Termination. As used in this Agreement, the term "Cause"
shall mean, (i) the conviction of any crime involving dishonesty or resulting in
imprisonment without the option of a fine, (ii) the continuing material non-
observance or the material breach by Executive of any of the material provisions
of this Agreement after due written notice to Executive from the Board
specifying with particularity the nature of such non-observance or breach, or
(iii) the continuing neglect, failure or refusal of Executive to carry out the
duties properly assigned to him after due written notice to Executive from the
Board specifying with particularity the nature of such neglect, failure or
refusal.
(b) In the event of termination for Cause, Company shall
pay Executive his full Base Salary and accrued vacation time though the Date of
Termination, plus all other benefits to which Executive has a vested right at
the time. With the exception of any covenants which by their terms survive
termination, Company and Executive shall thereafter have no further obligations
under this Agreement.
5.8 Termination for Good Reason.
---------------------------
(a) Executive may terminate this Agreement at any time for
"Good Reason," by giving the Board a Notice of Termination stating such intent
to terminate. "Good Reason" shall mean, without Executive's prior written
consent, the occurrence of any one or more of the following:
(i) Failure by the Company to honor any of its
material obligations under this Agreement; or
(ii) Any purported termination by the Company of
Executive's Employment that is not effected pursuant to a Notice
of Termination as required by 5.1 and, for purposes of this
Agreement, no such purported termination shall be effective; or
(iii) Failure to elect or reelect or otherwise to
maintain Executive to or in the office or the position (or a
substantially equivalent office or position) in the Company that
Executive held as of the date hereof; or
<PAGE>
(iv) Executive's overall compensation or perquisites
are reduced or adversely modified in any material respect, or
Executive's authority or duties are materially changed, in either
case without the prior and voluntary written consent of
Executive, which change is not fully remedied within ten (10)
calendar days after receipt by the Company of written notice from
Executive identifying such change(s). For purposes of this
Agreement, Executive's authority or duties shall be conclusively
considered to have been "materially changed" if, without
Executive's express and voluntary written consent, there is any
substantial diminution or adverse modification in Executive's
title, status, overall position, responsibilities, reporting
relationship, general working environment (including without
limitation secretarial and staff support, offices, and frequency
and mode of travel); or
(v) A change in circumstances significantly
affecting Executive's position, including without limitation a
change in the scope of the business or other activities for which
he was responsible as of the Effective Date of this Agreement,
and, as a result thereof, Executive has been rendered
substantially unable to carry out, has been substantially
hindered in the performance of, or has suffered a substantial
reduction in any of the authorities, powers, functions,
responsibilities or duties attached to the position held by
Executive as of the date hereof, which situation is not fully
remedied within ten (10) calendar days after written notice to
the Company from Executive of such determination, or
(vi) Company's requiring Executive to be based more
than 100 miles from the location of his principal office at that
time.
(c) In the event of termination pursuant to this section
5.8, Executive shall be entitled to the "Severance Payment" (as defined in
section 6.5) and "Additional Benefits" provided for in section 6.6.
(d) With the exception of the payments and benefits
described in this section 5.8, and any covenants which by their terms survive
termination, Company and Executive thereafter shall have no further obligations
under this Agreement.
6. Change of Control
-----------------
6.1 Survival. The provisions of this Section 6 shall (i) survive
--------
this Agreement and shall continue one (1) day past termination of Executive's
employment, and (ii) only become effective upon a "Change in Control," as
defined below. No termination or expiration of this Agreement shall limit, alter
or otherwise affect Executive's continuing rights hereunder with respect to the
benefits and rights afforded to him as provided herein.
<PAGE>
6.2 Background.
----------
(a) The Company believes that because of its position in
the industry, financial resources and historical operating results there is a
possibility that the Company may become the subject of a Change in Control (as
defined below), either now or at some time in the future.
(b) The Company believes that it is in the best interest
of the Company and its shareholders to foster Executive's objectivity in making
decisions with respect to any pending or threatened Change in Control of the
Company and to assure that the Company will have the continued dedication and
availability of Executive, notwithstanding the possibility, threat or occurrence
of a Change in Control. The Company believes that these goals can best be
accomplished by alleviating certain of the risks and uncertainties with regard
to Executive's financial and professional security that would be created by a
pending or threatened Change in Control and that inevitably would distract
Executive and could impair his ability to objectively perform his duties for and
on behalf of the Company.
(c) Accordingly, the Company believes that it is
appropriate and in the best interest of the Company and its shareholders to
provide to Executive compensation arrangements upon a Change in Control that
lessen Executive's financial risks and uncertainties and that are reasonably
competitive with those of other corporations. With these and other
considerations in mind, the Board has authorized the Company to enter into these
arrangements with Executive to provide the protections set forth herein
following a Change in Control.
6.3 Change in Control. As used in this Agreement, the phrase
-----------------
"Change in Control" shall mean:
(a) Except as provided by Paragraph (c) hereof, the
acquisition by any person, entity or "group", within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange
Act"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of forty percent (40%) or more of the combined voting
power of the then outstanding securities entitled to vote generally in the
election of directors of the Company; or
(b) Individuals who, as of the Effective Date hereof,
constitute the Board of Directors of the Company (as of the Effective Date
hereof the "Incumbent Board") cease for any reason to constitute at least a
majority of the Board of Directors of the Company, provided that any person
becoming a director subsequent to the Effective Date hereof whose election, or
nomination for election by the Company's shareholders, is or was approved by a
vote of at least a majority of the directors then comprising the Incumbent Board
(other than an election or nomination of an individual whose initial assumption
of office is in connection with an actual or threatened election contest
relating to the election of the directors of the Company, as such terms are used
in Rule 14a-11 of
<PAGE>
Regulation 14A promulgated under the Exchange Act) shall be,
for purposes of this Agreement, considered as though such person were a member
of the Incumbent Board; or
(c) Approval by the stockholders of the Company of a
reorganization, merger or consolidation of the Company with any other person,
entity or corporation, other than:
(i) a merger or consolidation which would result
in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
another entity) more than sixty percent (60%) of the combined
voting power of the securities entitled to vote generally in
the election of directors of the Company or such other entity
outstanding immediately after such merger or consolidation, or
(ii) a merger or consolidation effected to
implement a recapitalization of the Company (or similar
transaction) in which no person, entity or group (other than
any employee benefit plan of any of the Company) acquires
beneficial ownership of forty percent (40%) or more of the
combined voting power of the securities entitled to vote
generally in the election of directors of the Company
outstanding immediately after such merger or consolidation; or
(d) Approval by the stockholders of the Company of a plan
of complete liquidation of the Company or an agreement for the sale or other
disposition by the Company of all or substantially all of such Company's assets.
6.4 Qualifying Termination. If Executive's Employment is
----------------------
terminated within 6 months following a Change of Control for any reason other
than retirement, death, disability or for Cause, such termination shall
constitute a "Qualifying Termination." In the event of a Qualifying Termination,
the Company shall be obligated to make the "Severance Payment" to Executive
provided for in section 6.5 and provide the "Additional Benefits" described in
section 6.6
6.5 Severance Payment.
-----------------
(a) For purposes of this Agreement, the "Severance
Payment" shall equal one hundred fifty percent (150%) of Executive's
"Compensation" (as defined below). Executive shall be entitled to receive the
Severance Payment in a cash lump sum within five (5) calendar days after the
later of Executive's Date of Termination or the date of the Change in Control.
