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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON, NOVEMBER 12, 1998
REGISTRATION FILE NO. 333-65273
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM SB-2/A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
VITAFORT INTERNATIONAL CORPORATION
--------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
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<CAPTION>
<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. [_]
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CALCULATION OF REGISTRATION FEE
========================================================================================================
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 9,365,914 $.24 $2,206,895 $651.03
========================================================================================================
</TABLE>
* Based upon the closing bid price of the Registrant's Common Stock as
reflected on the Over the Counter Bulletin Board on September 30, 1998 of $.28
as to 6,741,414 shares of common stock issuable, if at all, upon conversion of a
debenture and 204,500 shares being sold by selling security holders, and based
upon the exercise price of $.93 with respect to 127,000 shares underlying a
warrant exercisable at $.93 per share. All of the foregoing shares were included
in the initial filing of this registration statement and fees of $590.20 were
paid with respect thereto upon the filing of this Registration. Based upon the
closing bid price on the Over the Counter Electronic Bulletin Board on November
6, 1998 of $.115 as to 190,000 shares being added by this pre-effective
amendment and the exercise price of $.085 of 2,170,000 shares underlying stock
options which are being added by this pre-effective amendment.
** Calculated pursuant to Rule 457(h).
*** Fees of $590.20 were paid on the initial filing of this registration
statement and additional fees of $60.83 are being paid upon the filing of this
pre-effective amendment.
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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<CAPTION>
ITEM AND NUMBER LOCATION IN PROSPECTUS
- -----------------------------------------------------------------------------------
<S> <C>
1. Front of Registration Statement Front of Registration Statement
and Outside Front Cover of Prospectus and Outside Front Cover of Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Pages of Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Selling Stockholders
8. Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Principal Stockholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Experts; Counsel
14. Disclosure of Commission Position Statement of Indemnification
on Indemnification For Securities Act Liabilities
15. Organization Within Last Five Years Business of the Company
16. Description of Business Business of the Company
17. Management's Discussion and Analysis Management's Discussion and Analysis of
or Plan of Operation Financial Condition and Results of Operations
18. Description of Property Business of the Company - Property
19. Certain Relationships and Related Transactions. Certain Transactions
20. Market for Common Equity and Related Market for Common Equity and Related
Stockholder Matters Stockholder Matters
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements With Change of Auditors
Accountants on Accounting and
Financial Disclosure
</TABLE>
3
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALES OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
- ----------
VITAFORT INTERNATIONAL CORPORATION
COMMON STOCK
($.0001 PAR VALUE)
9,365,914 SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING STOCKHOLDERS
This Prospectus relates to 9,365,914 shares of Common Stock which
consists of:
(a) 6,741,414 shares reserved for issuance upon conversion of shares
of a convertible debenture issued in August 1998, including
shares of common stock which may be issued in connection with the
mandatory conversion of such convertible debenture. See
"Description of Securities -- Convertible Debentures" for a
description of the terms of the convertible debenture.
(b) 60,000 shares issuable, if at all, upon exercise of a warrant
granted to the lender to the Company in August 1998.
(c) 112,500 shares previously issued to an officer of the Company,
12,500 shares in 1993 and 100,000 shares in 1997.
(d) 25,000 shares previously issued to an officer of the Company in
1997.
(e) 2,237,000 shares issuable, if at all, upon exercise of options
and warrants granted to various vendors, employees and
consultants.
(f) 190,000 shares issued to various vendors in October 1998.
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 November 5, 1998, the closing price bid for the Common
Stock on the OTC Electronic Bulletin Board was $.115 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 NOVEMBER 12, 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(TM) to sell products connected to motion picture licenses. The first
effort, connected with "The Lost World: Jurassic Park" was introduced into the
marketplace in November 1997.
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.
In March 1998, the Company acquired Global International Sourcing, Inc.
("Global"). Global is an international sourcing company which provides natural
and low fat product sources from abroad. These sources should be able to
provide products to be distributed by Vitafort at significantly lower cost.
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 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 Company has recently acquired Global International Sourcing which
provides imported products to Vitafort and other customers at significantly
reduced costs to the ultimate consumer.
THE OFFERING
Up to 9,365,914 shares offered by the Selling Security Holders.
SHARES OUTSTANDING
Before the Offering After the Offering
8,042,852 (1) 17,014,266 (1)
(1) Includes 144,500 previously issued shares which are offered hereby,
6,741,414 shares issuable, if at all, upon conversion of a debenture, and
60,000 shares issuable, if at all, upon exercise of warrants and options.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS PROSPECTUS, WHICH ARE
FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISKS AND UNCERTAINTIES. POTENTIAL
RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES
FROM OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, THE IMPACT OF QUALITY
PROBLEMS EXPERIENCED IN 1996, THE LACK OF ADEQUATE CAPITAL TO FUND CONTINUING
OPERATIONS, ECONOMIC CONDITIONS IN THE COMPANY'S PRIMARY MARKETS AND OTHER
UNCERTAINTIES DETAILED FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
SUMMARY FINANCIAL INFORMATION
The following table sets forth, for the periods and at the dates indicated,
certain summary financial information for the Company. Such data have been
derived from, and should be read in conjunction with, the financial statements
of the Company, including the notes thereto, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," included elsewhere
in this Prospectus.
The Company's independent public accountants included an explanatory paragraph
in their opinion as of December 31, 1997 and 1996 reflecting uncertainty about
the Company's ability to continue to operate as a "going concern". Should the
Company be unsuccessful in raising capital or generating an adequate level of
3
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profitable sales, it may be forced to curtail and/or suspend operations. See
Note 2 of Notes to the Consolidated Financial Statements for the year ended
December 31, 1997 for additional information. The Company received $6,750,000
in full and complete settlement from the Keebler arbitration on July 5, 1997.
See Note 16 of Notes to the Consolidated Financial Statements for the year ended
December 31, 1997 for an explanation of the total Keebler transaction.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 1,995,317 $ 5,285,149 $ 749,994 $ 1,175,107
Cost of sales 1,896,410 6,870,120 548,315 882,628
----------- ------------ ----------- -----------
Gross profit (loss) 98,907 (1,584,971) 201,679 292,479
----------- ------------ ----------- -----------
Operating expenses:
Research and development 337,806 737,044 139,584 56,131
Sales and marketing 1,239,460 3,029,480 746,344 739,226
General and administrative 2,672,946 2,721,321 1,473,731 1,890,887
----------- ------------ ----------- -----------
Total operating expenses 4,250,212 6,487,845 2,359,659 2,686,244
----------- ------------ ----------- -----------
Loss from operations (4,151,305) (8,072,816) (2,157,980) (2,393,765)
Interest income 78,070 49,319 36,017 -
Interest expense (214,690) (50,509) (97,906) (99,553)
Other income (expense) 15,210 (45,650) (60,385) 23,119
Litigation recovery , net of costs (Note 16) 4,748,946 - - -
----------- ------------ ----------- -----------
Income (loss) before income taxes 476,231 (8,119,656) (2,280,254) (2,470,199)
State income taxes (Note 8) 3,200 3,159 3,143 -
----------- ------------ ----------- -----------
Net Income (loss) 473,031 (8,122,815) (2,283,397) (2,470,199)
Deemed dividends to preferred shareholders (305,749) - (442,978) (305,749)
----------- ------------ ----------- -----------
Net income (loss) allocable to
common shareholders $ 167,282 $(8,122,815) $(2,726,375) $(2,775,948)
=========== ============ =========== ===========
Basic net income (loss) per common share $.03 $(1.58) $ (0.39) $(0.51)
=========== ============ =========== ===========
Diluted net income (loss) per common share $.03 $(1.58) $(0.39) $(0.51)
=========== ============ =========== ===========
Basic weighted average shares
of common stock 5,831,404 5,133,665 6,994,639 5,390,957
=========== ============ =========== ===========
Diluted weighted average shares
of common stock 6,343,397 5,133,665 6,994,639 5,390,957
=========== ============ =========== ===========
</TABLE>
4
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<CAPTION>
DECEMBER 31, JUNE 30,
1997 1996 1998
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit) $1,503,938 $(1,217,296) $ 382,545
Total assets 3,912,263 1,836,514 2,721,543
Total liabilities 1,634,266 2,330,343 1,522,090
Stockholders' equity (deficit) 2,277,997 (493,829) 1,199,453
</TABLE>
5
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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.
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". Some
stockkeeping units ("SKU's") were discontinued. Other products were introduced
or acquired in 1996 and 1997. The Company's business did not achieve operating
profitability during 1996, 1997, nor in the first two quarters of 1998.
CONTINUING LOSSES
The Company incurred losses from operations of $8,072,816 in 1996,
$4,151,305 in 1997, and $2,157,980 for the six months ended June 30, 1998 and
continues not to generate an operating profit. As of June 30, 1998, the Company
had working capital of $382,545 and stockholders' equity of $1,199,454. For the
year ended December 31, 1997, the Company had working capital of $1,503,938 and
a stockholders' equity of $2,277,997. Management anticipates that at September
30, 1998, working capital and stockholders equity will be further reduced. The
Company is slow and has been delinquent in paying its accounts payable and other
obligations. The Company's auditors have included an explanatory paragraph in
their report for the year ended December 31, 1997, indicating there is
substantial doubt regarding the Company's ability to continue as a going
concern. Although the Company generated a profit before income taxes in 1997,
the profit was derived from the arbitration in the Keebler litigation. There can
be no assurance that the Company will be profitable in the future. Furthermore,
future revenues and profits, if any, will be dependent on many factors,
including, but not limited to, the Company's ability to expand its operations in
a timely manner to meet demand, need for additional financing, competition from
other makers of low fat or fat-free products and market acceptance of the
Company's products. If the Company is not able to significantly improve its
operating results, it may be required to cease or substantially curtail its
operations.
LIEN ON ASSETS
Pursuant to a Loan and Security Agreement between the Company and Coast
Business Credit ("Lender"), all of the Company's assets are subject to a lien
which secures inventory and receivable financing. As of December 31, 1996 and
March 31, 1997, the Company was in violation of certain covenants in that it had
not maintained minimum tangible net worth of at least $1,500,000 and minimum
working capital of $1,000,000. Should the Lender exercise its rights under the
Agreement, it may request customer payments be made directly to it, sell the
finished goods inventory at auction, and seize and sell the fixed assets of the
Company until the obligation has been satisfied. As of December 31, 1997, the
Company
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was again in compliance with the covenants in the Loan and Security Agreement.
At June 30, 1998, the Company was in violation of the tangible net worth
covenant in that it had fallen below the $1,500,000 requirement and the working
capital covenant in that it had fallen below the $1,000,000 requirement. In
addition, the facility which expired on August 31, 1998 has not been renewed,
although the lender has extended the term until September 30, 1998. As of
September 30, 1998, the amount due under this credit facility was $91,043. The
Company is in negotiations with a new lender and the original lender has
indicated it will provide an extension. Should the Company be unable to secure a
replacement lender, it could seriously jeopardize the future ability of the
Company to fund operations.
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, as well as the marketing of
existing products. 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.
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, the likelihood that a
working capital shortage will occur in the future is high based on the present
level operating results. The Company continues to suffer working capital
shortages during 1998 which may, if the shortages continue, adversely impact the
Company's ability to meet its obligations.
POSSIBLE ADVERSE MARKET IMPACT OF CONVERTIBLE SECURITIES
The Company currently has outstanding a total of 1,626 of 1997 Series A
Preferred Stock each with a liquidation preference and conversion value of
$1,000 and $548,352 principal amount of convertible debentures. Both the 1997
Convertible Preferred Stock and the convertible debentures are convertible into
Common Stock at a price equal to 75% of the average closing bid price of the
Common Stock on the five prior trading days. If all of the shares of the
Preferred Stock were converted into Common Stock at a time when the Company's
Common Stock price was $.1115 (the closing bid price on November 6, 1998), then
the Company would be required to issue approximately 18,800,000 shares of Common
Stock to the holders of the 1997 Series A Preferred Stock. If all of the
$548,352 principal amount of the Debenture were converted into Common Stock at a
time when the Company's Common Stock price was $.1115 (the closing bid price on
November 6, 1998), then the Company would be required to issue approximately
6,350,000 shares of Common Stock to the holders of the Convertible Debentures.
Not only would such conversions exceed the number of shares available for issue
by the Company, but such conversions would also be likely to have a disastrous
effect on the market for the Company's Common Stock as such market would be
unable to absorb such large quantities of shares.
NEED FOR MARKET ACCEPTANCE AND DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS
Consumer preferences for snack foods in general, and for fat-free and low-
fat foods in particular, are continually changing and are extremely difficult to
predict. In 1997, the Company derived approximately 62% of its revenues from
the sale of the Auburn Farms and Natures Warehouse lines of products and
approximately 38% of its revenues from the sale of Fudgets and Caketts. There
can be no assurance that the Company's products will a) achieve a significant
degree of market acceptance; b) will be sustained for any significant period; or
c) that the product life cycles will be sufficient to permit the Company to
recover start-up and other associated costs. Failure of the Company's products
to achieve or sustain market acceptance could have a material adverse effect on
the Company's business, financial condition and results of operations. Certain
of the Company's products, particularly Fudgets and Caketts, had their market
acceptance materially adversely affected by the mold problem, principally
associated with Keebler.
COMPETITION
The market for snacks is large and highly competitive. Competitive factors
in the snack industry include product quality and taste, brand awareness among
consumers, access to supermarket shelf space,
7
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price, advertising and promotion and variety of snacks offered. The Company's
fat-free and low-fat products are priced higher than traditional snacks. As a
result, price erosion due to competitive factors could have a material adverse
effect on the Company.
The Company also competes with a number of manufacturers in the fat-free
and low-fat portion of the industry, including Health Valley Foods, Nabisco
(Snackwell's) and Pepperidge Farms (Greenfield). Additional competitors include
regional and private label snack companies. Potential entrants in the fat-free
and low-fat snack food market segment include the national competitors and
private label competitors.
DEPENDENCE ON KEY EXECUTIVE OFFICERS AND OTHER QUALIFIED PERSONNEL
The Company is highly dependent on certain key personnel, including Mark
Beychok, its President and Chief Executive Officer. Another key employee is 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. The recruitment, retention and motivation of skilled executives, sales
and technical personnel and other employees are important to the Company's
operations. Although the Company has not experienced significant problems in
recruiting and retaining qualified personnel, there can be no assurance that it
will not encounter such problems in the future.
AVAILABILITY OF SHELF SPACE
The majority of the Company's sales are made through supermarkets, and the
Company expects supermarket sales to constitute a significant portion of its
future sales. Such sales are affected by access to shelf space, which is
limited. Food retailers typically seek concessions, allowances or other
discounts from food manufacturers and suppliers, such as the Company and its
distributors, in return for shelf space. The Company believes that it may have
to incur such expenditures in the future in order to obtain or retain shelf
space for its products. Should the Company be unable, financially, to incur
such costs, it could be limited in its ability to increase sales volume. Such
expenditures, if significant, could adversely affect the Company's business,
financial condition and results of operations.