(b) For purposes of this Agreement, Executive's
"Compensation" shall equal the sum of (1) Executive's highest annual salary rate
with the Company within the three-year period ending on Executive's Date of
Termination, plus (2) the "Bonus
<PAGE>
Increment." The Bonus Increment shall equal the annualized average of all
bonuses and incentive compensation payments other than stock options paid or
payable to Executive during the three-year period immediately before Executive's
Date of Termination under all of the Company's bonus and incentive compensation
plans or arrangements, if any.
(c) In lieu of a cash lump sum, Executive may, in his
sole discretion, elect to receive the Severance Payment in equal annual
installments over three (3) years (or such lesser number of years as Executive
may elect). Such installments shall be paid to Executive on each anniversary of
Executive's Date of Termination, beginning with the first such anniversary and
continuing on each such anniversary thereafter until fully paid. Such election
to receive the Severance Payment in installments may be made and/or revoked by
Executive at any time prior to the termination of his employment by providing
written notice to the Board of such election. Any such election by Executive to
receive the Severance Payment in installments that has been made and not revoked
prior to Executive's termination shall, effective the date of such termination,
be irrevocable and binding on all parties hereto.
(d) In the event that at the time of Executive's
Qualifying Termination there is not in effect an election by Executive to
receive the Severance Payment in installments, such Severance Payment shall be
paid to Executive in a single cash lump sum. In the event that Executive has
made an appropriate election to receive the Severance Payment in annual
installments, and Executive becomes entitled to such Severance Payment as
provided in this Agreement, then such Severance Payment, to the extent at any
time unpaid and/or deferred, shall be deemed to bear interest at the base or
prime rate in effect from time to time as publicly announced by Bank of America
NT&SA (the "Prime Rate"). Accrued interest shall be due and payable together
with each annual installment of the Severance Payment.
6.6 Additional Benefits.
-------------------
(a) In the event of a Qualifying Termination, the Company
agrees and covenants that Executive and his dependents shall be entitled to
continue to participate in all benefit programs which had been made available to
Executive before the Qualifying Termination including without limitation, any
and all medical insurance, dental insurance, vision insurance, life insurance,
disability insurance, retirement and/or pension plans and other benefit programs
of the Company and/or its affiliates. These programs shall be continued at no
cost to Executive, except to the extent of Executive's income tax payable
thereon because tax rules require the inclusion of the value of such benefits in
Executive's income. The programs shall be continued in the same way and at the
same level as immediately prior to the Qualifying Termination, and shall
continue for the benefit of Executive for eighteen (18) months (the "Benefit
Period"). In the event that participation in any such plan or program is barred
or unavailable for any reason, the Company shall arrange to provide Executive,
at the expense of the Company, with benefits substantially comparable to those
which he was entitled to receive under such plans and programs as were in effect
immediately prior to the time of the Qualifying
<PAGE>
Termination. The continuation of benefits provided for herein shall extend to
the dependents of Executive as permitted by the applicable plans, provided that
Executive shall continue to be responsible for the cost of any and all dependant
coverage.
(b) In the event of a Qualifying Termination, Executive or
his successors may, at the expense of the Company, utilize the reasonable
services of accountants and attorneys of his or their choice for assistance in
interpreting and enforcing this Agreement as well as for preparation of his tax
returns for the year of the Qualifying Termination and for each other year all
or any portion of which is included within the Benefit Period.
(c) In the event of a Qualifying Termination, Executive
shall be entitled, at the expense of the Company, to "Automobile Benefits"
during the entire term of the Benefit Period. For purposes hereof, "Automobile
Benefits" shall include a $1,300 per month allowance to defray automobile
expenses and costs.
(d) In the event any perquisite or benefit enjoyed by
Executive or his dependents is reduced or eliminated within six (6) months
before a Qualifying Termination, then for all purposes of this Agreement, the
perquisite or benefit as was in effect prior to such reduction or elimination
shall be deemed to have been in place immediately prior to the Date of
Termination.
(e) In the event of a Qualifying Termination, any and all
of Executive's unvested stock options and equity-based incentives shall
immediately vest and be fully exerciseable.
7. Other Covenants of the Parties.
------------------------------
7.1 Indemnification for Golden Parachute Excise Tax.
-----------------------------------------------
(a) In the event that it shall be determined that any
payment, benefit or distribution provided, or to be provided, by the Company (or
by any person whose actions result in a Change in Control or any person
affiliated with the Company or such person) to or for the benefit of Executive
under the terms of this Agreement, or under any other agreement, plan or
arrangement with the Company (or with any person whose actions result in a
Change in Control or any person affiliated with the Company or such person),
would be subject to any excise tax imposed pursuant to Section 4999 of the
Internal Revenue Code of 1976, as amended, or any comparable provision of state
law (an "Excise Tax"), the Company agrees that it will promptly pay or cause to
be paid to Executive, in addition to any other payments made or required to be
made pursuant to the terms of this Agreement, an additional amount in cash (a
"Gross-Up Payment") equal to the sum of (i) the amount of such Excise Tax plus
(ii) all Attributable Taxes and Penalties. For purposes of this Agreement,
"Attributable Taxes and Penalties" means all taxes, interest and penalties,
including, without limitation, any federal, state and local income taxes and any
Excise Taxes, which become payable by Executive as a result of
<PAGE>
the receipt of the Gross-Up Payment or the assessment of any Excise Tax against
Executive. It is intended that under this provision the Company will indemnify
Executive in such a manner that Executive shall not suffer any loss or expense
by reason of the assessment of any Excise Tax or the reimbursement of Executive
for payment of any such Excise Tax.
(b) In determining the amount of any Gross-Up Payment
payable pursuant to Paragraph (i) above, Executive shall be deemed to pay
federal income taxes at the highest marginal rate of federal income taxation in
the calendar year in which the Gross-Up Payment is to be made, and state and
local taxes at the highest marginal rates of taxation for such year in the state
and locality of Executive's residence. For such purposes, federal income taxes
shall be determined net of the maximum reduction in such federal income taxes
that could be obtained from the deduction of such state and local taxes.
(c) Within 30 days after Executive's Date of Termination,
a mutually agreed upon nationally recognized accounting firm (the "Accounting
Firm"), shall make a determination as to whether any Excise Tax should be
reported and paid by Executive for any period or periods by reason of any
payment, benefit or distribution under this Agreement or under any other
agreement, plan or arrangement with the Company (or with any person whose
actions result in a Change in Control or any person affiliated with the Company
or such person). If the Accounting Firm determines that any Excise Tax should be
reported and paid by Executive, the Accounting Firm shall also determine the
amount of such Excise Tax and the amount of the Gross-Up Payment required to be
paid to Executive by the Company with respect to such Excise Tax. In such event,
the Company shall, within five (5) business days after such determination, pay
or cause to be paid to Executive the amount of the Gross-Up Payment with respect
to the Excise Tax as determined by the Accounting Firm, and Executive shall
report and pay the Excise Tax as so determined. If the Accounting Firm
determines that no Excise Tax should be reported and paid by Executive, it shall
furnish Executive with its opinion that there is substantial authority not to
report any Excise Tax, and Executive shall prepare and file his tax returns in
accordance with such advice until such time as the Internal Revenue Service (the
"IRS") or any applicable state taxing authority shall notify Executive that such
manner of reporting is improper. The Company shall be responsible for all fees
and expenses connected with the determinations by the Accounting Firm pursuant
to this Paragraph 7.1.