PAST DISPUTES WITH CONTRACT MANUFACTURERS
In order to achieve economies of scale and production flexibility the
Company has entered into contract manufacturing agreements with established food
manufacturers, which have the facilities for the production of its products.
The Company does not, itself, own or operate any production facilities. In the
event of a contract dispute between the Company and any of these contract
manufacturers, or if any contract manufacturer experiences an interruption in
its business as a result of labor disputes, acts of God or a similar occurrence
over which the Company has no control, such an event could materially and
adversely affect the Company's business. Past financial restraints have
hampered the Company's ability to respond to production manufacturers financial
requirements on a timely basis, resulting in significant problems receiving
production quantities timely. In addition, the Company has experienced quality
control problems at certain of its past contract manufacturers, particularly the
Keebler Company, which may continue to adversely effect its goodwill. The
Company was recently engaged in legal proceedings with former co-packers.
During the pendency of these proceedings, the Company's ability to procure
products in response to customer demand was materially impaired which resulted
in a substantial loss of goodwill. No assurance can be given that the Company
will not, in the future, have its results again adversely effected by disputes
with its contract manufacturers.
8
<PAGE>
PENDENCY OF LEGAL PROCEEDINGS
As set forth under the heading "Legal Proceedings," the Company is engaged
in several legal proceedings. An adverse finding in certain of these
proceedings could have a material adverse effect on the Company. See Note 13 to
the consolidated financial statements for the year ended December 31, 1997 and
Note 11 to the consolidated financial statements for the period ended June 30,
1998 for additional information concerning all legal proceedings.
MANAGEMENT OF POSSIBLE GROWTH
The Company intends to expand its operations during 1998 and thereafter,
through the expansion of its sales and marketing capacity, the addition of new
products and the expansion and addition of distribution channels. There can be
no assurance that the Company will have sufficient financial and management
resources necessary to support the capital outlays and logistical difficulties
posed by such growth as they may occur.
COORDINATION OF PRODUCT SUPPLY AND DISTRIBUTION
If the Company is to be successful, it must match its production capacity
to the demand for its products in a timely manner and maintain its distribution
system. The Company has no long-term contracts with its distributors. The
Company has previously experienced problems both with a slowing of demand and
resulting excess capacity, as well as with sharp increases in demand and
resulting shortages of capacity. Efforts by the Company to increase production
rapidly in order to meet sharp increases in demand have sometimes resulted, and
could in the future result, in additional expenses that materially increase the
cost of goods sold and reduce profitability. The occurrence of any of these
events would likely have a material adverse effect on the Company's business,
financial condition and results of operations, as well as on its distribution
relationship and prospects.
LIMITED PRODUCT SHELF LIFE
Because the Company's fat-free products have a limited shelf life, the
Company cannot produce significant inventories for later sale. As a result,
manufacture, distribution and marketing of these products require a high degree
of coordination. Should the Company be unsuccessful in coordinating such
functions, the Company could be adversely affected by reduced sales volume.
NEED FOR IMPROVED OPERATING CONTROLS
To improve its results, the Company must continue to implement and improve
its financial, accounting and management information systems and to hire, train,
motivate and manage its employees. A failure to improve management controls
would have a material adverse effect on the Company's business, financial
condition and results of operations, and on its ability to execute its business
strategy successfully.
LACK OF PATENTS, DEPENDENCE ON TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success is dependent to some degree on its ability to
preserve its trademarks and operate without infringing upon the proprietary
rights of third parties. The Company has registered various trademarks in the
United States. No assurance can be given as to the degree of protection the
trademarks will afford or the Company's ability to avoid violating or infringing
upon any trademarks issued to others. Defense and prosecution of trademark
objections can be expensive and time consuming, even in those instances in which
the outcome is favorable to the Company, and can result in the diversion of
resources
9
<PAGE>
from the Company's other activities. An adverse outcome could subject the
Company to significant liabilities to third parties, require the Company to
obtain licenses from third parties or require the Company to cease any related
product development activities or sales. The Company is seeking to determine
whether its various formulas and procedures are patentable in the United States.
No assurance can be given, however, that such steps will adequately protect the
Company. Should there be an adverse outcome resulting from a dispute, the
outcome could impede the Company's ability to continue to operate.
The Company's success is also dependent upon the skills, knowledge and
experience (none of which is patentable) of its technical personnel. To help
protect its rights, the Company requires all employees to enter into
confidentiality agreements that prohibit the disclosure of confidential
information to anyone outside the Company. There is no assurance, however, that
these agreements will provide adequate protection for the Company's trade
secrets, know-how or other proprietary information in the event of any
unauthorized use or disclosure. While the loss of any member of the technical
staff could impede development in the short term, the greater concern is the
lack of protection afforded the Company.
POSSIBLE IMPACT OF GOVERNMENT REGULATION
The packaged food industry is subject to numerous federal, state and local
government regulations, including those relating to the preparation, labeling
and marketing of food products. The Company is particularly affected by the
recently enacted Nutrition Labeling and Education Act ("NLEA"), which requires
specified nutritional information to be disclosed on all packaged foods. In
addition, the NLEA, which is administered by the Food and Drug Administration
("FDA"), strictly regulates the standards that must be met to make a claim that
a product is "fat-free" or "low-fat." In addition, the FDA standards could
conceivably be lowered further or reduced to zero. Changes in fat content could
adversely affect the taste and texture of the Company's products and their
acceptability to consumers, which could adversely affect the Company's sales and
results of operations. Labeling standards imposed by certain other countries
may vary from those in the United States. Were the Company to be found to have
violated any regulations applicable to it, such finding could materially
adversely affect its ongoing operations and curtail its business significantly.
EFFECT OF PENNY STOCK RULES
The Common Stock of the Company currently trades on the OTC Bulletin Board
maintained by the National Association of Securities Dealers, Inc. (the "NASD").
Under the Securities Enforcement and Penny Stock Reform Act of 1990, the Common
Stock is defined as a "penny stock" because its market price is below $5.00.
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. Furthermore,
even if the Common Stock were to be included in NASDAQ in the future, 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
10
<PAGE>
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.
11
<PAGE>
SELLING STOCKHOLDERS
Relationship of Selling Shareholders with the Company
None of the Selling Shareholders currently has, or within the past
three years has had, any position, office, or other material relationship with
the Company or any predecessor or affiliate of the Company except that Mark
Beychok is President, Chief Executive Officer and a Director and John Coppolino
is Executive Vice President.
Sales of the Outstanding Shares by Selling Shareholders
None of the Selling Shareholders have advised the Company, and the
Company is unable to predict, if, when, and the extent to which they intend to
sell the Shares being registered hereunder for their respective accounts.
Notwithstanding the foregoing, for purposes of the following Selling
Shareholders Table, all of the Shares are deemed to be offered hereby by the
Selling Shareholders for sale to the public (for purposes of the Selling
Shareholders Table, the "Offering"). Based upon the foregoing assumption, the
following Table sets forth as of September 18, 1998: (i) the number of shares
of Common Stock owned by each Selling Shareholder prior to the Offering (as of
the date of this prospectus); (ii) the number of Shares which it is deemed are
being offered for the account of each Selling Shareholder; (iii) the number of
shares of Common Stock to be owned by each Selling Shareholder after the
completion of the Offering (assuming that all of the Shares are offered and sold
in the Offering); and (iv) based upon the foregoing assumptions, the percentage
of the Company's common stock to be owned by each Selling Shareholder after
completion of the Offering. 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>
Dominion Capital Fund, Ltd. 0 (1) 6,741,414 (1) 0 0
Mark Beychok 1,323,838 (2) 112,500 (2) 1,211,338 (4) 15.4%
Dominion Capital Fund, Ltd. 0 (3) 60,000 (3) 0 0
John Coppolino 492,333 (4) 25,000 (4) 467,333 (4) 5.9%
Carolina Consulting, Inc. 0 (5) 27,000 (5) 0 0
Frederick Jay Associates, Inc. 0 (5) 20,000 (5) 0 0
Pillow, Inc. 0 (5) 20,000 (5) 0 0
Georgis, Peter 0 60,000 0 0
Levene, Neale, Bender & Rankin 100,000 100,000 0 0
McEneely, Kevin 100,000 100,000 0 0
Professional Container Corporation 100,000 100,000 0 0
Zackler, Allan 120,000 120,000 0 0
Broadbent, Valerie A. 0 (6) 75,000 (6) 0 0
Brown, Audrea 0 (6) 20,000 (6) 0 0
Carolina Consulting, Inc. 0 (6) 70,000 (6) 0 0
Chinn, Lisa 0 (6) 25,000 (6) 0 0
Coast Business Credit 0 (6) 100,000 (6) 0 0
CodeLine Communications 0 (6) 75,000 (6) 0 0
DeCaprio, Beth 0 (6) 35,000 (6) 0 0
Dellavechia, Linda 0 (6) 75,000 (6) 0 0
Dray, Jennifer 0 (6) 25,000 (6) 0 0
Frederick Jay Associates 0 (6) 40,000 (6) 0 0
Hahnfeldt, Fred 0 (6) 100,000 (6) 0 0
Himes, Keith 0 (6) 30,000 (6) 0 0
Hitchcock, Reginald 0 (6) 35,000 (6) 0 0
Holbert, Julia 0 (6) 45,000 (6) 0 0
Liaison Marketing, Inc. 0 (6) 40,000 (6) 0 0
Luke, Robert 0 (6) 150,000 (6) 0 0
Mambo Sprouts 0 (6) 50,000 (6) 0 0
Norwood, Jennifer 0 (6) 30,000 (6) 0 0
Salberg, Larry 0 (6) 60,000 (6) 0 0
Valcon Consulting 0 (6) 400,000 (6) 0 0
Weissen, Seymour D. 0 (6) 120,000 (6) 0 0
Williams, Wayne 0 (6) 150,000 (6) 0 0
</TABLE>
(1) Issuable on conversion of a debenture which is not exercisable until
December 22, 1998. Does not include approximately 2,550,000 shares which
could be issued if 500 shares of 1997 Series A Preferred Stock held by such
seller were converted on the date hereof.
(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, 1999;
(iii) 100,000 shares underlying a currently exercisable option with an
exercise price of $0.91 per share which expires on November 15, 1999; (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) 403,125 shares underlying the currently exercisable portion
of a stock option, expiring December 16, 2000, which has an exercise price
of $0.91 per share; (vi) 100,000 shares underlying a currently exercisable
option with an exercise price of $0.91 which expires on June 16, 2002;
(vii) 100,000 shares underlying a currently exercisable option with an
exercise price of $.875 which expires on December 31, 2002; and (viii)
225,000 shares underlying a currently exercisable option with an exercise
price of $0.87 which expires September 1, 2002 and does not include 225,000
shares underlying options which are not currently exercisable with an
exercise price of $0.87 expiring September 1, 2002.
12
<PAGE>
(3) Issuable upon exercise of options after August 24, 1998 at an exercise
price of $.93 per share.
(4) Includes (i) 168,750 shares underlying a currently exercisable option with
an exercise price of $0.91 per share, which expires on December 16, 2000;
(ii) 70,000 shares underlying a currently exercisable option with an
exercise price of $0.91 which expires on June 16, 2002; (iii) 225,000
shares underlying a currently exercisable option with an exercise price of
$0.87 which expires on September 1, 2002; and does not include (iv) 75,000
shares with an exercise price of $0.87 which are not currently exercisable
expiring September 1, 2002.
(5) Issuable upon exercise of options with an exercise price of $1.00 per
share.
(6) Issuable upon exercise of options with an exercise price of $.085 per
share.
PLAN OF DISTRIBUTION
As at the date hereof, none of the Selling Security Holders have advised
the Company if, when, and to what extent they intend to sell any of their
Shares. In addition, none of the holders of the securities which may be
exercised for, or converted into, the Shares have advised the Company if, when,
and to what extent they intend to acquire the Shares and, if they do so, their
intentions respecting the offer and resale of such Shares to the public. For
purposes of this discussion, the Shares held or which may be acquired by the
Selling Security Holders upon the exercise of options or the conversion of
preferred shares are sometimes referred to hereinafter, collectively, as the
"Shares."
Commencing as at the date of this Prospectus, all of the Shares may be
offered and sold by the Selling Shareholders and, with the exception of the
Shares underlying the debentures which may not be converted until December 22,
1998. None of the proceeds from any sales of the Shares will be received by the
Company. If any Shares issuable upon the exercise of options are sold, the
Company will have received the exercise price of the options prior to such sale.
The Selling Shareholders may make such sales or resales from time to time as
market conditions permit in transactions that may take place in the over-the-
counter market, including block trades, ordinary brokers' transactions,
privately negotiated transactions or through sales to one or more broker/dealers
for resale of such securities as principals, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices or at
negotiated prices. In connection with sales or resales of Shares pursuant to the
Registration Statement of which this Prospectus is a part, a Selling shareholder
offering such Shares and brokers and dealers who participate in the offer and
sale of the shares may be deemed "underwriters" as such term is defined in the
Securities Act. In addition, persons using this Prospectus in the offer and sale
of the Shares will be deemed to be engaged in a "distribution" of the Shares as
such term is defined in Regulation M under the Exchange Act, and will be
required to comply with Regulation M with respect to contemporaneous market
activity and other provisions of such Regulation.
As at the date of this Prospectus, none of the Selling Shareholders intends
to utilize the services of an underwriter in any distribution of the Shares,
should such distribution occur, except insofar as any securities dealer
executing a sell order for any of them may be deemed an underwriter as that term
is defined in the Securities Act. Further, it is intended that if and when any
of the Shares are sold through a dealer, no more than the ordinary and customary
brokerage commission will be paid. Shares purchased by dealers for their own
accounts may be re-offered from time to time at prices obtainable and
satisfactory to such dealers. The names of any participating brokers or
dealers, any applicable commissions or discounts and the net proceeds to the
Selling Shareholders from such sale will be set forth in an applicable
Prospectus Supplement, as required.
The registration statement, of which this Prospectus forms a part, must be
current at any time during which a Selling Shareholder sells any of the Shares.
Any material changes which the Company, in its sole discretion, determines
should be disclosed prior to the sale of any of the Shares will be set forth in
an accompanying supplement to this Prospectus (the "Prospectus Supplement").
The Company will bear all expenses (other than underwriting discounts and
selling commissions, state and local transfer taxes, and fees
13
<PAGE>
and expenses of counsel or other advisors to the Selling Shareholders) in
connection with the registration of the Shares.
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.
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 Regulation M
of the General Rules and Regulations under the Securities Exchange Act of 1934,
as amended ("Exchange Act"), (d) report weekly to the Company all sales, pledges
and other dispositions of the shares of Common Stock covered hereby if any such
shall have occurred, and (e) not bid for, or purchase, any Company securities
other than as permitted under the Exchange Act.
Each of the Selling Stockholders has been advised by the Company that he or
she may not, during any period during which the shares of Common Stock are being
offered, use or disseminate information concerning the Company other than this
Prospectus. In addition, each of the Selling Stockholders has confirmed that he
has no material adverse information with regard to the current and prospective
operations of the Company except as may be disclosed in this Prospectus, and
that the reason prompting the sale of any securities by any Selling Stockholder
is to realize cash from time to time for investment, business or personal
reasons.