(d) In the event that Executive is at any time required to
pay any Excise Tax (or any interest or penalties with respect to any Excise Tax)
in addition to any amount determined pursuant to Paragraph 7.1 (c) by reason of
any payment, benefit or distribution under this Agreement or under any other
agreement, plan or arrangement with the Company (or with any person whose
actions result in a Change in Control or any person affiliated with the Company
or such person), within five (5) business days after Executive notifies the
Company of such required additional Excise Tax (or additional interest or
penalties) the Company shall pay or cause to be paid to Executive a Gross-Up
<PAGE>
Payment determined with respect to such additional Excise Tax (and any such
additional interest and penalties). In the event that Executive receives any
refund of any Excise Tax with respect to which Executive has previously received
a Gross-Up Payment hereunder, Executive shall promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto).
(e) Executive agrees to notify the Company in a timely
manner in the event of any audit or other proceeding by the IRS or any state
taxing authority in which the IRS or the state taxing authority asserts that any
Excise Tax should be assessed against Executive and to cooperate with the
Company (at the Company's sole cost and expense) in contesting any such proposed
assessment with respect to such Excise Tax (a "Proposed Assessment"). Executive
agrees not to settle any Proposed Assessment without the consent of the Company.
If, however, Executive's tax liability for any year cannot be finally resolved
principally by reason of a failure to settle a Proposed Assessment, Executive
may demand that the Company settle the Proposed Assessment. If the Company does
not settle the Proposed Assessment, or does not consent to allow Executive to
settle the Proposed Assessment, within ten (10) days following such demand, the
Company shall indemnify and hold harmless Executive (i) with respect to any
additional interest and/or penalties that Executive is required to pay by reason
of the delay in finally resolving Executive's tax liability and (ii) with
respect to any taxes, interest and penalties that Executive is required to pay
by reason of any indemnification payment under this Paragraph.
7.2 Non-Exclusivity of Rights. Nothing in this Agreement
shall prevent or limit Executive's continuing or future participation in any
benefit, bonus, incentive or other plan or program provided by the Company or
any of its affiliated companies. Amounts which are vested benefits or which
Executive is otherwise entitled to receive under any plan or program of the
Company or any of its affiliated companies at or subsequent to the date of any
termination shall be payable in accordance with such plan or program except as
otherwise provided herein.
7.3. Intellectual Property Rights.
----------------------------
(a) Executive shall promptly and fully inform Company of,
and disclose to Company, any and all ideas, concepts, themes, inventions,
designs, creations, improvements and discoveries that he makes during the term
of this Agreement, whether individually or jointly in collaboration with others,
which are, at the time any such item is conceived or reduced to practice,
related to Company's business or to actual or demonstrably anticipated research
or development of Company, or which result from any work performed by Executive
for Company.
(b) Executive agrees that any and all ideas, concepts,
themes, inventions, designs, creations, improvements or discoveries conceived,
developed or written by Executive either individually, or jointly in
collaboration with others, which are
<PAGE>
related to Company's business, whether patentable or unpatentable or
copyrightable or uncopyrightable, shall belong to and be the sole and exclusive
property of Company.
(c) Executive shall assist Company in obtaining patents
or copyright registration on such intellectual properties an execute all
documents and do all things necessary to enable Company to obtain and enforce
full an exclusive title to such properties which are related to Company's
business.
8. General Provisions.
------------------
8.1 No Assignment. Neither party may assign this Agreement
-------------
without the prior written consent of the other.
8.2 Complete Agreement. This Agreement contains the entire
------------------
agreement of the parties with respect to the subject matter hereof and
supersedes all previous oral and written agreements and all contemporaneous oral
negotiations, commitments, writings and understandings.
8.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.4 Governing Law. This Agreement shall be governed by, and
-------------
construed in accordance with, the internal laws of the State of California.
8.5 Modifications and Waivers. No waiver or modification of this
-------------------------
Agreement shall be binding unless it is in a writing signed by both parties
hereto.
8.6 Severability. In the event any provision or provisions of this
------------
Agreement is or are to be held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
8.7 Legal Fees. If any legal action, arbitration or other
----------
proceeding is brought for the enforcement of this Agreement, or because of any
alleged dispute, breach or default in connection with this Agreement, the
successful or prevailing party shall be entitled to recover all of its costs
incurred in such action or proceeding, including without limitation its actual
attorneys' fees and disbursements, in addition to any other relief to which it
may be entitled.
8.8 Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered United States mail to, the party to be charged
with receipt hereof. Notices and other communications served by mail shall be
deemed given hereunder seventy-two (72) hours after deposit of such notice or
communication in the United States Post Office as certified or registered mail
with postage prepaid and duly addressed to the receiving
<PAGE>
party as follows, or at such other address as such party has designated in a
written notice given as provided herein:
To Company:
Vitafort International Corporation
Attention: Jack B.Spencer, CFO/COO
1800 Avenue of the Stars, Suite 480
Los Angeles, CA 90067
To Executive:
Mark Beychok
955 North Beverly Glen
Los Angeles, CA 90077
8.9 Construction. The language of this Agreement shall be construed
------------
simply and according to its fair meaning, and shall not be construed for or
against any party hereto as a result of the source of its draftsmanship.
8.10 Arbitration. Any controversy or claim arising out of or
-----------
relating to this Agreement, or an alleged breach of this Agreement, shall be
settled by arbitration administered by JAMS/ENDispute, and judgment on the award
rendered by the arbitrator(s) may be entered in the Superior Court in and for
the County of Los Angeles, California. In case of a dispute, any party may
commence arbitration by giving written notice to the others of its desire to do
so. Each party hereto agrees that service of process for an arbitration
proceeding will be deemed completed when a notice of another party's desire to
arbitrate is received by such party. Each party hereby agrees that any such
arbitration shall be held in the County of Los Angeles, California and consents
to the jurisdiction of the Superior Court in and for the County of Los Angeles
for entering of any judgment. The arbitrator shall have authority equal to that
of a Superior Court Judge to grant equitable relief in an action pending in Los
Angeles County Superior Court in which all parties have appeared. Judgment upon
the Arbitrator's award may be entered as if after trial in accordance with
California law. Should any party fail to pay fees as required, any other party
may advance the same and shall be entitled to a judgment from the arbitrator in
the amount of such fees plus interest. Any award issued by the arbitrator shall
bear interest at the judgment rate in effect in the State of California from the
date determined by the arbitrator.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, even though the parties
do not sign the same counterpart.
<PAGE>
IN WITNESS WHEREOF the parties hereto do hereby execute and make effective this
Agreement as of the Effective Date.
Vitafort International Corporation
By:_______________________________
Jack B. Spencer
Chief Operating Officer
Chief Financial Officer
__________________________________
MARK BEYCHOK
<PAGE>
EXHIBIT B
to
EMPLOYMENT AGREEMENT
DATED SEPTEMBER 3, 1997
This Exhibit B to the Employment Agreement dated as of September 3, 1997
(the "Agreement") by an between Vitafort International Corporation ("Company")
Mark Beychok ("Executive") is hereby attached to the Agreement and made a part
thereof pursuant to section 4.3 of such Agreement.
Company hereby grants to Executive Stock Options to purchase up to 450,000
shares of Common Stock of the Company, at a purchase price of $.87 per, provided
that the right to exercise such options shall vest as follows:
Upon the Effective Date, Executive shall have the right to exercise the
option for up to 75,000 shares.
On March 3, 1998, Executive shall have the right to exercise the option for
up to 75,000 shares.
On September 3, 1998, Executive shall have the right to exercise the option
for up to 75,000 shares.
On March 3, 1999, Executive shall have the right to exercise the option for
up to 75,000 shares.
On September 3, 1999, Executive shall have the right to exercise the option
for up to 75,000 shares.
On March 3, 2000, Executive shall have the right to exercise the option for
up to 75,000 shares.
The grant of such options shall be confirmed by the delivery to Executive
of a written option agreement in the form of Company's standard Stock Option,
and shall further be subject to all applicable provisions of the Agreement.