The Company has agreed that it will furnish the Selling Stockholders a
reasonable number of copies of this Prospectus.
MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's common stock, redeemable warrants (each of which entitles the
holder to purchase one-twentieth of one share of common stock at a price of
$2.375 or $47.50 per share through the close of business on October 31, 1997, or
an earlier redemption date) and units (each of which is comprised of three
shares pre-reverse split and .15 shares post reverse split of common stock and
two redeemable warrants) traded on the National Association of Securities
Dealers, Inc., Automatic Quotation System ("NASDAQ") from December 19, 1989, the
effective date of the Company's Registration Statement on Form S-18, until
August 27, 1992. At that time, the Company fell below the net asset requirement
for continued listing and was subsequently disqualified. Since such date, the
Company's securities have traded on the Electronic Bulletin Board maintained by
NASDAQ. Prior to December 19, 1989, there was no market for the Company's
securities. The table below sets forth the high and low closing bid prices for
the common stock, redeemable warrants and units during the period January 1,
1995 to December 31, 1996, as reported on the Electronic Bulletin Board; and, as
adjusted to take into effect a one-for-twenty reverse stock split effected on
October 4, 1996. The quotations represent inter-dealer quotations without
adjustment for retail mark-ups, mark-downs or commissions and may not represent
actual transactions:
14
<PAGE>
<TABLE>
<CAPTION>
PERIOD COMMON STOCK WARRANTS UNITS
HIGH LOW HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 1996 $14.063 $5.938 $0.050 $0.010 $1.625 $0.250
2nd Quarter 1996 $ 7.188 $4.688 $0.010 $0.010 $1.000 $1.000
3rd Quarter 1996 $ 6.250 $2.813 $0.010 $0.010 $1.000 $0.500
4th Quarter 1996 $ 4.063 $0.875 $0.010 $0.010 $0.500 $0.500
1st Quarter 1997 $ 2.297 $0.875 $0.010 $0.010 $0.500 $0.500
2nd Quarter 1997 $ 1.625 $0.625 $0.010 $0.010 $0.500 $0.500
3rd Quarter 1997 $ 1.844 $0.813 $0.010 $0.010 $0.500 $0.500
4th Quarter 1997 $ 1.750 $0.750 $0.010 * $0.500 $0.500
1st Quarter 1998 $ 1.468 $0.687 $0.010 * $0.500 $0.500
2nd Quarter 1998 $ 1.437 $0.828 $0.010 * $0.500 $0.500
3rd Quarter 1998 $ 1.000 $0.250 $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 November 5, 1998, the closing bid prices for the common stock, as
reported by the Over The Counter Electronic Bulletin Board, was $.115. The
Company has been advised that there are no current quotations available for the
Warrants or Units.
At the close of business on November 5, 1998, there were approximately 421
holders of record of the common stock and approximately 44 holders of record of
the redeemable warrants.
The Company has not paid any dividends on the common stock since inception
and intends to retain any future earnings for the development of its business.
Future dividends on the common stock, if any, will be dependent upon the
Company's earnings, financial condition, the dividend priority of any preferred
shares and other relevant factors as determined by its Board of Directors.
No dividends were paid on Series B Convertible Preferred Stock during 1996
or 1997. Cumulative unpaid dividends on the Series B Convertible Preferred
Stock as of December 31, 1997 totaled $25,000. During August 1996, the holder
of 500 of the then 1,500 issued and outstanding shares of Series B Convertible
Preferred Stock converted his shares and all accrued dividends thereon into
2,500 shares of Common Stock (as adjusted for the reverse stock split effected
in October 1996). The conversion of the Series B Preferred Shares was in
accordance with the formula set forth in the Certificate of Designation for such
security and the accrued dividends were converted at the market price for the
Common Stock at the date of the conversion. In March 1996, the 672.5 shares of
Series D Convertible Preferred Stock and all 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.
15
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for each of the periods presented for
the two years in the period ended December 31, 1996 and 1997 are derived from,
and should be read in conjunction with the Company's audited financial
statements, and the Company's unaudited financial statements, including the
notes thereto, for the three month period ended June 30, 1998, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------ --------
1997 1996 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 1,995,317 $ 5,285,149 $ 749,994 $ 1,175,107
Gross profit (loss) 98,907 (1,584,971) 201,679 292,479
Net income (loss) 473,031 (8,122,815) (2,283,397) (2,470,199)
Net income (loss) allocable to common $ 167,282 $(8,122,815) (2,726,375) (2,775,948)
shareholders
Net income (loss) per share $ .03 $ (1.58) $ (0.39) $ (0.51)
Weighted average common shares 5,831,404 5,133,665 6,994,639 5,390,957
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA:
DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1998
<S> <C> <C> <C>
Working capital (deficit) $ 1,503,938 $ (1,217,296) $ 382,545
Total assets 3,912,263 1,836,514 2,721,543
Total liabilities 1,634,266 2,330,343 1,522,090
Stockholder's equity (deficit) 2,277,997 (493,829) 1,199,453
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS PROSPECTUS, WHICH ARE
FORWARD LOOKING, INVOLVE A HIGH DEGREE OF RISK AND UNCERTAINTY. POTENTIAL RISKS
AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES FROM
OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, THE IMPACT OF QUALITY
PROBLEMS EXPERIENCED IN 1996, THE LACK OF ADEQUATE CAPITAL TO FUND CONTINUING
OPERATIONS, ECONOMIC CONDITIONS IN THE COMPANY'S PRIMARY MARKETS AND OTHER
UNCERTAINTIES DETAILED FROM TIME-TO-TIME IN THE COMPANY'S SECURITIES AND
EXCHANGE COMMISSION FILINGS.
YEARS ENDED DECEMBER 31, 1997 AND 1996
- --------------------------------------
The 1997 year can best be characterized as one of regrouping and re-
energizing. The first half of the year was spent in attempting to salvage
deteriorating customer and broker relationships resulting from product returns
due to mold, the inability to ship complete orders as a result of liquidity
problems created, in no small way, by the mold problem, and the broker
dissatisfaction and their lack of commissions from a lack of paid sales. In
addition, management focus was clearly on the preparation for the arbitration
involving Keebler. That effort was rewarded when the arbitration finally
resulted in the Company receiving $6,750,000 in cash in July 1997. See Note 16
to the Consolidated Financial Statements for a detailed explanation of the costs
associated with the recovery.
The second half of 1997 was devoted to repairing the damages done to the
Company's customers and brokers. These efforts involved detailed reconciliation
of customer accounts, discussions by senior management with the merchandising
managers of these customers to resolve any major disputes, and the final
settlement of a business relationship, with at least an understanding going
forward of how future transactions in general would be handled.
In product development, the Company began, after June 1997, to focus on
products to be introduced in the last quarter of 1997 and in 1998. The first
product was a reformulation of the existing toaster pastry products marketed
under the name Toast'N Jammers, plus the addition of two new frosted flavors
named Apple Cobbler and Cinnamon Toast. The reformulation was developed as a
result of a new flavor house supplying raw ingredients that the Company believed
provided a superior tasting product. The new flavors increased the line to a
total of eight: frosted and unfrosted strawberry, cherry and blueberry, plus
apple cobbler and cinnamon toast. The new formulation was introduced after
Thanksgiving and the customer response to the flavors has been excellent.
Additionally, the Company began the reformulation of its chocolate truffles
marketed under the name Juliette's Private Collection. The Company decided to
reformulate the chocolate truffles because the centers of the truffles were
becoming prematurely hard. This change in texture was not foreseen in the
original formula, but was the cause of customer complaints. The reformulation,
which was tested during the end of 1997 and incorporated in the product produced
and shipped during the end of the year, allows the center to remain softer than
before during the entire shelf life of the product. The reformulation was
completed in the last quarter of 1997 and the first two truckloads of product
were shipped around Christmas. Other products under development are scheduled
for introduction in the first half of 1998.
The Company used the remainder of 1997, after the Keebler award, to improve
its vendor relationships by negotiating multiple monthly payment schedules for
some of the Company's major creditors. This process, which occurred over a
three month period, resulted in deferred payment schedules being negotiated for
over $650,000 of the Company's liabilities.
17
<PAGE>
NET SALES
The liquidity issues which created inventory availability problems and the
continued fallout from the mold significantly reduced sales in 1997 compared to
1996. In 1997 sales were $1,995,317 compared to $5,285,149 in 1996, a reduction
of $3,289,832 or 62.2% of 1996 sales. Fudgets and Caketts, marketed under the
name Vitafort and the products associated with the mold, represented $3,751,858
of 1996 sales or 71.0% of the total , while in 1997 the products represented
$754,408 or 37.8% of total 1997 sales. The decline of $2,997,450 for these
products represents almost the entire reduction between 1996 and 1997. In
addition, sales of Auburn Farms brands products decreased by $300,624 due to the
problems discussed above which resulted in the Company not being able to ship
complete and timely orders.
GROSS PROFIT
Gross profit in 1997 was $98,907 or 5.0% of sales, compared to a gross loss
of $1,584,971 in 1996, an increase of $1,683,878 from 1996 to 1997. The
improvement of gross profit in 1997 over 1996 is due, in large part, to products
returned in 1996, sales of products in 1996 at less than list price, and
product that was destroyed in 1996 because it was not saleable. The product
returns due to mold continued to be a source of margin erosion. In addition,
the lack of customer acceptance of the Company's Fudgets and Caketts manifested
itself in reduced customer sales of other products. The Company also began
experiencing serious customer complaints resulting in chargebacks of Auburn
Farms and Nature's Warehouse products, which in some cases were shipped to the
customer prior to the acquisition of Auburn Farms brands and reformulations by
the Company. When the Company acquired the trademarks, brands, and other
intellectual properties of Auburn Farms/Nature's Warehouse ("Auburn Farms") in
May 1996, Auburn Farms was experiencing significant returns due to products
becoming hard and uneatable, especially the cookies. The Company continued to
experience such returns but minimized the future potential risk by reducing the
manufacturing lot size thereby increasing the inventory turnover and sending
fresher product to the customers. Finally, the reduced volume of sales
translated to increased inventory levels since some of the co-packers have
minimum production quantities. The increase in inventory levels created further
margin erosion as the Company was then forced to sell the products at prices
which, for the most part, were at or slightly above inventory cost. For the
Company to achieve higher gross margins, it must increase its sales volume to
eliminate selling inventory with short expiration periods, which requires
selling to liquidators at less than normal list price.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
In 1997, product development expenses were $337,806 compared to $737,044
for the same period in 1996, a reduction of $399,238 or 54%. The decrease is
due in part to the reduced emphasis in the first half of 1997 because of the
financial difficulties of the Company. Also, the Company made the decision to
work in conjunction with its co-packers in developing new products or enhancing
existing products. These joint efforts resulted in reduced cost to the Company
plus the added benefit of having the co-packer who will be the ultimate
manufacturer, also be an integral part of the development process and thus "take
ownership" of the program along with the Company. The reduction in staff,
$102,790, the closing of the office in Petaluma, California, $185,755, and the
reduction in travel, $107,920, accounted for approximately $396,000 of the total
reduction between 1997 and 1996.
SALES AND MARKETING
The lack of sales is reflected in the reduction in sales and marketing
expenses from $3,029,480 in 1996 down to $1,239,460 in 1997, a reduction of
$1,790,020 or 59.1%. The reduction in promotion, advertising, and product
introduction fees of $1,436,873 between 1996 and 1997 are due in large part to
the Company's decision to defer new product development and related expenditures
and to use advertising and promotion dollars only where there is likely to be
measurable value. The other cost reductions in staffing
18
<PAGE>
and related expenses, $69,255, and travel, $207,626, are primarily the result of
the problems in the first half of the year associated with the liquidity issue
and the continued customer complaints.
GENERAL AND ADMINISTRATIVE
The effort expended in the Keebler arbitration and in improving the
systems, procedures, and administrative functions is evident by the fact that
the general and administrative expenses were $2,672,946 in 1997 and $2,721,321
in 1996, a reduction of $48,375. The emphasis on Keebler and the settlement of
the other various legal cases reduced overall legal expenses by $28,964 after
taking into account the payment by Keebler of $767,000 against the legal fees
and costs as part of the overall settlement. In addition, the liquidity
problems in the first part of 1997 and the decision by the Company not to
replace certain administrative staff positions resulted in a reduction in
payroll and related expenses, including consulting, of $43,611 in 1997 compared
to 1996. While this reduction is consistent with the Company's effort to reduce
expenses, as the business level increases in the future, such continued cost
saving measures will be difficult to maintain.
INCOME TAXES
As of December 31, 1997, the Company had unused Federal and California net
operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, available to offset future Federal taxable income and future
California taxable income. In addition, the Company had unused research and
experimental credits of $44,000 and $26,000 for Federal and California state
purposes. The unused net operating loss and credit carryforwards expire in
various amounts through the year 2012. In contrast to Federal net operating
losses, only 50% of the California net operating losses incurred subsequent to
December 31, 1986 may be carried forward. The California net operating losses
will expire in various amounts through the year 2002.
Net deferred tax assets of approximately $7,605,000 resulting from net
operating losses, tax credits and other temporary differences have been offset
by a valuation allowance since management cannot determine whether it is more
likely than not such assets will be realized.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
INTEREST INCOME AND EXPENSE
Interest income was $78,070 in 1997 and $49,319 in 1996. The loan proceeds
from the Keebler arbitration have been invested in short term government
securities which do not carry high interest rates, but are almost risk free.
Interest expense was $214,690 in 1997 compared to $50,509 in 1996. The
increase is due primarily to the lending arrangement with Coast Business Credit
which has a $15,000 per month minimum interest clause in the contract. In 1997,
this amount represented $180,000 of the total interest expense.
19
<PAGE>
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Net Cash From (Used In) Operations $1,790,893 ($5,523,462)
Net Cash Used in Investing Activities (214,095) (172,896)
Net Cash Provided By Financing Activities 433,371 4,568,819
Working Capital (Deficit) 1,503,938 (1,217,296)
</TABLE>
Although the cash position had improved significantly at year end due to
the arbitration settlement, the Company is still under pressure to maintain and
improve its financial condition and has yet to generate profitable operations.
The Company is continuing to repair the relationships with its brokers and
customers (distributors), but the effort involved is both time consuming on
management's part and costly in that the effort detracts time which could
otherwise be spent procuring orders. Although the vendor relationships are now
stable, the Company may again jeopardize this area should the liquidity problem
again become extreme.
The Company has suffered recurring losses from operations as of December
31, 1997. Although the Company has raised additional capital after year-end
1997 (see Note 15 to the Consolidated Financial Statements), it has not
generated sufficient revenue-producing activity to sustain its operations. The
Company's independent certified public accountants have included a modification
to their opinion which indicates there is substantial doubt about the Company's
ability to continue as a going concern. See "Note 2" to the Consolidated
Financial Statements for additional information. The Company is attempting to
raise additional capital to meet future working capital requirements, but may
not be able to do so. Should the Company not be able to raise additional
capital, it may have to severely curtail operations.
The Company is reducing its cost of sales by centralizing the warehousing
of its products in a single location and negotiating lower rates with existing
manufacturers or by selecting another competent less expensive producer. In
addition, the Company increased prices on the majority of its products effective
August 1, 1997 and changed its terms of sale to F.O.B. the Company's warehouse.