<PAGE>
EXHIBIT 10.85
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") is made by and between Vitafort International
Corporation., a Delaware Corporation ("Company") and John Coppolino, an
individual ("Executive"), as of __________________ (the "Effective Date"), who
agree as follows:
1. Recitals. This Agreement is made with reference to the following material
--------
facts:
1.1 Executive is presently employed by Company pursuant to an oral
agreement, a previous written employment agreement having expired on December
31, 1996.
1.2 The parties desire to continue Executive's employment with the Company
pursuant to the written agreement set forth herein.
2. Employment.
----------
2.1 Company hereby engages and employs Executive in the capacity of
Executive Vice President and Director of Sales as of the Effective Date (the
"Employment"). The Company's Board of Directors (the "Board") may also provide
such additional designations of title to Executive as the Board, in its
discretion, may deem appropriate. Executive agrees to perform the executive
duties and functions customarily associated with the offices of Executive Vice
President and Director of Sales, and as specified from time to time by the
Board.
2.2 Except for legal holidays, vacations and absences due to temporary
illness or as otherwise permitted pursuant to company policy, Executive shall
devote his time, attention and energies to the business of the Company on a
full-time basis. Executive represents and warrants to the Company that he is
under no restriction, limitation or other prohibition to perform his duties as
described herein.
3. Term. The term of this Agreement (the "Term"), shall commence on the
----
Effective Date hereof and shall continue for a period of two (2) years
thereafter unless terminated earlier as provided hereinafter.
4. Compensation.
4.1. Base Salary. Executive's initial salary shall be $120,000 per annum.
-----------
This salary level will be reviewed at least annually by the Board, but will not
be reduced without Executive's prior written consent
4.2. Bonus. Any and all bonus payments shall be in the discretion of the
-----
Board. If the Company establishes a written bonus plan applicable to Executive,
he shall be entitled to receive bonus payments in accordance therewith. Such
plan, if adopted, shall be affixed to each original of this Agreement as Exhibit
A.
4.3 Incentive Stock Options. Any and all grants of Incentive Stock
-----------------------
Options or other options shall be in the discretion of the Board. If the Board
establishes a written option plan applicable to Executive, he shall be entitled
to receive Incentive Stock Options in
<PAGE>
accordance therewith. Such plan, if adopted, shall be affixed to each original
of this Agreement as Exhibit B.
4.4 Retirement Benefits. Company shall provide Executive with the
-------------------
opportunity to participate in all of Company's qualified defined benefit and
defined contribution retirement plans, subject to the eligibility and
participation requirements of such plans.
4.5 Employee Benefits.
-----------------
(a) The Company shall, at its expense, provide Executive and his
immediate family with comprehensive medical insurance coverage at least
comparable to the coverage provided to the Company's other executive officers,
provided that Executive shall bear the cost of coverage for any dependents. The
Company shall also maintain Directors and Officers (D&O) insurance which shall
cover Executive with reasonable coverages and policy limits.
(b) During the term of this Agreement, and as otherwise provided
within the provisions of each of the respective plans, Company shall provide
Executive all benefits to which other executives and employees of Company are
generally entitled to receive, as commensurate with Executive's position. Such
benefits shall include, but not be limited to, group term life insurance, travel
insurance, dental insurance, vision insurance, and short-term and long-term
disability coverage. Executive shall likewise participate in any additional
benefits as may be established during the term of this Agreement, by standard
written policy of Company.
4.6 Vacation. Executive shall receive three (3) weeks paid vacation each
--------
year which shall be taken in accordance with the Company's vacation policy.
Executive shall also receive all the paid holidays observed by the Company, and
any other paid absence days established by Company policy.
4.7 Perquisites. Company shall provide Executive, at Company's cost, all
-----------
perquisites to which other executives of Company are entitled to receive in
accordance with Company policy. Such perquisites, if established, shall
include, but not be limited to, coverage of cost for auto allowance, cellular
telephone, and pager, provided that pursuant to this Agreement it is agreed that
Executive shall receive a monthly auto allowance of not less than $750.00 to
defray the cost of business automobile expense.
4.8 Expenses. Company shall pay, or reimburse Executive, for all ordinary
--------
and necessary expenses, in reasonable amounts, which Executive incurs in
performing his duties under this Agreement, including, but not limited to,
travel, entertainment, professional dues and subscriptions, and all dues, fees
and expenses associated with membership in various professional business and
civic associations and societies of which Executive's participation is in the
best interests of Company, subject, however, to any limitations, rules and
procedures adopted by Company and which are applicable to executives generally.
4.9 Indemnification. The Company shall indemnify Executive, to the
---------------
maximum extent then permitted by applicable law, from and against any and all
claims, actions, suits,
2
<PAGE>
losses, fines, judgments, interest, costs and expenses (including without
limitation actual attorney's fees and disbursements) arising out of or relating
to Executive's actions or omissions as an officer, director (if ever applicable)
or employee of the Company and/or any affiliate of the Company and/or as a
trustee or fiduciary of any plan, trust or other program established by the
Company. This Section 4.9 shall survive termination or expiration of this
Agreement.
5. Termination and Compensation Upon Termination.
---------------------------------------------
5.1 Notice and Date of Termination
------------------------------
(a) Any termination of Executive's Employment by Company or Executive
shall be communicated by a written notice to the other party (the "Notice of
Termination"). The Notice of Termination shall indicate the specific termination
provision in this Agreement that is applicable and is being relied upon, and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employment under the provision so indicated.
(b) "Date of Termination" shall mean:
(i) In the case of termination under sections 5.2 (retirement)
or 5.3 (death), the date of retirement or death, as may be applicable.
(ii) In the case of termination initiated by the Executive under
section 5.5 (voluntary resignation) or 5.8 (termination for Good
Reason), the date specified in the applicable Notice of Termination, or
such earlier date, if any, determined by the Company.
(iii) In all other situations, the date specified in the
applicable Notice of Termination.
5.2. Termination Due to Retirement.
-----------------------------
(a) In the event Executive's employment is terminated, while this
Agreement is in force, by reason of Normal Retirement (as defined under the then
established rules of Company's tax-qualified retirement plan), Executive's
benefits shall be determined in accordance with Company's retirement, survivor's
benefits, insurance and other applicable programs then in effect.
(b) Upon the effective date of such termination, Company shall pay to
Executive his full Base Salary, at the rate then in effect as provided in
section 4.1 herein, through the effective date of termination, and Executive
shall receive all other benefits to which he has a vested right at that time,
including, but not limited to, the retirement benefits as described in section
4.4 herein. Company's obligation to pay and provide to Executive the Base
Salary as provided for in section 4.1 shall immediately thereafter expire and,
with the exception of the any covenants which by their terms survive
termination, Company and Executive thereafter shall have no further obligations
under this Agreement.
3
<PAGE>
5.3 Termination Due to Death. In the event of Executive's death during
------------------------
the term of this Agreement, or during any period of Disability (as defined
herein) during which Executive is receiving compensation pursuant to section 5.4
herein, Company shall pay to Executive's beneficiary as so designated by
Executive during his lifetime, or to his estate, as appropriate, all benefits to
which Executive had a vested right pursuant to this Agreement, including, but
not limited to, the retirement benefits described in section 4.4 above.
Company's obligation to pay and provide to Executive Base Salary as provided for
in section 4.1 shall immediately thereafter expire and, with the exception of
the any covenants which by their terms survive termination, Company and
Executive thereafter shall have no further obligations under this Agreement.
5.4 Termination Due to Disability.
-----------------------------
(a) In the event Executive becomes Disabled during the term of this
Agreement and is, therefore, unable to perform his duties under this Agreement
for a period of more than 60 calendar days in the aggregate, during any period
of 120 consecutive days, or in the event of the Board's reasonable, good faith
determination that Executive's Disability is likely to last for more than a
period of 60 consecutive calendar days, Company shall have the right to
terminate Executive's active Employment upon the delivery to Executive of a
Notice of Termination stating Company's intent to terminate for Disability at
least 30 calendar days prior to the effective date of such termination
(b) Upon the Date of Termination (as defined by section 5.1), Company
shall pay to Executive his full Base Salary, at the rate then in effect, as
provided in section 4.1 herein, through the effective date of termination.
Company's obligation to pay and provide to Executive Base Salary shall
immediately thereafter expire, however, Executive shall receive all rights and
benefits in which he is vested, including, but not limited to, short and long-
term disability benefits, retirement benefits and options as described herein.
(c) The term "Disability" shall mean, for all purposes of this
Agreement, the incapacity of Executive due to injury, illness, disease, or
bodily or mental infirmity, to engage in the performance of substantially all of
the usual duties of employment with Company as contemplated by section 2 herein,
such Disability to be determined by the Board of Directors of Company upon
receipt of and reliance on competent medical advice from one or more
individuals, selected by the Board, who are qualified to give such professional
medical advice.
5.5 Voluntary Termination by Executive.
----------------------------------
(a) This section is applicable only to the voluntary resignation by
Executive, as opposed to resignation arising in the context of "Termination for
Good Reason," which is governed by section 5.8, below.
(b) Executive may terminate this Agreement at any time by giving the
Board of Directors of Company a Notice of Termination. The termination shall
automatically become effective upon the expiration of the period of notice
specified, or at anytime sooner at the discretion of Company. During such
notice period Company shall make no changes adverse to Executive with
respect to his compensation, benefits and perquisites in effect as of the
time such notice was given, and upon such termination, Company shall pay to
Executive all compensation due through the date of termination. Thereafter,
4
<PAGE>
Executive shall retain all benefits which vested prior to termination in
accordance with the rules and procedures then in effect with respect to
vesting, including, without limitation all vested retirement benefits,
insurance, options, warrants and deferred compensation benefits. Otherwise,
with the exception of the any covenants which by their terms survive
termination, Executive and Company shall thereafter have no further
obligations under this Agreement.
5.6 Involuntary Termination by Company.
----------------------------------
(a) Company may terminate Executive's Employment at any time for any
reason other than death, Disability, Retirement, or for Cause (as defined in
section 5.7), by giving Executive a Notice of Termination.
(b) Upon the Date of Termination, Company shall pay to Executive his
Base Salary through the effective date of termination, plus all other benefits
to which Executive has a vested right at the time.
(c) In the event of termination pursuant to this section 5.6, Executive
shall be entitled to the "Severance Payment" (as defined in section 6.5) and
"Additional Benefits" provided for in section 6.6.
(d) With the exception of the payments and benefits described in this
section 5.6, and any covenants which by their terms survive termination, Company
and Executive thereafter shall have no further obligations under this Agreement.
5.7 Termination for Cause.
---------------------
(a) The Company may, at any time, discharge Executive "for Cause",
whereupon his employment shall terminate in accordance with the Company's Notice
of Termination. As used in this Agreement, the term "Cause" shall mean, (i) the
conviction of any crime involving dishonesty or resulting in imprisonment
without the option of a fine, (ii) the continuing material non-observance or the
material breach by Executive of any of the material provisions of this Agreement
after due written notice to Executive from the Board specifying with
particularity the nature of such non-observance or breach, or (iii) the
continuing neglect, failure or refusal of Executive to carry out the duties
properly assigned to him after due written notice to Executive from the Board
specifying with particularity the nature of such neglect, failure or refusal.
(b) In the event of termination for Cause, Company shall pay Executive
his full Base Salary and accrued vacation time though the Date of Termination,
plus all other benefits to which Executive has a vested right at the time. With
the exception of any covenants which by their terms survive termination, Company
and Executive shall thereafter have no further obligations under this Agreement.
5.8 Termination for Good Reason.
---------------------------
(a) Executive may terminate this Agreement at any time for "Good
Reason," by giving the Board a Notice of Termination stating such intent to
terminate. "Good Reason"
5
<PAGE>
shall mean, without Executive's prior written consent, the occurrence of any one
or more of the following:
(i) Failure by the Company to honor any of its material
obligations under this Agreement; or
(ii) Any purported termination by the Company of Executive's
Employment that is not effected pursuant to a Notice of Termination as
required by 5.1 and, for purposes of this Agreement, no such purported
termination shall be effective; or
(iii) Failure to elect or reelect or otherwise to maintain
Executive to or in the office or the position (or a substantially
equivalent office or position) in the Company that Executive held as of
the date hereof; or
(iv) Executive's overall compensation or perquisites are reduced
or adversely modified in any material respect, or Executive's authority
or duties are materially changed, in either case without the prior and
voluntary written consent of Executive, which change is not fully
remedied within ten (10) calendar days after receipt by the Company of
written notice from Executive identifying such change(s). For purposes
of this Agreement, Executive's authority or duties shall be
conclusively considered to have been "materially changed" if, without
Executive's express and voluntary written consent, there is any
substantial diminution or adverse modification in Executive's title,
status, overall position, responsibilities, reporting relationship,
general working environment (including without limitation secretarial
and staff support, offices, and frequency and mode of travel); or
(v) A change in circumstances significantly affecting Executive's
position, including without limitation a change in the scope of the
business or other activities for which he was responsible as of the
Effective Date of this Agreement, and, as a result thereof, Executive
has been rendered substantially unable to carry out, has been
substantially hindered in the performance of, or has suffered a
substantial reduction in any of the authorities, powers, functions,
responsibilities or duties attached to the position held by Executive
as of the date hereof, which situation is not fully remedied within ten
(10) calendar days after written notice to the Company from Executive
of such determination, or
(vi) Company's requiring Executive to be based more than 100
miles from the location of his principal office at that time.
(c) In the event of termination pursuant to this section 5.8, Executive
shall be entitled to the "Severance Payment" (as defined in section 6.5) and
"Additional Benefits" provided for in section 6.6.
6
<PAGE>
(d) With the exception of the payments and benefits described in this
section 5.8, and any covenants which by their terms survive termination, Company
and Executive thereafter shall have no further obligations under this Agreement.
6. Change of Control
-----------------
6.1 Survival. The provisions of this Section 6 shall (i) survive this
--------
Agreement and shall continue one (1) day past termination of Executive's
employment, and (ii) only become effective upon a "Change in Control," as
defined below. No termination or expiration of this Agreement shall limit,
alter or otherwise affect Executive's continuing rights hereunder with respect
to the benefits and rights afforded to him as provided herein.
6.2 Background.
----------
(a) The Company believes that because of its position in the industry,
financial resources and historical operating results there is a possibility that
the Company may become the subject of a Change in Control (as defined below),
either now or at some time in the future.
(b) The Company believes that it is in the best interest of the
Company and its shareholders to foster Executive's objectivity in making
decisions with respect to any pending or threatened Change in Control of the
Company and to assure that the Company will have the continued dedication and
availability of Executive, notwithstanding the possibility, threat or occurrence
of a Change in Control. The Company believes that these goals can best be
accomplished by alleviating certain of the risks and uncertainties with regard
to Executive's financial and professional security that would be created by a
pending or threatened Change in Control and that inevitably would distract
Executive and could impair his ability to objectively perform his duties for and
on behalf of the Company.