The Company also eliminated the cash discount for prompt payment since most
customers were taking the discount beyond the terms. The Company has also
introduced reformulated products at the end of 1997 and plans to introduce new
products in 1998. These steps, coupled with improvements in subcontract
manufacturing quality control and quality assurance and monitoring improvements
in Company internal control and communications with respect to product returns
and deductions, should improve the Company's prospects to achieve profitability.
The Company is currently negotiating the acquisition of Global
International Sourcing, Inc., ("Global") a Nevada corporation, by acquiring the
stock of the corporation from its sole shareholder. Global is a company with
international contacts to provide natural and low fat food products for Vitafort
to sell into the United States market at a cost significantly below those found
in the United States for similar products. The Company advanced $193,818 to
Global as of December 31, 1997 to meet Global's operating expenses and fund
inventory purchases for future sales. The Company believes that the acquisition
cost will not be a material amount. Global was formed in October 1997 and its
financial position and results of operations are not material compared to the
Company's financial position at December 31, 1997 or its results of operations
for the year ended December 31, 1997.
20
<PAGE>
As of December 31, 1997, the Company had unused Federal and California net
operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, available to offset future Federal taxable income and future
California taxable income. In addition, the Company had unused research and
experimental credits of $44,000 and $26,000 for Federal and California state
purposes. The unused net operating loss and credit carryforwards expire in
various amounts through the year 2012. In contrast to Federal net operating
losses, only 50% of the California net operating losses incurred subsequent to
December 31, 1986 may be carried forward. The California net operating losses
will expire in various amounts through the year 2002.
Net deferred tax assets of approximately $7,605,000 as of December 31, 1997
resulting from net operating losses, tax credits and other temporary differences
have been offset by a valuation allowance since management cannot determine
whether it is more likely than not such assets will be realized.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
CREDIT FACILITY
In August 1996, the Company entered into a revolving credit facility with
Coast Business Credit, that provides a credit line of up to $4,000,000 subject
to certain covenants. Advances made to the Company under the facility are based
on a certain percentage of eligible accounts receivable, as defined, and a
certain percentage of eligible inventory, as defined. The amount of inventory
advances under the facility cannot exceed $500,000. The initial term of the
facility ends August 1998, with automatic renewals thereafter for one year
periods. Advances under the facility bear an interest rate at the Bank of
America NT plus 3%, and are secured by a first priority lien on all of the
Company's assets. Minimum interest charges are currently $15,000 per month.
The Company paid $40,000 to the institution upon execution of the agreement, and
$40,000 to a facilitator in connection with the placement of the loan.
The Company is using the proceeds of advances under the facility to help
meet its current working capital requirements. The amount due, under this
credit facility, was $440,022 on December 31, 1996, and $60,757 on December 31,
1997.
As of December 31, 1996 and subsequently, the Company was in violation of
certain covenants in that it had not maintained minimum tangible net worth of at
least $1,500,000 and minimum working capital of $1,000,000. If the Lender had
exercised its rights under the Agreement, it could have requested customer
payments be made directly to it, sold the finished goods inventory at auction,
and seized and sold the fixed assets of the Company until the obligation had
been satisfied. The Company classified the entire loan as a current liability
as of December 31, 1996. On September 30, 1997, due to receipt of the award
from the Keebler arbitration, the Company was no longer in violation of the loan
covenants. As of December 31, 1997 the Company was not in violation of any
covenants of the credit facility. As of June 30, 1998, the Company was in
violation of the tangible net worth covenant in that it had fallen below the
$1,500,000 requirement and the working capital covenant in that it had fallen
below the requirement. In addition, the facility which expired on August 31,
1998 has not been renewed, although the lender has extended the term until
September 30, 1998. As of September 30, 1998, the amount due under this credit
facility was $91,043. The Company is in negotiations with a new lender and the
original lender has indicated it will provide an extension. Should the Company
be unable to secure a replacement lender, it could seriously jeopardize the
future ability of the Company to fund operations.
GENERAL
21
<PAGE>
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 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.
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
- ---------------------------------------
Results of Operations:
A significant portion of the Company's efforts in new product development
culminated in the manufacture and shipment of two new product lines during the
first half of 1998: Toast `N Jammers Low Fat Toaster Pastries and The Wizard of
Oz brand marshmallows. The development of Juliette's Private Collection Low Fat
Cookies was completed in the second quarter and, because consumer demand and
overall retail cookie sales are relatively unaffected by the seasons, the timing
of their introduction will not present serious obstacles to distribution over
the remainder of 1998. Management is encouraged by steady retail sales of Toast
`N Jammers at Trader Joe's.
At the end of the quarter, the majority of the inventory of marshmallow
product was at the Mexican border undergoing inspection by both the Food and
Drug Administration and the U. S. Customs Service. Both inspections are
routine; however, this was the first significant shipment of marshmallows and
thus the procedure and process took longer than anticipated. When the product
finally was released and delivered to the Company's subcontracted public
warehouse, there was not enough time to receive the goods, process the orders,
and re-ship the product to the customers. Thus, revenue of $257,004 was
recorded in July for the third quarter that would have been recorded in June
were it not for the inspection delays encountered.
Overcoming retailer resistance resulting from problems in the past with
Vitafort Fudgets and Caketts previously reported remains an obstacle; however,
recent orders for The Wizard of Oz marshmallows to some of those retailers point
to a reconsideration of past resistance. Management hopes that these
marshmallows will help overcome lingering resistance by others to all of the
Company's products. The Company is presently using acceptance by these
retailers to help restore its former position in other markets, especially in
its home state of California.
From the standpoint of the Company's retailers, successful sell-through and
restocking of the products are one way to re-establish the level of credibility
the Company enjoyed prior to the manufacturing problem referred to above. The
planned promotion of the re-release of The Wizard of Oz motion picture by
22
<PAGE>
Warner Bros. and the Company's tie-ins as an official licensee are an important
element of the Fall marketing activities to support retail sales.
The acquisition of Global International Sourcing has to date proved
fortuitous because Global handled the manufacturing arrangements for the "The
Wizard of Oz" brand marshmallows. The Company plans to make full use of
Global's sourcing skills in the future for rounding out the licensed products
brands with the additional snack food products needed for continuity and
category growth.
Net Revenues:
For the three months ended June 30, 1998, net sales were $403,158 compared
to $402,788 for the same period in 1997, an increase of $370 or approximately
.09%. The loss of Fudgets and Caketts sales, which in the three months ended
June 30, 1997 were $136,850, were not replaced by any other of the Company's
other products, but sales of these products were not sufficient to allow
substantial overall sales growth. In May 1998, the Company discontinued the
Caketts line of three products and two of the three Fudget products. The
introduction of The Wizard of Oz(TM) marshmallows in this second quarter of 1998
generated sales of $92,736 for the three months ended June 30, 1998 compared to
no sales for the same period in 1997. The Auburn Farms/Natures Warehouse
product lines weakened somewhat in the quarter ended June 30, 1998 where sales
were $214,433 compared to $265,867 for the same period in 1997. The loss of
Auburn Farms sales reflects the Company's opinion that consumer tastes are
shifting from the no fat products, which are usually associated with no taste,
to reduced fat products which do provide the consumer with reasonably good
taste. Most of the new products scheduled for introduction are either reduced
fat or low fat. Global International Sourcing contributed $174,019 in sales
during the three month period ended June 30, 1998.
For the six months ended June 30, 1998, net sales were $749,994 compared to
$1,175,107 for the same period in 1997, a decrease of $425,113. The loss of
Fudgets and Caketts sales, which in the six months ended June 30, 1997 were
$518,670, were not replaced by any other of the Company's other products. The
Company introduced The Wizard of Oz marshmallows under its Avenue of the
Stars(TM) brand in the month of June 1998 and recorded sales at the end of the
quarter of $92,736. The Auburn Farms/Natures Warehouse product lines continued
to weaken in the six months ended June 30, 1998 where sales were $430,048
compared to $656,220 for the same period in 1997. The loss of Auburn Farms
sales reflects the Company's opinion that consumer tastes are shifting from the
no fat products, which are usually associated with no taste, to reduced fat
products which do provide the consumer with reasonably good taste. Most of the
new products scheduled for introduction are either reduced fat or low fat.
Gross Profit:
Gross profit increased from $68,448 or 17.0% for the three months ended
June 30, 1997 to $123,415 or 30.6% for the three months ended June 30, 1998, an
increase of $54,967. The increase reflects a shift in product mix for 1998
which should, as the year progresses, assist the Company in reaching the target
margins.
Gross profit decreased from $292,479 for the six months ended June 30, 1997
to $201,679 for the six months ended June 30, 1998, a decrease of $90,800. The
decline is due to the low gross profit margins which are normally generated from
Global.
Operating Expenses:
23
<PAGE>
Overall operating expenses for the three month period ended June 30, 1998
have decreased over the previous year period by $364,212 due to the decrease in
legal expenses from the Keebler arbitration which occurred in May 1997.
Overall operating expenses for the six month period ended June 30, 1998
have decreased over the previous year due to the reduction in legal fees in 1998
compared to 1997 offset by the selling expense increase due to the Global
acquisition. The development and introduction of new products continues to
offset the savings due to the reduction in general and administrative expenses.
Research and Development:
Total expenses for product development in the quarter ended June 30, 1998
were $78,225 compared to $61,444 for the same period in 1997, an increase of
$61,441. The majority of the increase in expenses was related to the employment
of outside consultants to assist the staff in insuring development of new
formulations and product design. In addition, these consultants were
working with the Company's co-packers to maintain acceptable quality
assurance and to insure that quality control measures are in place during the
manufacturing process of the Company's products. The cost for the three months
ended June 30, 1998 for outside consultants was $64,885 compared to $15,199 for
the same period in 1997, an increase of $49,686.
Total expenses for product development in the six months ended June 30,
1998 were $139,584 compared to $56,131 for the same period in 1997, an increase
of $83,453. The majority of the increase in expenses was related to the
employment of outside consultants to continue the effort in new product
development, design and sourcing. The cost for the six months ended June 30,
1998 for staff and outside consultants was $134,899 compared to $53,621 for the
same period in 1997, an increase of $81,278.
Sales and Marketing:
Total sales and marketing expenses for the quarter ended June 30, 1998 were
$488,247 compared to $359,430 for the three months ended June 30, 1997, an
increase of $128,817. Global International Sourcing sales and marketing
expenses for the quarter ended June 30, 1998 were $205,003, while Vitafort sales
and marketing expenses were $283,244. Without the acquisition of Global, the
overall sales and marketing expenses for the quarter would have been less than
the previous year period by $76,186. The decrease in Vitafort expenses were
primarily in sales promotion expenses, $31,176 and product introduction fees,
$75,970, all of which are related to the decline in overall sales volume. These
reductions were offset by the $62,162 increase in staffing costs to support the
introduction of new products and the increase in customer service.
Total sales and marketing expenses for the six months ended June 30, 1998
were $746,344 compared to $739,226 for the six months ended June 30, 1997, an
increase of $7,118. Global International Sourcing sales and marketing expenses
for the six months ended June 30, 1998 were $205,003, while Vitafort sales and
marketing expenses were $541,341. The decrease in Vitafort expenses were
primarily in the areas of sales promotion expenses, $79,199 and product
introduction fees, $171,517 related to the decline in overall sales volume.
General and Administrative:
For the quarter ended June 30, 1998, total general and administrative
expenses were $750,183 compared to $1,304,656 for the same quarter ended June
30, 1997 a decrease of $554,473. Staff increases and related expenses increased
by $48,634 for the three months ended June 30, 1998 compared to the three
24
<PAGE>
months ended June 30, 1997 due to the conversion of certain staff positions from
temporary consulting classifications to permanent employees. The decrease is in
the professional services, especially legal, where the expense level declined
from $793,580 for the three months ended June 30, 1997 to $262,505 for the three
months ended June 30, 1998, a decrease of $531,075 which was accomplished
principally through the resolution of certain legal proceedings.
For the six months ended June 30, 1998, total general and administrative
expenses were $1,473,731 compared to $1,890,887 for the same period in 1997, a
decrease of $417,156. Staff increases and related expenses increased by $87,490
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997, as temporary positions in 1997 were converted to permanent positions in
1998. The professional expenses were reduced by $524,744 for the six months
ended June 30, 1997 from $1,041,876 to $517,132 for the six months period ended
June 30, 1998.
Other Income (Expense):
The interest income continues to reflect the Company's investment of excess
cash in short term investment instruments. As the amount of the total
investment declines due to cash requirements, the amount of income will also
decline.
The other expense recognizes the effect of the lawsuit settled in the
current quarter.
<TABLE>
<CAPTION>
Liquidity and Capital Resources:
Six Months Ended
June 30,
(unaudited)
1998 1997
---- ----
<S> <C> <C>
Net Cash Used for Operations $(2,163,533) $(1,683,087)
Net Cash Used for Investing Activities (246,387) (378)
Net Cash Provided by Financing Activities 678,690 1,727,261
Working Capital (Deficit) 382,545 1,503,938
</TABLE>
The Company continues to expend resources in the product development area
for the scheduled introduction of new products. The Company's financial
condition continues to impair its ability to obtain credit terms with new co-
packers. This will put additional pressure on the liquidity of the Company and
may impede its ability to produce product. Although the Company believes the
new products, which have higher gross profit margins, can allow the Company to
reach an operating profit, there is no guarantee that the Company will be able
to reach such revenue levels. Nor is there any assurance that the Company will
be able to meet its future cash obligations without additional external funding
and improved sales. Neither additional financing nor improved sales can be
guaranteed to occur in the future.
The Company has suffered recurring losses from operations as of June 30,
1998. Although the Company has raised additional capital, it has not generated
sufficient revenue-producing activity to sustain its operations. The Company's
independent certified public accountants have included a modification to their
opinion which indicates there is substantial doubt about the Company's ability
to continue as a going concern. See "Note 10" to the consolidated financial
statements for additional information. The Company is attempting to raise
additional capital to meet future working capital requirements, but may not be
able to do so. Should the Company not be able to raise additional capital, it
may have to curtail operations.
As of June 30, 1998, the Company was in violation of the tangible net worth
covenant in that it had fallen below the $1,500,000 requirement and the working
capital covenant in that it had fallen below the requirement. In addition, the
facility which expired on August 31, 1998 has not been renewed, although the
lender has extended the term until September 30, 1998. As of September 30, 1998,
the amount due under this credit facility was $91,043. The Company is in
negotiations with a new lender and the original lender has indicated it will
provide an extension. Should the Company be unable to secure a replacement
lender, it could seriously jeopardize the future ability of the Company to fund
operations.
25
<PAGE>
IMPACT OF INFLATION
The Company believes that inflation has not had a material impact on its
operations. However, substantial increases in material costs could adversely
affect the operations of the Company for future periods.