(c) Accordingly, the Company believes that it is appropriate and in
the best interest of the Company and its shareholders to provide to Executive
compensation arrangements upon a Change in Control that lessen Executive's
financial risks and uncertainties and that are reasonably competitive with those
of other corporations. With these and other considerations in mind, the Board
has authorized the Company to enter into these arrangements with Executive to
provide the protections set forth herein following a Change in Control.
6.3 Change in Control. As used in this Agreement, the phrase "Change in
-----------------
Control" shall mean:
(a) Except as provided by Paragraph (c) hereof, the acquisition by
any person, entity or "group", within the meaning of Section 13(d)(3) or
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act"), of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of forty percent (40%) or more of the combined voting
7
<PAGE>
power of the then outstanding securities entitled to vote generally in the
election of directors of the Company; or
(b) Individuals who, as of the Effective Date hereof, constitute the
Board of Directors of the Company (as of the Effective Date hereof the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board of Directors of the Company, provided that any person becoming a director
subsequent to the Effective Date hereof whose election, or nomination for
election by the Company's shareholders, is or was approved by a vote of at least
a majority of the directors then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of the directors of the Company, as such terms are used in Rule 14a-11
of Regulation 14A promulgated under the Exchange Act) shall be, for purposes of
this Agreement, considered as though such person were a member of the Incumbent
Board; or
(c) Approval by the stockholders of the Company of a reorganization,
merger or consolidation of the Company with any other person, entity or
corporation, other than:
(i) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of another entity) more than sixty
percent (60%) of the combined voting power of the securities entitled
to vote generally in the election of directors of the Company or such
other entity outstanding immediately after such merger or
consolidation, or
(ii) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
person, entity or group (other than any employee benefit plan of any of
the Company) acquires beneficial ownership of forty percent (40%) or
more of the combined voting power of the securities entitled to vote
generally in the election of directors of the Company outstanding
immediately after such merger or consolidation; or
(d) Approval by the stockholders of the Company of a plan of complete
liquidation of the Company or an agreement for the sale or other disposition by
the Company of all or substantially all of such Company's assets.
6.4 Qualifying Termination. If Executive's Employment is terminated within
----------------------
6 months following a Change of Control for any reason other than retirement,
death, disability or for Cause, such termination shall constitute a "Qualifying
Termination." In the event of a Qualifying Termination, the Company shall be
obligated to make the "Severance Payment" to Executive provided for in section
6.5 and provide the "Additional Benefits" described in section 6.6
8
<PAGE>
6.5 Severance Payment.
-----------------
(a) For purposes of this Agreement, the "Severance Payment" shall
equal seventy five percent (75%) of Executive's "Compensation" (as defined
below). Executive shall be entitled to receive the Severance Payment in a cash
lump sum within five (5) calendar days after the later of Executive's Date of
Termination or the date of the Change in Control.
(b) For purposes of this Agreement, Executive's "Compensation" shall
equal the sum of (1) Executive's highest annual salary rate with the Company
within the three-year period ending on Executive's Date of Termination, plus (2)
the "Bonus Increment." The Bonus Increment shall equal the annualized average of
all bonuses and incentive compensation payments other than stock options paid or
payable to Executive during the three-year period immediately before Executive's
Date of Termination under all of the Company's bonus and incentive compensation
plans or arrangements, if any.
(c) In lieu of a cash lump sum, Executive may, in his sole discretion,
elect to receive the Severance Payment in equal annual installments over three
(3) years (or such lesser number of years as Executive may elect). Such
installments shall be paid to Executive on each anniversary of Executive's Date
of Termination, beginning with the first such anniversary and continuing on each
such anniversary thereafter until fully paid. Such election to receive the
Severance Payment in installments may be made and/or revoked by Executive at any
time prior to the termination of his employment by providing written notice to
the Board of such election. Any such election by Executive to receive the
Severance Payment in installments that has been made and not revoked prior to
Executive's termination shall, effective the date of such termination, be
irrevocable and binding on all parties hereto.
(d) In the event that at the time of Executive's Qualifying
Termination there is not in effect an election by Executive to receive the
Severance Payment in installments, such Severance Payment shall be paid to
Executive in a single cash lump sum. In the event that Executive has made an
appropriate election to receive the Severance Payment in annual installments,
and Executive becomes entitled to such Severance Payment as provided in this
Agreement, then such Severance Payment, to the extent at any time unpaid and/or
deferred, shall be deemed to bear interest at the base or prime rate in effect
from time to time as publicly announced by Bank of America NT&SA (the "Prime
Rate"). Accrued interest shall be due and payable together with each annual
installment of the Severance Payment.
6.6 Additional Benefits.
-------------------
(a) In the event of a Qualifying Termination, the Company agrees and
covenants that Executive and his dependents shall be entitled to continue to
participate in all benefit programs which had been made available to Executive
before the Qualifying Termination including without limitation, any and all
medical insurance, dental insurance, vision insurance, life insurance,
disability insurance, retirement and/or pension plans and other benefit programs
of the Company and/or its affiliates. These programs shall be continued at no
cost to Executive, except to the extent of Executive's income tax payable
thereon because tax rules require the inclusion of the value of such benefits in
Executive's income. The programs shall be continued
9
<PAGE>
in the same way and at the same level as immediately prior to the Qualifying
Termination, and shall continue for the benefit of Executive for nine (9) months
(the "Benefit Period"). In the event that participation in any such plan or
program is barred or unavailable for any reason, the Company shall arrange to
provide Executive, at the expense of the Company, with benefits substantially
comparable to those which he was entitled to receive under such plans and
programs as were in effect immediately prior to the time of the Qualifying
Termination. The continuation of benefits provided for herein shall extend to
the dependents of Executive as permitted by the applicable plans, provided that
Executive shall continue to be responsible for the cost of any and all dependant
coverage.
(b) In the event of a Qualifying Termination, Executive or his
successors may, at the expense of the Company, utilize the reasonable services
of accountants and attorneys of his or their choice for assistance in
interpreting and enforcing this Agreement as well as for preparation of his tax
returns for the year of the Qualifying Termination and for each other year all
or any portion of which is included within the Benefit Period.
(c) In the event of a Qualifying Termination, Executive shall be
entitled, at the expense of the Company, to "Automobile Benefits" during the
entire term of the Benefit Period. For purposes hereof, "Automobile Benefits"
shall include a $750 per month allowance to defray automobile expenses and
costs.
(d) In the event any perquisite or benefit enjoyed by Executive or his
dependents is reduced or eliminated within six (6) months before a Qualifying
Termination, then for all purposes of this Agreement, the perquisite or benefit
as was in effect prior to such reduction or elimination shall be deemed to have
been in place immediately prior to the Date of Termination.
(e) In the event of a Qualifying Termination, any and all of
Executive's unvested stock options and equity-based incentives shall immediately
vest and be fully exerciseable.
7. Other Covenants of the Parties.
------------------------------
7.1 Indemnification for Golden Parachute Excise Tax.
-----------------------------------------------
(a) In the event that it shall be determined that any payment,
benefit or distribution provided, or to be provided, by the Company (or by any
person whose actions result in a Change in Control or any person affiliated with
the Company or such person) to or for the benefit of Executive under the terms
of this Agreement, or under any other agreement, plan or arrangement with the
Company (or with any person whose actions result in a Change in Control or any
person affiliated with the Company or such person), would be subject to any
excise tax imposed pursuant to Section 4999 of the Internal Revenue Code of
1976, as amended, or any comparable provision of state law (an "Excise Tax"),
the Company agrees that it will promptly pay or cause to be paid to Executive,
in addition to any other payments made or required to be made pursuant to the
terms of this Agreement, an additional amount in cash (a "Gross-Up
10
<PAGE>
Payment") equal to the sum of (i) the amount of such Excise Tax plus (ii) all
Attributable Taxes and Penalties. For purposes of this Agreement, "Attributable
Taxes and Penalties" means all taxes, interest and penalties, including, without
limitation, any federal, state and local income taxes and any Excise Taxes,
which become payable by Executive as a result of the receipt of the Gross-Up
Payment or the assessment of any Excise Tax against Executive. It is intended
that under this provision the Company will indemnify Executive in such a manner
that Executive shall not suffer any loss or expense by reason of the assessment
of any Excise Tax or the reimbursement of Executive for payment of any such
Excise Tax.