YEAR 2000
The Company's accounting software currently does not utilize a four digit
year field; however, the Company has been assured by the software manufacturer
and independent consultants that all necessary modifications for the year 2000
have been or will be made and tested timely. The Company has been advised by a
consultant that the hardware will be modified timely. The Company does not
expect the cost of these modifications will have a material effect on its
financial position or results of operations. The Company currently does not
interact electronically with either customers, suppliers or other entities that
could be impacted by Year 2000 issues. Should any of the Company's internal
systems fail to achieve Year 2000 compliance, the Company's business and results
of operations could be adversely impacted.
RECENT NEW ACCOUNTING STANDARDS
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements with fiscal years ending after December 15,
1997. The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15, which has
been superceded by SFAS No. 128. The Company adopted SFAS No. 129 on December
15, 1997 and it did not have any effect on its financial position or results of
operations.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," ("SFAS 130") issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The Company adopted SFAS 130 on January 1, 1998
and it did not have any effect on its financial position or results of
operations.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years ending after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any effect on its financial position or results of
operations; however, disclosures with respect to the aforementioned items may be
increased.
26
<PAGE>
REPORTING ON THE COST OF START-UP ACTIVITIES
Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." ("SOP 98-5") issued by the Accounting Standards Executive
Committee is effective for financial statements with fiscal years beginning
after December 15, 1998. SOP 98-5 requires that the costs of start-up
activities should be expensed as incurred. At the time of adopting this SOP,
the initial application should be reported as the cumulative effect of a change
in accounting principles. At June 30, 1998 and December 31, 1997, the Company
capitalized product introduction costs of $9,500 and $10,711, respectively.
These costs are considered as start-up activities under SOP 98-5. The Company
does not believe that the adoption of this SOP will have a material effect on
its financial position, results of operations or cash flows.
THE BUSINESS OF THE COMPANY
GENERAL
Vitafort International Corporation (the "Company" or "Vitafort" or
"Registrant") was formed as a California corporation in 1986, and reincorporated
as a Delaware corporation in 1989. Prior to May of 1993, Vitafort was in the
business of formulating and developing value-added foods and beverages for third
parties. In addition, the Company was also marketing branded seafood. In May
of 1993, these businesses were discontinued due to lack of revenues and profit
and later in the year the Company disposed of them. In the fall of 1993, the
Company installed new management, who selected a new direction for the Company.
Vitafort would begin developing fat free and low fat bakery snacks that would be
marketed under Company owned trademarks. Vitafort, however, did not own any
production facilities, so established contract manufacturers (co-packers) would
be utilized to manufacturer these branded products developed by the Company.
In the spring of 1994, at the Natural Food Expo in Anaheim, California,
Vitafort introduced its first branded product called Fudgets(TM), a single-serve
fat free brownie with icing. Four flavors of Fudgets were marketed throughout
1994 and 1995, while Vitafort research and development continued to develop
additional low fat and fat free snacks. During this period Fudgets were sold at
retailers such as: Price Costco (Bellevue, WA), Circle-K (Phoenix, AZ), Ralphs
(Compton, CA), Albertsons (Brea, CA), GNC (Pittsburgh, PA), Shop-Rite/Wakefern
(Woodbridge, NJ), along with many others. In addition, Fudgets were being
marketed to hundreds of health food stores across the country by natural food
distributors.
In the spring of 1995, the Company introduced double chocolate, cappuccino
and peanut flavor Fudgets in a multi-pack of five individually wrapped 1.4 oz.,
packages. These three flavors were test marketed through the year. In the
latter part of 1995, Vitafort signed a co-packing agreement with The Keebler
Company ("Keebler") and began the marketing introduction of four flavors of fat
free cakes called Caketts(TM) (lemon poppy, carrot, pound and banana). The
Company believes that this unique snack was the first individually portioned fat
free snack cake with an extended shelf life to be merchandised in the cookie
section of supermarkets.
In the fourth quarter of 1995, as the Company was completing the final
stages of its financing, the Company put in place the distribution
infrastructure that would support the roll out of these seven new flavors of
Fudgets and Caketts. In addition, the Company began the manufacture of Fudgets
at Michel's Bakery ("Michel's") at this time. Food brokers agreed to represent
the Vitafort product line and serve as the sales agents to the marketplace for
the Company.
The introduction of Fudgets and Caketts to grocery stores across the
country began in the first quarter of 1996, as retailers such as Acme
(Philadelphia, PA), Delchamps (Mobile, AL) and Shop-
27
<PAGE>
Rite/Wakefern (Woodbridge, NJ) placed purchase orders for Fudgets and Caketts.
The roll out continued in the second quarter as Vitafort's distributors added
Caketts and Fudgets to the shelves of hundreds of chain stores including: Kroger
(Cincinnati, OH), Albertsons (Brea, CA), Meijer (Grand Rapids, MI), Albertsons
(AZ, CA, UT and TX), Price Chopper (Schenectady, NY) Demoulas (Tewksberry, MA),
Winn-Dixie (Jacksonville, Orlando and Tampa, FL), Kash and Karry (Tampa, FL),
Publix (Lakeland, FL) and others. In addition, the company received direct
purchases orders from Food Lion (Salisbury, NC), Kroger (Roanoke, VA) and
Richfoods (Richmond, VA), while procuring purchase orders attached to national
print advertisements with both Thrifty Payless and Eckerd Drugs, two large drug
store chains.
In the second half of 1996, Vitafort's distributors added Stop + Shop (MA),
Kroger (Atlanta, GA), Farmer Jack's (MI), Grand Union (NY), Ralphs (CA), Hughes
(CA), and others to the supermarkets selling the Company's products. The
largest purchase order in the history of the Company was also received as K-Mart
placed a $550,000 order for product as part of a national advertisement for
2,300 stores.
During the second quarter of 1996, the Company received complaints of mold
from Caketts being manufactured by The Keebler Company, Vitafort's primary co-
packer at the time. The Company notified Keebler that it had received these
complaints and engaged Keebler in discussions to correct the problem. Keebler
attempted to solve the mold problem by creating an inspection process that would
identify the acceptable product for reshipment. The Company shipped this
inspected product to its customers. Thereafter, however, the Company received
reports that this inspected product also turned moldy. Vitafort continued to
engage Keebler in discussions regarding this problem, but in August, Keebler
abruptly terminated the manufacturing agreement. This interrupted the supply of
Caketts to customers resulting in delayed shipments and lost sales.
The Company anticipated strong orders toward the year-end of 1996 as
supermarkets across the country prepared for January and February healthy diet
promotions and advertisements. During the third quarter, the Company shipped
orders of Caketts and Fudgets produced by its new co-packer. In the fourth
quarter, however, complaints from retailers about mold on products produced by
Keebler (Caketts) by Michel's (Fudgets) continued. By December the Company
learned that the damage to the consumer acceptance of these brands caused by the
previously shipped defective product was greater than previously realized. This
quality problem created hundreds of consumer complaints that led to both loss of
distributor goodwill and a significant loss of shelf space in the supermarkets.
In addition, product had to be withdrawn from the marketplace. As a result,
fourth quarter sales were significantly adversely affected and costs relating to
this problem were much greater than previously anticipated.
During the first half of 1997, the Company continued to suffer declining
sales resulting from returned product, loss of distributor goodwill, and the
lack of adequate capital to resolve both broker financial issues and co-packer
payment demands. This liquidity issue was the primary cause of the lack of new
product effort, the maintenance of harmonious broker relations which could have
led to increased sales, and the Company's inability to comply with customer
requests that orders be shipped complete and on time.
The Keebler arbitration award announcement in June 1997 and the receipt of
proceeds in July 1997 allowed the Registrant to begin reestablishing mutually
acceptable payment terms with its suppliers, negotiating settlements of
chargebacks from its customers as a vehicle to reestablish channels of
distribution, and planning the product introduction schedules for the remainder
of 1997 and 1998. See Note 16 to the Consolidated Financial Statements.
During the second half of 1997, the Company focused its sales and marketing
efforts on reestablishing relationships with its distributors and brokers to
address past commission issues, chargebacks from retailer issues, and the
Company's ability to currently ship product on a timely basis.
While the Company has continued to ship Fudgets and Caketts, it has done so
in reduced volume due primarily to customer dissatisfaction with the brand name
based on past performance, not based on current product or availability. In
May 1998, the Company discontinued the Caketts line and two of the
28
<PAGE>
three stockkeeping units ("SKU's") of Fudgets to avoid further customer illwill.
The Company believes there are some regional markets remaining for the product.
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.
The poor sales performance in 1998 continues to erode working capital and
once again damage relations with suppliers that the Company has worked so hard
to reestablish. While the Company believes such sales performance will not
continue, no assurance can be given that it will not.
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 Avenue of the Stars in late 1997
for snack foods and confectionery products. The purpose was to use motion
picture studios logos and trademarks for packaging differentiation of the
Company's products.
Although management believes that the Company's products are unique and are
superior in taste to competitively available products, the food industry is
characterized by the continual development of new products employing various new
technologies and processes. Additionally, the Company must overcome the
negative goodwill associated with the defective products produced by its former
co-packers. Accordingly, no assurance can be given that new products will not
be developed and marketed, which are superior to the Company's products in
taste, texture and feel and or that the Company's products will achieve or
maintain reasonable levels of market acceptance.
29
<PAGE>
ACQUISITION OF AUBURN FARMS, INC. BRANDS
On May 2, 1996, pursuant to the terms of a letter agreement, dated May 1,
1996, and the attachments thereto (the "Foreclosure Purchase Agreement" or
"FPA"), the Company acquired the trademarks "Auburn Farms" and "Natures
Warehouse" and certain related trademarks, trade dress, and related intangibles
in a foreclosure sale from secured lenders to Auburn Farms, Inc., dba. Natures
Warehouse ("AFI"). The purchase price under the FPA consisted of a cash payment
of $75,000 and deferred payments based upon gross sales, as defined in the FPA,
of products sold by the Company which bear the acquired trademarks. The
deferred payment for AFI's existing products, as defined in the FPA, equals
three and one half (3 1/2%) per cent of gross sales for a period of thirty
months commencing May 1, 1996; three (3%) per cent of gross sales for the next
ensuing period of thirty months; two and one half (2 1/2%) per cent of gross
sales for the next ensuing period of thirty months; and two (2%) per cent of
gross sales for the next ensuing period of thirty months. For newly created
products, as defined in the FPA, which utilize the acquired trademarks, the
Company is required to pay a deferred purchase price equal to one and one half
(1 1/2%) per cent of gross sales for a period of 120 months commencing May 1,
1996. $72,000 of inventory was purchased under such option in 1996. The FPA
agreement also provides that the Company has the option to purchase certain
inventories of packaging materials from AFI. During 1996, sales of products
bearing the acquired trademarks were $1,337,475; and, the total deferred
payments under the FPA were $45,612. During 1997, 18,501 of deferred payments
were made under the FPA and total sales of products bearing the acquired
trademarks were $1,036,851. For the first quarter of 1998, sales of products
were $210,371 and deferred payments were $3,709.
The Company is using co-packers to produce products bearing the acquired
trademarks.
PRODUCT MANUFACTURING
The Company manufacturers its products by entering into agreements with
established food manufacturers ("co-packers"), who have the facilities, staff,
quality assurance and process control programs for the production of their own
products as well as the Company's products ("co-packer agreements"). Co-packer
relations are intended to enable the Company to secure the expertise of
qualified food manufacturers with respect to the development, manufacture and
packaging of the product; and, to achieve economies of scale in production and
staffing requirements, while providing production flexibility to meet changes in
product mix demand by customers that the Company could not achieve on its own.
Additionally, the Company benefits from, and relies upon, the production
experience and expertise of these companies while avoiding the capital outlays,
staffing requirements, quality control, legal process requirements and other
manufacturing costs and delays that the Company would encounter were it to
attempt to manufacture its products utilizing its own facility. However, there
can be no assurance that co-packers will meet their obligations.
Management believes that the most recent switch in co-packer arrangements
has improved product quality and availability, while improving the Company's
gross profit margin. Management believes that the current co-packers have
sufficient capacity to meet the Company's requirements.
The Company is in the process of negotiating co-packing agreements with
other established firms to act as co-packers for various other products.
Management believes that, if the research and development of the products is
completed and the Company's capital resources allow, it will be able to select
co-packers and enter agreements on terms acceptable to the Company.
DISTRIBUTION
Vitafort utilizes distributors and brokers to market its brands of fat free
and low fat snacks. These distributors ship to grocery chains in the United
States. Wholesale club stores, drug store chains and mass merchandisers are
distributed, by the Company, directly into their warehouses. Management
believes that,
30
<PAGE>
with sufficient funding, distribution can expand throughout the marketplace with
additional products and distributors.
MARKETING
Vitafort developed a phased strategic marketing plan in the latter part of
1995, which continued into 1996, involving the development and expansion of the
Fudgets Fat Free Brownies and Juliette's Low Fat Chocolate Creams brands while
staging the rebuilding of the more mature Auburn Farms and Natures Warehouse
brands. The mold problem associated with the co-packers of Caketts and Fudgets
during 1996 has had a serious impact on the distribution channels of the
products. In addition, the liquidity problems caused by the same production
issue, has severely hampered the Company's ability to increase the distribution
of its products through the increase in product introduction costs. The Company
does not have formal agreements with its distributors which are the primary
customers of the Company, but delivers products under normal industry terms of
sales.
In connection with Auburn Farms and Natures Warehouse the Company has
changed packaging and formulations in an effort to appeal to a broader customer
base. The first new product was Toast `N Jammers, a toaster pastry line.
Combined with icing and a product presentation that is closer to mainstream
products, Vitafort is attempting to establish Toast `N Jammers as the standard
for the toaster pastry segment. The Company is preparing similar new products
for the other Auburn Farms brands. The severity of financial losses suffered as
a result of the product quality problem could hamper the Company's ability to
market Auburn Farms and Natures Warehouse products, as well as to execute other
projects.
INTELLECTUAL PROPERTY RIGHT PROTECTION AND TRADEMARKS
The Company believes that its trademarks do afford it some degree of
protection from competition and do allow it to differentiate its products from
those of its competitors through brand loyalty and identity. There are however,
no assurances that such trademarks may offer significant protection from
competitors or that the Company would be successful should litigation to protect
such trademarks become necessary. The Company is seeking to determine whether
its various formulas and procedures are patentable in the United States, and
relies upon non-disclosure, secrecy agreements and its common law rights in
order to protect its proprietary formulae, procedures, and other information.
No assurance can be given that such steps will adequately protect the Company
against competing products or that the Company will be able to adequately
enforce its rights against third parties who may be utilizing the Company's
proprietary formulae, procedures and other information. If the Company is
advised by counsel that any of its formulae, processes, procedures or other
techniques are patentable, then it may seek appropriate patent protection.
The Company has developed several proprietary formulations for its
products. While these formulations may or may not be protected under the U.S.
Patent laws, they may have value inasmuch as they provide Vitafort with its
unique competitive edge. The Company has established brands within certain
market niches of major product categories. The consumer acceptance of the
nutritional and flavor profiles of the products, have been heavily influenced by
the proprietary formulations and processes.
The Company's trademarks and their marketing status are detailed below:
<TABLE>
<CAPTION>
TRADEMARK MARKETING ACTIVITY
- --------- ------------------
<S> <C>
Vitafort This is an actively marketed mark and used on all Company material; however,
quality problems encountered in 1996 have impaired the value of this mark.
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.
</TABLE>
31
<PAGE>
<TABLE>
<S> <C>
TOAST `N JAMMERS A repositioned brand name with specialty grocery presence. With the
repositioned product, this brand has experienced expansion versus a year ago.
JAMMERS One of the all natural fat free cookie brands in both the health food and
specialty food classes of trade.
7-GRAINERS A snack cracker brand within the health food class of trade. This brand also
holds a shelf position within the specialty grocery class of trade.
Avenue of the Stars A new mark used for products which shall be part of motion
picture licensing agreements.
JULIETTE'S PRIVATE A mark established for a line of low fat chocolate products first shipped in
COLLECTION December 1997. Brand name is also used for new reduced fat
line of super premium cookies.
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. The Company ceased marketing Caketts in May 1998.
FUDGETS This was one of the key food products with distribution in a number of
supermarkets throughout the U.S. Quality problems encountered in 1996 have
severely limited the realization of this mark. The Company discontinued all but
one SKU in May 1998.
</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 $337,806 and $737,044 on research and development in 1997
and 1996, respectively, and $746,344 in the six months ended June 30, 1998. The
Company intends to create new products using the above strategy and to launch
products in the marketplace in 1998 and beyond. The current financial condition
of the Company, however, may preclude it from successfully accomplishing its
goal.
COMPETITION
The Company is engaged in the highly competitive healthy food marketplace.
There are numerous companies with financial and business resources far greater
than Vitafort's, currently marketing healthy and fat free foods. The Company
seeks to compete based on the unique taste, texture and quality of its products
and by obtaining recognition for its brands.
The Vitafort brands compete within different categories and with different
products depending upon the class of trade and placement within retail outlets.
The chart below details the Company's product lines and identifies the
competitors with the classes of trade.
32
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
VITAFORT BRAND CLASS OF TRADE PRINCIPAL COMPETITION MARKET NICHE
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Juliette's Private Main grocery sections, There is no known direct Appeal to those consumers who
Collection natural food stores competition for boxed low are not willing to sacrifice
Chocolate Truffles 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.
- ---------------------------------------------------------------------------------------------------------------
Juliette's Private Main grocery sections, Westbrae, Appeal to consumers who want
Collection natural food stores Pepperidge Farms, a premium cookie with great
Super Premium Cookies and discount drug Barbara's, taste and just the right
stores within the U.S. Pamela's amount of fat to ensure great
taste.
- ---------------------------------------------------------------------------------------------------------------
Fudgets Main grocery cookie Snackwell's Brownies The Company decided to
section Pepperidge Farms discontinue all but two SKU's.
Brownies
Greenfield's Brownies
Frookies Brownies
- ---------------------------------------------------------------------------------------------------------------
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 in taste and
supermarkets and Choice Toaster Pastries all natural ingredients.
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
- ---------------------------------------------------------------------------------------------------------------
The Wizard of Oz Grocery, mass None flavored Flavored marshmallow snack to
Marshmallows merchants, club and be consumed every day as a
discount drug stores confection.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
ENVIRONMENTAL REGULATION AND SEASONALITY
Management believes that the costs associated with compliance with
environmental regulations do not at this time impose a significant burden upon
the Company's operations. Any change in that burden, however, could adversely
impact the Company. Management does not believe that the Company's business is
seasonal to any significant extent.
EMPLOYEES
As of November 9, 1998, the Company had 9 employees of whom 2 were
executive officers, 1 was engaged in sales and marketing, and 6 were clerical
and administrative.
33
<PAGE>
DESCRIPTION OF PROPERTY
THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE CONSISTS OF 3,921 RENTABLE SQUARE
FEET LOCATED AT 1800 AVENUE OF THE STARS, LOS ANGELES, CALIFORNIA, WHICH IS
LEASED PURSUANT TO A THREE-YEAR LEASE WHICH EXPIRED AUGUST 31, 1997. THE BASE
RENT UNDER SAID LEASE WAS $69,000 FOR THE FIRST YEAR OF THE TERM; $72,000 FOR
THE SECOND YEAR OF THE TERM; AND, $75,000 FOR THE THIRD YEAR OF THE TERM. THE
COMPANY IS NOW LEASING THE SAME SPACE ON A MONTH-TO-MONTH BASIS AT A RATE OF
$6,250 PER MONTH.
LEGAL PROCEEDINGS
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, several companies in which he had invested, and, certain of those
companies' officers. Included among the defendants were the Company and its
then Chief Executive Officer. The complaint seeks damages in an unspecified
amount in excess of $500,000 and punitive damages in an unspecified amount in
excess of $5,000,000. The Court has dismissed the class action claims as to the
Company and granted a motion that the claims against the brokerage firms and
associated persons must be submitted to arbitration. The plaintiff has
appealed that ruling. The Company denies any liability to the plaintiff and
intends to vigorously defend this action. The Company notes that the plaintiff
sold a portion of the securities he purchased from the Company, realizing a
profit; that the balance of the securities became salable under Rule 144; and
that, if sold, the plaintiff `s losses on the Company's securities might be as
little as $15,000.
In connection with the acquisition of assets of Auburn Farms, Inc.,
("AFI"), the Company acquired the intellectual property and certain claims of
AFI which it was asserting against AFI's co-packer, New Life Bakers ("New Life")
and against a customer of New Life, Barbara's Bakery ("Barbara's"). In May 1996,
the Company filed an action in federal court alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition, conspiracy and related
claims arising out of New Life and Barbara's misappropriation of Auburn Farms'
principal products. Although no trial date has been set, the Company expects
the case to proceed to a jury trial in 1999.
On March 25, 1998, New Life and Barbara's purported to purchase from AFI's
bankruptcy estate certain claims against Barbara's and New Life for $300,000.
The purchased claims do not include any of the claims previously acquired by the
Company. The Company expects New Life and Barbara's to raise by motion the
effect of the March 25, 1998 bankruptcy purchase. The Company has been advised
by outside litigation counsel that evidence supports the Company's claim for
damages in excess of $3 million for the destruction of AFI's business and
intellectual property rights. The Company may be obligated to pay a portion of
any recovery to the Company against New Life to AFI's bankruptcy estate and/or
its creditors. The Company intends to pursue this litigation vigorously. There
is no assurance given that the Company will receive any recovery.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other similar
claims arising out of the consulting relationship that previously existed
between the Company and Mr. Ellis. The Complaint seeks damages in an
unspecified amount. The court has dismissed the complaint against Mark Beychok
without leave to amend. Mr. Ellis filed an amended complaint against the
Company. The Company was defending the action vigorously and trial was
scheduled for March 31, 1998. The Company filed a counter-claim against Ellis
charging violations of Section 16(b) of the Securities Exchange Act of 1934
(short swing profits). Ellis sold stock in violation of that section and,
therefore, the profits, estimated at $20,000, belong to the Company. In March
1998, the court ruled in favor of the Company in this matter
34
<PAGE>
and awarded it $21,260. On June 2, 1998, the parties resolved both the Ellis
issues. Under the terms of the agreement, the settlement is treated as
confidential and the public response has been agreed to as follows: "The matter
has been resolved."
MANAGEMENT OF THE COMPANY
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions Held
----------------------------- --- --------------
<S> <C> <C>
Mark Beychok 41 President, CEO, CFO and a Director
Paul G. Cowen 65 Director
Benjamin Tabatchnick 45 Director
John Coppolino 38 Executive Vice President
</TABLE>
MARK BEYCHOK was elected President and a Director of the Company in
------------
September of 1993, and has been Chief Executive Officer since February 1995.
Mr. Beychok is a private investor with fifteen years experience in the food
industry as an owner and operator of various food manufacturing, marketing and
distribution companies. Mr. Beychok graduated in 1979 from the Haas Business
School at the University of California (Berkeley).
PAUL G. COWEN was elected a director in January 1998. Mr. Cowen was the
-------------
founder of Paul Cowen Associates in 1984, an executive recruitment firm. Prior
to that, Mr. Cowen was in senior marketing and sales positions at Xerox and
Vivitar. Mr. Cowen has a BA from Ohio University and an MS from Indiana
University.
BENJAMIN TABATCHNICK was elected a Director of the Company in February
--------------------
1997. Since January 1990, Mr. Tabatchnick has owned and operated Tabatchnick's
Fine Foods (and predecessors), a privately held concern, which manufactures and
distributes its own trademarked line of frozen soups, and manufactures frozen
and refrigerated foods for others on a contract basis.
JOHN COPPOLINO began as Director of Sales in 1994 and became Executive Vice
--------------
President during September 1997. Mr. Coppolino was a vice president for LC
Marketing from 1993 to 1994. Mr. Coppolino has over ten years experience in the
food industry, including experience as a food broker and in product manufacture.
Mr. Coppolino graduated from the Pennsylvania State University School of
Business in 1983 with a degree in Business Logistics.
35
<PAGE>
EXECUTIVE COMPENSATION
On December 1, 1993, the Company entered into a three-year employment
agreement with Mark Beychok which provided for an annual base salary of
$150,000, the grant of an option to purchase 100,000 shares of common stock at
$5.00 per share (as adjusted for the reverse stock split effected in 1996), and
$1,000,000 of life insurance, the proceeds of which will be split equally
between the employee's beneficiary and the Company. In December 1995, in
recognition of Mr. Beychok's deferral of his compensation during 1995 and his
assuming additional responsibilities within the Company, Mr. Beychok's
employment agreement was amended to grant him an additional 62,500 five-year
options with an exercise price of $3.00 (as adjusted for the reverse stock split
effected in 1996), a price equal to the offering price in the Company's then on-
going private placement. In November 1995, Mr. Beychok agreed to convert his
accrued salary to stock and options on the same terms as the Company's on-going
equity bridge financing. The Company's Board of Directors approved this
transaction in December 1995. In such connection, Mr. Beychok converted $45,821
of accrued salary into 19,092 shares; 9,547 options with an exercise price of
$4.50; and 9,547 options with an exercise price of $6.00. In September 1997,
Mr. Beychok entered into a new employment agreement ("Agreement") with the
Company for three years. Under the Agreement, Mr. Beychok receives an annual
base salary of $150,000 and was granted options for 450,000 shares of stock at
an exercise price of $0.87 per share. Such options vest 75,000 each on
September 3, 1997, March 3, 1998, September 3, 1998, March 3, 1999, September 3,
1999, and March 3, 2000. In May 1997 the price of all options other than those
related to the private placement were repriced to $0.91. In September 1997 Mr.
Beychok was given a successful litigation reward of $51,535 plus 100,000 shares
of common stock at fair market value of $1.00.
In August 1996, the Company entered into an employment agreement with John
Coppolino, which was dated January 1, 1996. Under his agreement, which is for a
one year term, with two one year renewal terms at the option of the Company, Mr.
Coppolino received an initial salary of $102,000; and, is entitled to annual
increases of 5-6% based on increases in the cost of living. Mr. Coppolino's
employment agreement provided for the grant of 225,000 options, expiring
December 31, 2000 for the purchase of common stock at $3.00 (as adjusted for the
reverse stock split effected in October 1996). Of these options: (i) 56,250
have vested (ii) 56,250 have lapsed and (iii) 56,250 will vest on each of
January 1, 1998 and January 1, 1999, subject to the Company meeting certain
performance criteria. In May 1997 the Board of Directors reduced the option
price of all unlapsed options to $0.91 and removed the vesting requirement. In
September 1997, Mr. Coppolino entered into a new employment agreement
("Agreement") with the Company for two years. Under the Agreement, Mr.
Coppolino receives an annual base salary of $120,000, and was granted options
for 300,000 shares of stock at an exercise price of $0.87 per share. Such
options vest 75,000 each on September 3, 1997, March 3, 1998, September 3, 1998,
and March 3, 1999. In September 1997, Mr. Coppolino was given a successful
litigation reward of $25,000, forgiveness of debt of $25,000, plus 25,000 shares
of common stock at $1.00, being the fair market value at the date of the award.
In June 1997, the Company entered into a two year employment agreement with
Jack B. Spencer under which Mr. Spencer will serve the Company as its Chief
Operating Officer and Chief Financial Officer. The agreement provides for
compensation to Mr. Spencer in the amount of $125,000 per annum and the grant of
an aggregate of 300,000 five year incentive stock options with an exercise price
of $ 0.91 per share (such being the market price of the common stock on the date
the agreement was executed). The options vest as to 109,890 shares on September
15, 1997 and 109,890 shares on June 16, 1998, and 80,220 shares on June 16,
1999. Mr. Spencer's employment agreement provides that if Mr. Spencer's
employment by the Company is terminated without cause after September 15, 1997,
then Mr. Spencer shall be entitled to six months severance pay. Mr. Spencer's
employment agreement also provides that upon the occurrence of certain events
constituting a change in control of the Company, as defined therein, followed by
certain changes in Mr. Spencer's duties, Mr. Spencer shall be entitled to
receive a severance equal to one and one half times his then current annual
salary plus certain other benefits designed, in part, to offset any special
taxes that might be imposed upon Mr. Spencer in connection with such payments.
On September 24, 1998, Mr. Spencer sent a letter to the Company giving notice
that pursuant to Section 6(k) of his employment agreement the Company had
breached his agreement in that it has altered Mr. Spencer's duties,
36
<PAGE>
responsibilities, reporting relationships and position. The Company has
responded by asking Mr. Spencer to clarify his allegations. Mr. Spencer
resigned as an officer of the Company in October 1998.
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 1997, 1996 and 1995:
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
PRINCIPAL POSITION ALL OTHER ANNUAL
& NAME YEAR SALARY OTHER COMPENSATION
<S> <C> <C> <C> <C>
CEO / President
Mark Beychok 1997 $150,000 $ 12,500 (1) $102,467 (2)
1996 137,500 12,500 (3) 8,864 (4)
1995 40,000 110,000 (5) 14,212 (6)
Executive Vice President
John Coppolino 1997 $120,000 $ 20,750 (7) $59,000 (8)
1996 87,500 14,500 (9) 9,000 (10)
1995 - - -
</TABLE>
(1) A portion of Mr. Beychok's salary was deferred in 1996 and paid in 1997.
(2) Comprised of $9,584 car allowance, accrued vacation of $41,348, plus
$51,535 as a successful litigation reward.
(3) A portion of Mr. Beychok's salary was deferred in 1996 and paid in 1997.
(4) Comprised of $8,204 car allowance and $660 in medical insurance benefits.
(5) A portion of Mr. Beychok's salary was deferred during 1994 and applied as
an offset against a note payable in 1995. A portion of Mr. Beychok's
salary was deferred in 1995 and the majority converted to common stock and
options during 1995 and early 1996.
(6) Comprised of $10,912 car allowance and $3,300 in medical insurance
benefits.
(7) A portion of Mr. Coppolino's salary, $15,500, and car allowance, $5,250,
were deferred in 1996 and paid in 1997.
(8) Comprised of $9,000 car allowance and $50,000 as a successful litigation
reward.
(9) Mr. Coppolino deferred a portion of his salary and exercised stock options
in 1996.