(b) In determining the amount of any Gross-Up Payment payable
pursuant to Paragraph (i) above, Executive shall be deemed to pay federal income
taxes at the highest marginal rate of federal income taxation in the calendar
year in which the Gross-Up Payment is to be made, and state and local taxes at
the highest marginal rates of taxation for such year in the state and locality
of Executive's residence. For such purposes, federal income taxes shall be
determined net of the maximum reduction in such federal income taxes that could
be obtained from the deduction of such state and local taxes.
(c) Within 30 days after Executive's Date of Termination, a mutually
agreed upon nationally recognized accounting firm (the "Accounting Firm"), shall
make a determination as to whether any Excise Tax should be reported and paid by
Executive for any period or periods by reason of any payment, benefit or
distribution under this Agreement or under any other agreement, plan or
arrangement with the Company (or with any person whose actions result in a
Change in Control or any person affiliated with the Company or such person). If
the Accounting Firm determines that any Excise Tax should be reported and paid
by Executive, the Accounting Firm shall also determine the amount of such Excise
Tax and the amount of the Gross-Up Payment required to be paid to Executive by
the Company with respect to such Excise Tax. In such event, the Company shall,
within five (5) business days after such determination, pay or cause to be paid
to Executive the amount of the Gross-Up Payment with respect to the Excise Tax
as determined by the Accounting Firm, and Executive shall report and pay the
Excise Tax as so determined. If the Accounting Firm determines that no Excise
Tax should be reported and paid by Executive, it shall furnish Executive with
its opinion that there is substantial authority not to report any Excise Tax,
and Executive shall prepare and file his tax returns in accordance with such
advice until such time as the Internal Revenue Service (the "IRS") or any
applicable state taxing authority shall notify Executive that such manner of
reporting is improper. The Company shall be responsible for all fees and
expenses connected with the determinations by the Accounting Firm pursuant to
this Paragraph 7.1.
(d) In the event that Executive is at any time required to pay any
Excise Tax (or any interest or penalties with respect to any Excise Tax) in
addition to any amount determined pursuant to Paragraph 7.1 (c) by reason of any
payment, benefit or distribution under this Agreement or under any other
agreement, plan or arrangement with the Company (or with any person whose
actions result in a Change in Control or any person affiliated with the Company
or such person), within five (5) business days after Executive notifies the
Company of such required additional Excise Tax (or additional interest or
penalties) the Company shall pay or cause to be paid to Executive a Gross-Up
Payment determined with respect to such additional
11
<PAGE>
Excise Tax (and any such additional interest and penalties). In the event that
Executive receives any refund of any Excise Tax with respect to which Executive
has previously received a Gross-Up Payment hereunder, Executive shall promptly
pay to the Company the amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto).
(e) Executive agrees to notify the Company in a timely manner in the
event of any audit or other proceeding by the IRS or any state taxing authority
in which the IRS or the state taxing authority asserts that any Excise Tax
should be assessed against Executive and to cooperate with the Company (at the
Company's sole cost and expense) in contesting any such proposed assessment with
respect to such Excise Tax (a "Proposed Assessment"). Executive agrees not to
settle any Proposed Assessment without the consent of the Company. If, however,
Executive's tax liability for any year cannot be finally resolved principally by
reason of a failure to settle a Proposed Assessment, Executive may demand that
the Company settle the Proposed Assessment. If the Company does not settle the
Proposed Assessment, or does not consent to allow Executive to settle the
Proposed Assessment, within ten (10) days following such demand, the Company
shall indemnify and hold harmless Executive (i) with respect to any additional
interest and/or penalties that Executive is required to pay by reason of the
delay in finally resolving Executive's tax liability and (ii) with respect to
any taxes, interest and penalties that Executive is required to pay by reason of
any indemnification payment under this Paragraph.
7.2 Non-Exclusivity of Rights. Nothing in this Agreement shall prevent or
-------------------------
limit Executive's continuing or future participation in any benefit, bonus,
incentive or other plan or program provided by the Company or any of its
affiliated companies. Amounts which are vested benefits or which Executive is
otherwise entitled to receive under any plan or program of the Company or any of
its affiliated companies at or subsequent to the date of any termination shall
be payable in accordance with such plan or program except as otherwise provided
herein.
7.3. Intellectual Property Rights.
----------------------------
(a) Executive shall promptly and fully inform Company of, and
disclose to Company, any and all ideas, concepts, themes, inventions, designs,
creations, improvements and discoveries that he makes during the term of this
Agreement, whether individually or jointly in collaboration with others, which
are, at the time any such item is conceived or reduced to practice, related to
Company's business or to actual or demonstrably anticipated research or
development of Company, or which result from any work performed by Executive for
Company.
(b) Executive agrees that any and all ideas, concepts, themes,
inventions, designs, creations, improvements or discoveries conceived, developed
or written by Executive either individually, or jointly in collaboration with
others, which are related to Company's business, whether patentable or
unpatentable or copyrightable or uncopyrightable, shall belong to and be the
sole and exclusive property of Company.
(c) Executive shall assist Company in obtaining patents or copyright
registration on such intellectual properties an execute all documents and do all
things necessary to enable Company to obtain and enforce full an exclusive title
to such properties which are related to Company's business.
12
<PAGE>
8. General Provisions.
------------------
8.1 No Assignment. Neither party may assign this Agreement without the
-------------
prior written consent of the other.
8.2 Complete Agreement. This Agreement contains the entire agreement of
------------------
the parties with respect to the subject matter hereof and supersedes all
previous oral and written agreements and all contemporaneous oral negotiations,
commitments, writings and understandings.
8.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
8.4 Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the internal laws of the State of California.
8.5 Modifications and Waivers. No waiver or modification of this Agreement
-------------------------
shall be binding unless it is in a writing signed by both parties hereto.
8.6 Severability. In the event any provision or provisions of this
------------
Agreement is or are to be held invalid, the remaining provisions of this
Agreement shall not be affected thereby.
8.7 Legal Fees. If any legal action, arbitration or other proceeding is
----------
brought for the enforcement of this Agreement, or because of any alleged
dispute, breach or default in connection with this Agreement, the successful or
prevailing party shall be entitled to recover all of its costs incurred in such
action or proceeding, including without limitation its actual attorneys' fees
and disbursements, in addition to any other relief to which it may be entitled.
8.8 Notices. All notices and other communications required or permitted
-------
under this Agreement shall be in writing, served personally on, or mailed by
certified or registered United States mail to, the party to be charged with
receipt hereof. Notices and other communications served by mail shall be deemed
given hereunder seventy-two (72) hours after deposit of such notice or
communication in the United States Post Office as certified or registered mail
with postage prepaid and duly addressed to the receiving party as follows, or at
such other address as such party has designated in a written notice given as
provided herein:
To Company: To Executive:
Vitafort International Corporation John Coppolino
Attention: Mark Beychok, President [Home address to be provided]
1800 Avenue of the Stars, Suite 480
Los Angeles, CA 90067
13
<PAGE>
8.9 Construction. The language of this Agreement shall be construed
------------
simply and according to its fair meaning, and shall not be construed for or
against any party hereto as a result of the source of its draftsmanship.