(10) 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
37
<PAGE>
an increase in the number of options available for grant under the 1989 Plan to
50,000 (as adjusted for the reverse stock split effected in 1996). No options
are outstanding under this plan.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan")
pursuant to which 2,000,000 shares of Common Stock (as adjusted for the reverse
stock split effected in 1996) were reserved for issuance upon the exercise of
options. The 1995 Plan is similar to the 1989 Plan in many respects and in the
discussion below, each is referred to as a "Plan" and they are collectively
referred to as the "Plans".
Under the terms of the Plans, all directors, officers and key employees of,
and consultants to, the Company and all its subsidiaries are eligible for option
grants. The Board determines, at its discretion, which persons will receive
option grants, the number of shares subject to each option, the exercise price,
which may not be less than the par value of the shares subject to the option,
except that in the case of ISO's, the exercise price must be at least one
hundred percent (100%) of the fair market value of the optioned shares on the
date of grant, or one hundred and ten percent (110%) of such fair market value
if the optionee is the owner of more than ten percent (10%) of the total
combined voting power of all classes of voting stock of the Company (a "10%
Holder"), and the term (which may not be more than ten (10) years from the date
of grant, or five (5) years in the case of an ISO granted to a 10% holder)
thereof. The Plans permit options granted thereunder to be exercised by the
tender of shares of common stock having a fair market value equal to the
exercise price of such option.
Options granted under the Plans may, at the discretion of the Board, be
exercisable upon the tender of cash equal in amount to the aggregate par value
of the shares covered by such options, together with a one-year note bearing
interest at the "applicable federal rate" (as defined in the Code) and providing
for a required prepayment upon any disposition of the acquired shares.
Presently, the Board does not have a stock option committee.
During 1995 Mr. Beychok was granted an aggregate of 687,500 options under
the 1995 Plan with an exercise price of $3.00 (as adjusted for the reverse stock
split effected in October 1996). The exercise price of these options was
reduced to $0.91 in May 1997 (the current price of these options).
The following chart sets forth the options granted to directors and
officers in 1997:
<TABLE>
<CAPTION>
Percent of Potential realized value
Number of total at assumed annual rate
securities options/SARs Exercise of appreciation for
underlying granted to of base option term
options/ SARs employees in price Expiration
Name granted fiscal year ($/Share) Date 5% 10%
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Mark Beychok, CEO 100,000 2.8% $0.875 12/31/02 111,675 140,920
- ----------------------------------------------------------------------------------------------------------------------------
Mark Beychok, CEO 100,000 2.8% $ 0.91 06/16/02 116,142 146,556
- ----------------------------------------------------------------------------------------------------------------------------
Mark Beychok, CEO 450,000 12.8% $ 0.87 09/19/02 499,664 630,515
- ----------------------------------------------------------------------------------------------------------------------------
Jack B. Spencer, COO/CFO 300,000 8.5% $ 0.91 06/13/02 348,425 439,669
- ----------------------------------------------------------------------------------------------------------------------------
John Coppolino 100,000 2.8% $ 0.91 06/16/02 116,142 146,556
- ----------------------------------------------------------------------------------------------------------------------------
John Coppolino 300,000 8.5% $ 0.87 09/19/02 333,109 420,343
- ----------------------------------------------------------------------------------------------------------------------------
Donald Wohl 100,000 2.8% $0.875 12/31/02 111,675 140,920
- ----------------------------------------------------------------------------------------------------------------------------
Benjamin Tabatchnick 50,000 1.4% $0.875 02/17/02 55,837 70,460
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following chart sets forth certain information with respect to
options/warrants outstanding at December 31, 1997 to the named individuals:
38
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SARs at
Shares Options/SARs at FY- FY-End
Acquired on Value End Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Beychok -0- $ -0- 1,088,031/300,000 $ -0-/$ -0-
- --------------------------------------------------------------------------------------------------------
Jack B. Spencer -0- $ -0- 109,890/190,110 $ -0-/$ -0-
- --------------------------------------------------------------------------------------------------------
John Coppolino -0- $ -0- 421,500/150,000 $ -0-/$ -0-
- --------------------------------------------------------------------------------------------------------
Donald Wohl -0- $ -0- 250,000/0 $ -0-/$ -0-
- --------------------------------------------------------------------------------------------------------
Benjamin Tabatchnick -0- $ -0- 150,000/0 $ -0-/$ -0-
- --------------------------------------------------------------------------------------------------------
</TABLE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the ownership of the common stock by each
director and by entities or persons known to the Company to own beneficially in
excess of 5% of such stock and by all officers and directors as a group, as of
September 30, 1998. Except as otherwise indicated, all stockholders have sole
voting and investment power with respect to the shares listed as beneficially
owned by them, subject to the rights of spouses under applicable community
property laws.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OF
OF BENEFICIAL OWNER OF COMMON STOCK BENEFICIAL
IDENTITY OF GROUP BENEFICIALLY OWNED OWNERSHIP
- ------------------- ------------------ -------------
<S> <C> <C>
Mark Beychok (1) 1,323,838 (2) 16.4%
Paul G. Cowen (1) 50,000 (4) .6%
Benjamin Tabatchnick (1) 150,000 (4) 1.9%
John Coppolino (1) 492,333 (5) 6.1%
Sovereign Partners, LP 796,242 9.9%
90 Grove Street, Suite 01
Ridgefield, Connecticut 06877
Dominion Capital Fund, Ltd. 796,242 9.9%
Bahamas Financial Center, 3rd Floor
Shirley & Charlotte Streets
Nassau, Bahamas
ALL DIRECTORS AND OFFICERS AS A GROUP.
(4 persons) (2)(3)(4)(5) and (6) 2,016,171 25%
</TABLE>
(1) The address of these persons is 1800 Avenue of the Stars, Suite 480, Los
Angeles, California 90067.
(2) Includes (i) 62,500 shares underlying a currently exercisable option with
an exercise price of $0.91 per share, which expires on December 16, 2000; (ii)
15,000 shares underlying a currently exercisable option with an exercise price
of $0.91 per share which expires on September 29, 1999; (iii) 100,000 shares
underlying a currently exercisable option with an exercise price of $0.91 per
share which expires on November 15, 1999; (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) 403,125 shares underlying
the currently exercisable portion of a stock option, expiring December 16, 2000,
which has an exercise price of $0.91 per share; (vi) 100,000 shares underlying a
currently exercisable option with an exercise price of $0.91 which expires on
June 16, 2002; (vii) 100,000 shares underlying a currently exercisable option
with an exercise price of $.875 which expires on December 31, 2002; and (viii)
225,000 shares underlying a currently exercisable option with an exercise price
of $0.87 which expires September 1, 2002 and does not
39
<PAGE>
include 225,000 shares underlying options which are not currently exercisable
with an exercise price of $0.87 expiring September 1, 2002.
(3) Each of Messrs. Tabatchnick and Cowen holds a currently exercisable option
for the purchase of 50,000 shares at $0.875 granted in 1998. Mr. Tabatchnick
holds a currently exercisable option for an additional 50,000 shares at $0.875
granted in 1997, and has entered into a consulting agreement which provides for
the issuance of 50,000 shares, subject to forfeiture if certain performance
standards relating to sales into certain markets are not met. Mr. Cowen was
granted an option in 1998 for the purchase of 150,000 shares at $1.03 which are
not currently exercisable.
(4) Includes (i) 168,750 shares underlying a currently exercisable option with
an exercise price of $0.91 per share, which expires on December 16, 2000; (ii)
70,000 shares underlying a currently exercisable option with an exercise price
of $0.91 which expires on June 16, 2002; (iii) 225,000 shares underlying a
currently exercisable option with an exercise price of $0.87 which expires on
September 1, 2002; and does not include (iv) 75,000 shares with an exercise
price of $0.87 which are not currently exercisable expiring September 1, 2002.
(5) Issuable upon partial conversion of a debenture in the principal amount of
$548,352 held by Dominion Capital Fund, Ltd. The debenture provides that the
holder may not convert such amount of debenture as would result in the holder
owning more than 9.9% of the Company's outstanding Common Stock. There are
several exceptions to this limitation which may be presently applicable and
would allow the conversion of the entire principal amount of the debenture.
Dominion Capital Fund, Ltd. also holds 500 shares of the Company's 1997 Series A
Preferred Stock. The designation for the 1997 Series A Preferred Stock provides
that the holder may not convert such amount of preferred stock as would result
in the holder owning more than 9.9% of the Company's outstanding Common Stock.
There are several exceptions to this limitation which may be presently
applicable and would allow the conversion of the entire principal amount of all
of the preferred shares owned by Dominion Capital Fund, Ltd. If Dominion Capital
Fund, Ltd. were to convert all of its $548,352 principal amount of debentures
and its 500 shares of 1997 Series A Preferred Stock into the Company's Common
Stock, based on the closing price for the Common Stock on November 5, 1998 of
$.115, it would utilize a conversion price of $.08625 and would be entitled to
receive approximately 12,548,000 shares of Common Stock. If such event occurred,
Dominion Capital Fund, Ltd. would own approximately 61% of the Company's issued
and outstanding Common Stock. Dominion Capital, Ltd. has not filed any Schedule
13D or any other reports regarding its ownership with the Securities and
Exchange Commission. For a description of the terms of the debenture and the
1997 Series A Convertible Preferred Stock, see "Description of Securities".
(6) Issuable upon partial conversion of 1,126 shares of 1997 Series A
Convertible Preferred Stock held by Sovereign Partners, L.P. The designation for
the 1997 Series A Preferred Stock provides that the holder may not convert such
amount of preferred stock as would result in the holder owning more than 9.9% of
the Company's outstanding Common Stock. There are several exceptions to this
limitation which may be presently applicable and would allow the conversion of
all of the preferred shares owned by Sovereign Partners, L.P. If Sovereign
Partners, L.P. were to convert all of its 1,126 shares of 1997 Series A
Preferred Stock into the Company's Common Stock, based on the closing price for
the Common Stock on November 5, 1998 of $.115, it would utilize a conversion
price of $.08625 and would be entitled to receive approximately 13,055,000
shares of Common Stock. If such event occurred, Sovereign Partners, L.P. would
own approximately 62% of the Company's issued and outstanding Common Stock.
Sovereign Partners, L.P. has not filed any Schedule 13D or any other reports
regarding its ownership with the Securities and Exchange Commission. For a
description of the terms of the 1997 Series A Convertible Preferred Stock, see
"Description of Securities".
The following table sets forth the ownership of the Series B Preferred
Stock and 1997 Series A Preferred Stock by each director and by each entity or
person known to the Company to own beneficially in excess of 5% of such class of
stock and by all officers and directors as a group. To the Company's knowledge,
all stockholders have sole voting and investment power with respect to the
shares listed as owned by them, subject to applicable community property laws.
40
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Title of Class Name and Address of Number of Percentage
Beneficial Owner Shares Owned Of Class
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Thomas Von Ledersteger
Series B Preferred Stock 23 Chemin des Meandres 500 50%
CH-1287 Laconnex/GE, Switzerland
- -------------------------------------------------------------------------------------------------------------
Pictet et CIE
Series B Preferred Stock 29 Boulevard Georges Favon 500 50%
CH-1211 Geneva, Switzerland
- -------------------------------------------------------------------------------------------------------------
All officers and directors as a group
Series B Preferred Stock (6 persons) 0 0%
- -------------------------------------------------------------------------------------------------------------
1997 Series A Sovereign Partners, L.P. *
Preferred Stock 90 Grove Street, Suite 01 1,126 69.3%
Ridgefield, CT 06877
- -------------------------------------------------------------------------------------------------------------
1997 Series A Dominion Capital Fund, Ltd. *
Preferred Stock Bahamas Financial Center, 3/rd/ Floor 500 30.7%
Shirley & Charlotte Streets
Nassau, Bahamas
- -------------------------------------------------------------------------------------------------------------
1997 Series A All officers and directors as a group
Preferred Stock (6 persons) 0 0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* The equity interests in each of these funds are widely held by a large
group of accredited investors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has employment agreements with Mark Beychok, and John
Coppolino, and had employment agreements, consulting agreements and settlement
agreements with certain of its former officers. See "Management -Executive
Compensation."
In April, 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald Wohl,
a Director of the Company at the time, is the general partner, for a loan in the
amount of $300,000 (the "Loan"), to fund the payment of legal fees in connection
with the Company's arbitration against The Keebler Company. See Note 16:
Litigation Recovery, Net of Costs. The loan was evidenced by a note which bears
interest at the lesser of 15% per annum or the highest rate allowed by law with
recourse solely to the net proceeds of the arbitration, if any. If the Company
did not realize any net proceeds from the arbitration, the Loan would be
canceled and the Lender would receive a warrant for the purchase of 400,000
shares of the Company's Common Stock at $.01 per share. If the Loan was repaid
through the application of the net proceeds of the arbitration, the Lender would
receive warrants for the purchase of 200,000 shares of Common Stock at $.01 per
share and a percentage of net proceeds of the arbitration equal to 15% of the
first $1,000,000 of net proceeds, but not less than $100,000; 20% of the net
proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of net
proceeds above $3,000,000. The Loan was approved by the disinterested members of
the Company's Board of Directors, and was on terms no less favorable to the
Company than were available from non-affiliated lenders. A second proposal, from
another source, contained terms which would have required the Company to pay
$2,050,000 in fees based on the actual award, repay the $300,000 advance, and be
granted a warrant for 1,000,000 shares of the Company's common stock at an
exercise price of $1.00. The loan amount of $300,000 was repaid upon settlement
of the litigation in June 1997 and receipt of funds in July 1997, plus
$1,236,883 in conformity with the agreed upon formula, plus a warrant for
200,000 shares of the Company's common stock at a $0.01 per share. See Note 16
to the Consolidated Financial Statements for the recording of the entire
transaction.
41
<PAGE>
The Company entered into a one year consulting agreement with Benjamin
Tabatchnick, a Director of the Company, on April 1, 1997. Mr. Tabatchnick, in
exchange for 50,000 shares of the Company's common stock plus 2% of the new
sales endeavors in the school and food service business areas, agreed to assist
the Company in developing programs, formulations, marketing and sales in the
above mentioned business areas.
The Company granted options in 1997 for 50,000 shares to Paul S. Hermis who
was then a Director of the Company. Mr. Hermis resigned as a Director on
February 21, 1998.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company currently consists of (i)
30,000,000 shares of Common Stock, par value $.0001 per share, of which
7,500,350 were issued and outstanding on June 23, 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) 1,701 shares of 1997 Series A Preferred Stock were
issued and outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders generally, including the election of directors.
Holders of Common Stock do not have cumulative voting rights, which means that
the holders of more than 50% of the shares voting for the election of directors
can elect all of the directors if they chose to do so, and in such event, the
holders of the remaining shares will not be able to elect any persons to the
Board of Directors. The holders of Common Stock have no preemptive or other
subscription or conversion rights with respect to any stock issued by the
Company, The Common Stock is not subject to redemption, and the holders thereof
are not liable for further calls or assessments. Holders of Common Stock are
entitled to receive such dividends as may be declared by the Board of Directors
out of funds legally available therefore and to share pro-rata in any
distributions to the holders of Common Stock.