8.10 Arbitration. Any controversy or claim arising out of or relating to
-----------
this Agreement, or an alleged breach of this Agreement, shall be settled by
arbitration administered by JAMS/ENDispute, and judgment on the award rendered
by the arbitrator(s) may be entered in the Superior Court in and for the County
of Los Angeles, California. In case of a dispute, any party may commence
arbitration by giving written notice to the others of its desire to do so. Each
party hereto agrees that service of process for an arbitration proceeding will
be deemed completed when a notice of another party's desire to arbitrate is
received by such party. Each party hereby agrees that any such arbitration shall
be held in the County of Los Angeles, California and consents to the
jurisdiction of the Superior Court in and for the County of Los Angeles for
entering of any judgment. The arbitrator shall have authority equal to that of a
Superior Court Judge to grant equitable relief in an action pending in Los
Angeles County Superior Court in which all parties have appeared. Judgment upon
the Arbitrator's award may be entered as if after trial in accordance with
California law. Should any party fail to pay fees as required, any other party
may advance the same and shall be entitled to a judgment from the arbitrator in
the amount of such fees plus interest. Any award issued by the arbitrator shall
bear interest at the judgment rate in effect in the State of California from the
date determined by the arbitrator.
8.11 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument, even though the parties
do not sign the same counterpart.
IN WITNESS WHEREOF the parties hereto do hereby execute and make effective this
Agreement as of the Effective Date.
Vitafort International Corporation
By: __________________________
Jack B. Spencer
Chief Operating Officer
Chief Financial Officer
_____________________________
John Coppolino
14
<PAGE>
EXHIBIT B
to
EMPLOYMENT AGREEMENT
DATED SEPTEMBER 3, 1997
This Exhibit B to the Employment Agreement dated as of September 3, 1997
(the "Agreement") by an between Vitafort International Corporation ("Company")
and John Coppolino ("Executive") is hereby attached to the Agreement and made a
part thereof pursuant to section 4.3 of such Agreement.
Company hereby grants to Executive Stock Options to purchase up to 300,000
shares of Common Stock of the Company, at a purchase price of $0.87 per share,
provided that the right to exercise such options shall vest as follows:
Upon the Effective Date, Executive shall have the right to exercise the
option for up to 75,000 shares.
On March 3, 1998, Executive shall have the right to exercise the option for
up to 75,000 shares.
On September 3, 1998, Executive shall have the right to exercise the option
for up to 75,000 shares.
On March 3, 1999, Executive shall have the right to exercise the option for
up to 75,000 shares.
The grant of such options shall be confirmed by the delivery to Executive
of a written option agreement in the form of Company's standard Stock Option,
and shall further be subject to all applicable provisions of the Agreement.
<PAGE>
Exhibit 11
Vitafort International Corporation
Computation of Earnings (Loss) per Common Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Year Ended Year Ended ---------------------- -----------------------
12/31/96 12/31/95 9/30/97 9/30/96 9/30/97 9/30/96
----------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
ENDING MARKET PRICE PER SHARE $1.0468 $8.1250 $1.5625 $3.4375 $1.5625 $3.4375
----------- ----------- ---------- ----------- ---------- -----------
AVERAGE MARKET PRICE PER SHARE $4.8978 $8.7490 $1.2968 $4.4531 $1.2124 $5.5312
----------- ----------- ---------- ----------- ---------- -----------
Earnings:
Net income (loss) applicable to common stock ($8,122,815) ($2,812,281) $4,620,205 ($1,212,978) $1,880,842 ($3,571,710)
PRIMARY EARNINGS (LOSS) PER SHARE:
Weighted average number of common shares
outstanding 5,133,665 1,467,648 6,315,582 4,339,878 5,318,992 4,215,668
Incremental shares assuming all dilutive
options and warrants exercised and proceeds
used to purchase shares in the market at the
average stock price during the period. - - 443,993 - 443,993 -
----------- ----------- ---------- ----------- ---------- -----------
Total 5,133,665 1,467,648 6,759,575 4,339,878 5,762,985 4,215,668
=========== =========== ========== ========== ========== ===========
Primary income (loss) per share ($1.59) ($1.92) $0.68 ($0.28) $0.33 ($0.85)
=========== =========== ========== ========== ========== ===========
FULLY DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average number of common shares
outstanding 5,133,665 1,467,648 6,315,582 4,339,878 5,318,992 4,215,668
Incremental shares assuming all dilutive
options and warrants exercised and proceeds
used to purchase shares in the market at the
average stock price during the period, or
the stock price at the end of the period,
whichever is higher. - - 443,993 - 443,993 -
----------- ----------- ---------- ----------- ---------- -----------
Total 5,133,665 1,467,648 6,759,575 4,339,878 5,762,985 4,215,668
=========== =========== ========== ========== ========== ===========
Fully diluted income (loss) per share ($1.59) ($1.92) $0.68 ($0.28) $0.33 ($0.85)
=========== =========== ========== ========== ========== ===========
</TABLE>
<PAGE>
EXHIBIT 16
EXHIBIT 16: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On February 5, 1997, the Registrant dismissed the firm of KPMG Peat
Marwick, LLP (KPMG) as the Registrant's independent auditor, effective
immediately. The Registrant then selected BDO Seidman, LLP (BDO) to act as the
Company's independent auditor for the fiscal year ending December 31, 1996. The
foregoing actions of the Registrant were ratified by its Board of Directors.
The reports of KPMG on the Company's financial statements for the years
ended December 31, 1994 and December 31, 1995, did not contain an adverse
opinion or a disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope or accounting principles, except that the report for
the year ended December 31, 1994, contained a "going concern" explanatory
paragraph.
During the two years ended December 31, 1995, and during the subsequent
period from January 1, 1996 through February 5, 1997, there were no
"Disagreements" (as such term is defined under the Federal Securities laws) with
KPMG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which Disagreements, if not resolved
to the satisfaction of KPMG, would have caused that firm to make a reference to
the subject matter of the Disagreements in connection with their report.
During the two years ended December 31, 1995, and during the period from
January 1, 1996 through February 5, 1997, the Registrant was not (i) advised by
KPMG that the Registrant did not have internal controls necessary to develop
reliable financial statements; (ii) advised by KPMG that it was no longer able
to rely on management's representations or that it was unwilling to be
associated with financial statements prepared by management; (iii) advised by
KPMG of a need to expand the scope of its audit; or (iv) advised by KPMG that
information had come to its attention that materially impacted the fairness or
the reliability of any audit report or financial statement issued or to be
issued, or caused them to be unwilling to rely on management's representations
or be associated with the Registrant's financial statements (collectively
"Reportable Events").
During the year ended December 31, 1995, and the period from January 1,
1996 to January 31, 1997, neither the Registrant, nor anyone on its behalf,
consulted BDO on (i) the application of accounting principles to a specified
transaction, either completed or proposed; (ii) 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.
<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 of our report dated April 14, 1997, relating
to the audit of the consolidated financial statements of Vitafort International
Corporation for the year ended December 31, 1996, which are contained in that
Prospectus. Our report contains an explanatory paragraph regarding the Company's
ability to continue as a going concern.
We also consent to the reference to use under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Los Angeles, California
January 13, 1998
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP]
EXHIBIT 23.2
INDEPENDENT AUDITOR'S CONSENT
-----------------------------
The Board of Directors
Vitafort International Corporation:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
January 9, 1998