PREFERRED STOCK
The Preferred Stock is issuable with such rights, preferences, privileges
and such number of shares constituting each series to be fixed by the Board of
Directors without further action by the holders of Common Stock or Preferred
Stock. The Board of Directors could, without stockholder approval, issue
Preferred Stock with voting and conversion rights, which could dilute the voting
power of the holders of the Common Stock. The issuance of shares of Preferred
Stock by the Board of Directors could bee utilized, under certain circumstances,
as a method of preventing a takeover of the Company. As of the date of this
Memorandum, the Board of Directors as not authorized any series of Preferred
Stock except as set forth below. Except for the shares of Preferred Stock to be
issued in this offering, there are no agreements or understanding for the
issuance of any shares of Preferred Stock.
SERIES B 10% CUMULATIVE CONVERTIBLE PREFERRED STOCK ("SERIES B PREFERRED")
The Company is authorized to issue 110,000 shares of Series B Preferred,
1,000 of which are issued and outstanding. The holders of each share of Series
B Preferred are entitled to receive annual cash dividends of $5.00 per share on
the first day of December in each year and to receive a preference on
liquidation of the Company of $50.00 per share plus accrued dividends. The
aggregate dividend preference of the 1,000 shares if Series B Preferred is
$5,000 per annum and the liquidation preference thereof is $50,000 plus accrued
dividends. Each share of the Series B Preferred is convertible into Common
Stock on
42
<PAGE>
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")
As of December 31, 1997, the Company was authorized to issue 750 shares of
1997 Series A Preferred, all of which were 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 were entitled to 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
In March 1998, the Company amended the 1997 Series A Preferred to issue
1,701 shares of 1997 Series A Preferred, all of which are issued and
outstanding. The holders of 1997 Series A Preferred are entitled to annual
dividends at the rate of $60.00 per share 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 has a liquidation preference equal to
$1,000 plus accrued dividends and is convertible into Common Stock on the
following basis: (i) in the event that the market price of the Common Stock is
$.6875 or less, then at 78.5% of the market price of the Common Stock; and (ii)
if the market price of the Common Stock at the time of the conversion is in
excess of $.6875, then at the market price of the Common Stock at the time of
conversion
43
<PAGE>
with the holder also receiving warrants ("Conversion Warrants") for each share
converted so that the holder's potential profit on the sale of the Common Stock
received on the conversion plus the Common Stock receivable on exercise of the
Conversion Warrants is 27.5% of the liquidation preference of the 1997 Series A
Preferred at the time of conversion. For example: (i) if the market price of
the Common Stock were $1.00 at the time of conversion and there were no accrued
unpaid dividends at the date of conversion, then each share of 1997 Series A
Preferred would convert into 1,000 shares of Common Stock and 880 Conversion
Warrants; and (ii) if the market price of the Common Stock were $2.00 at the
time of conversion and there were no accrued unpaid dividends at the date of
conversion, then each share of 1997 Series A Preferred would convert into 500
shares of Common Stock and 210 Conversion Warrants. The holders of the 1997
Series A Preferred Stock have no voting rights except as is required under
Delaware Law. The resale of the Preferred Stock have no voting rights except as
is required under Delaware Law. The resale of the Common Stock issuable upon
conversion of the 1997 Series A Preferred Stock and the exercise of the
Conversion Warrants is included in the Registration Statement of which this
prospectus forms a part.
In October 1998, the Company, at the request of the holders of the 1997
Series A Preferred Stock, further amended the Certificate of Designation for the
1997 Series A Preferred to provide that a holder may not convert where such
conversion would result in the holder and its affiliates holding more than 9.9%
of the Company's Common Stock. However, the Amended Certificate of Designation
for the 1997 Series A Preferred Stock provides that this limitation is not
applicable in connection with any conversion of the 1997 Preferred Stock, or in
the event that the Company is in default of any agreement with the holder and
the holder has declared such default.
In September 1998, 75 shares of 1997 Series A Preferred Stock were
converted into 237,500 shares of Common Stock and 1,625 shares of 1997 Series A
Preferred Stock remain outstanding.
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.
CONVERTIBLE DEBENTURE
On August 24, 1998, the Company issued a $548,352 principal amount
debenture (the "Debenture") to an investor. The Debenture bears interest at the
rate or 6% per annum which payments, at the Company's option, may be made in the
Company's common stock payable at the time of conversion. The debentures are
convertible, commencing 120 calendar days after their issue; (to wit, December
22, 1998); at a price equal to 75% of the 5 day average closing bid price of the
Company's Common Stock as reported in the Electronic Bulletin Board. The
Debentures provide that, upon any conversion, the certificates representing the
Common Stock issuable upon conversion shall be delivered to the holder within
six business days or the holder shall be entitled for 1% of the face amount of
the Debenture converted, in cash, for each business day that the delivery of the
Common Stock is late plus additional damages. The Holder is also entitled to
additional penalties if the Company does not have sufficient authorized shares
available for any conversion at the rate of 24% per annum, accruing daily. Based
upon the closing prices of the Company's Common Stock during the week of
November 2, 1998, the $548,352 principal amount of Debenture would convert into
approximately 6,360,000 of the Common Stock and, if the entire Debenture were
converted, the Holder would hold approximately 41% of the Company's outstanding
shares of Common Stock. The Debentures provide that the Holder may not convert
where such conversion would result in the Holder and its affiliates holding more
than 9.9% of the Company's Common Stock. HOwever, this limitation provision is
not applicable in connection with any conversion of the Debenture or in the
event the Company is in default of any agreement it has with the Holder and the
Holder has declared such default. Notwithstanding their being a more than 5%
beneficial holder of the Company, the sole holder of the Debenture has failed to
file a Form 13D with the Company and the Securities and Exchange Commission or
any other report with respect to their beneficial ownership of the Company's
Common Stock. See "Principal Security Holders."
LEGAL OPINION
The validity of the Common Stock offered hereby is being passed upon for
the Company by Frank J. Hariton, Esq., New York, New York. Frank J. Hariton,
Esq. owns: (i) 7,977 shares of Common Stock; (ii) 800 of the Company's
Redeemable Common Stock Purchase Warrants; and (iii) 3,333 options with an
exercise price of $6.00.
EXPERTS
The consolidated financial statements of Vitafort International Corporation
for the years ended December 31, 1997 and 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 periods set forth in
their report, which contains an explanatory paragraph regarding the Company's
ability to continue as a going concern, and are included herein in reliance upon
such report given upon the authority of said firm as experts in auditing and
accounting.
CHANGE OF ACCOUNTANTS
On February 5, 1997, the Registrant dismissed the firm of KPMG Peat
Marwick, LLP ("KPMG") as the Registrant's independent auditor, effective
immediately. The Registrant then selected BDO Seidman, LLP ("BDO") to act as
the Company's independent auditor for the fiscal year ending December 31, 1996.
The foregoing actions of the Registrant were ratified by its Board of Directors.
44
<PAGE>
The report of KPMG on the Company's financial statements for the year ended
December 31, 1995, did not contain an adverse opinion or a disclaimer of
opinion, nor was it qualified or modified as to uncertainty, audit scope or
accounting principles.
During the two years ended December 31, 1995, and during the subsequent
period from January 1, 1996 through February 5, 1997, there were no
"Disagreements" (as such term is defined under the Federal Securities laws) with
KPMG on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which Disagreements, if not resolved
to the satisfaction of KPMG, would have caused that firm to make a reference to
the subject matter of the Disagreements in connection with their report.
During the two years ended December 31, 1995, and during the period from
January 1, 1996 through February 5, 1997, the Registrant was not (i) advised by
KPMG that the Registrant did not have internal controls necessary to develop
reliable financial statements; (ii) advised by KPMG that it was no longer able
to rely on management's representations or that it was unwilling to be
associated with financial statements prepared by management; (iii) advised by
KPMG of a need to expand the scope of its audit; or (iv) advised by KPMG that
information had come to its attention that materially impacted the fairness or
the reliability of any audit report or financial statement issued or to be
issued, or caused them to be unwilling to rely on management's representations
or be associated with the Registrant's financial statements (collectively
"Reportable Events").
During the year ended December 31, 1995, and the period from January 1,
1996 to January 31, 1997, neither the Registrant, nor anyone on its behalf,
consulted BDO on (i) the application of accounting principals to a specified
transaction, either completed or proposed; the type of audit opinion that might
be rendered on the Registrant's financial statements; or (iii) any matter that
was either the subject of a Disagreement or a Reportable Event.
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.
45
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations -
Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows -
Years Ended December 31, 1997 and 1996 F-7
Summary of Accounting Policies F-9
Notes to Consolidated Financial Statements F-13
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Vitafort
International Corporation and Subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of operations, shareholders'
equity (deficit) and cash flows for each of the two years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vitafort
International Corporation and Subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and cash flows for each of
the two years then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from
operations, including a loss from operations of $4,151,305 for the year
ended December 31, 1997. The Company has also previously had working
capital shortages. These and other factors raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 2. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Los Angeles, California
March 30, 1998 BDO SEIDMAN, LLP
F-2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS (Note 6)
Current assets:
Cash and cash equivalents $2,199,036 $ 188,867
Accounts receivable - trade, net of allowance for
doubtful accounts of $25,743 and $79,994 as of
December 31, 1997 and 1996, respectively 412,289 230,789
Notes receivable 10,000 56,000
Other receivables - 4,464
Inventory (Note 3) 247,611 361,196
Prepaid expenses and other current assets (Note 4) 269,268 271,731
---------- ----------
Total current assets 3,138,204 1,113,047
---------- ----------
Equipment (Note 7):
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,160 105,160
Computer equipment 193,571 173,294
---------- ----------
589,643 569,366
Less accumulated depreciation 347,493 231,592
---------- ----------
Net fixed assets 242,150 337,774
---------- ----------
Other Assets:
Advances to Global International Sourcing (Note 15) 193,818 -
Intangible assets, net of accumulated amortization of
$73,163 and $95,561 as of December 31, 1997 and 1996, 338,091 385,693
respectively ---------- ----------
Total Other Assets 531,909 385,693
---------- ----------
$3,912,263 $1,836,514
========== ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Current liabilities:
Note payable - bank (Note 6) $ 60,757 $ 440,022
Notes payable - other (Note 6) 283,898 -
Accounts payable - trade 909,315 1,510,982
Accrued expenses (Note 5) 342,437 341,480
Current maturities of long-term debt (Note 7) 37,859 37,859
------------ ------------
Total current liabilities 1,634,266 2,330,343
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity (deficit) (Notes 9, 10 and 15):
Series A, 6% Cumulative Convertible Preferred Stock,
$0.01 par value; 750 shares authorized;
750 shares issued and outstanding at December 31,
1997 and none at December 31, 1996; aggregate
liquidation preference of $750,000 at December 31, 1997 8 -
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued
and outstanding 1,000 ; aggregate liquidation
preference of $50,000 10 10
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50 shares;
aggregate liquidation preference of $50,000 1 1
Common stock, $.0001 par value, authorized 30,000,000 shares;
issued and outstanding 6,683,853 and 4,908,664 8,863 8,686
Additional paid-in capital 23,152,312 20,547,953
Accumulated deficit (20,883,197) (21,050,479)
------------ ------------
Total stockholders' equity (deficit) 2,277,997 (493,829)
------------ ------------
$ 3,912,263 $ 1,836,514
============ ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Net revenues $ 1,995,317 $ 5,285,149
Cost of sales 1,896,410 6,870,120
----------- -----------
Gross profit (loss) 98,907 (1,584,971)
----------- -----------
Operating expenses:
Research and development 337,806 737,044
Sales and marketing 1,239,460 3,029,480
General and administrative 2,672,946 2,721,321
----------- -----------
Total operating expenses 4,250,212 6,487,845
----------- -----------
Loss from operations (4,151,305) (8,072,816)
Interest income 78,070 49,319
Interest expense (214,690) (50,509)
Other income (expense) 15,210 (45,650)
Litigation recovery , net of costs (Note 16) 4,748,946 -
----------- -----------
Income (loss) before income taxes 476,231 (8,119,656)
State income taxes (Note 8) 3,200 3,159
----------- -----------
Net Income (loss) 473,031 (8,122,815)
Deemed dividends to preferred shareholders 305,749 -
----------- -----------
Net income (loss) allocable to common shareholders $ 167,282 $(8,122,815)
=========== ===========
Basic net income (loss) per common share $ .03 $ (1.58)
=========== ===========
Diluted net income (loss) per share $ .03 $ (1.58)
=========== ===========
Basic weighted average shares of common stock 5,831,404 5,133,665
=========== ===========
Diluted weighted average shares of common stock 6,343,397 5,133,665
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
SERIES A SERIES B
CUMULATIVE CUMULATIVE SERIES C
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, January 1, 1996 - $0 1,500 $15 50 $1 $3,418,196
Common stock issued from subscriptions - - - - - (3,418,196)
Common stock issued in private placement,
net of commissions and offering costs - - - - - -
Common stock issued in private placement - - - - - -
Conversion of preferred stock to
common stock - - (500) (5) - -
Common stock-consulting - - - - - -
Exercise of stock options - - - - - -
Net loss - - - - - -
--- -- ----- --- -- -- ----------
Balance, December 31, 1996 - $0 1,000 $10 50 $1 -
Common stock issued in private placement,
net of commissions
Common stock issued as settlement of
contract dispute
Series A Preferred issued in connection
with private placement, net of 750 8
commissions and expenses
Payment of accounts payable obligations
with stock
Exercise of warrants
Exercise of stock options
Preferred stock dividends
Net income
--- -- ----- --- -- -- ----------
Balance, December 31, 1997 750 $8 1,000 $10 50 $1 -
=== == ===== === == == ==========
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------------ ---------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1996 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
Common stock issued in private placement 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 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
Common stock issued as settlement of
contract dispute 70,000 7 78,743 78,750
Series A Preferred issued in connection
with private placement, net of 672,992 673,000
commissions and expenses
Payment of accounts payable obligations
with stock 662,589 66 638,297 638,363
Exercise of warrants 200,000 20 139,980 140,000
Exercise of stock options 342,600 34 318,648 318,682
Preferred stock dividends 305,749 (305,749) -
Net income 473,031 473,031
---------- ------ ----------- ------------ ----------
Balance, December 31, 1997 6,683,853 $8,863 $23,152,312 ($20,883,197) $2,277,997
========== ====== =========== ============ ==========
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
Increase (Decrease) in Cash and Cash Equivalents 1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net Income (Loss) $ 473,031 $(8,122,815)
Adjustments to reconcile net loss to net cash
and cash equivalents provided by (used in) operating activities:
Depreciation and amortization 163,503 119,459
Allowance for doubtful accounts (54,251) -
Warrants issued for services (Note 16) 138,000 -
Operating expenses paid with common stock - 1,377,644
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable - trade, net (127,249) (191,366)
Inventory 113,585 319,680
Other - (55,760)
Prepaid and other assets 2,463 93,386
Notes receivable 46,000 (36,222)
Other receivables 4,464 143,510
Increase (decrease) in:
Accounts payable and accrued expenses 1,031,347 979,022
Other current liabilities - (150,000)
----------- -----------
Cash and cash equivalents provided by (used in) operating activities 1,790,893 (5,523,462)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (20,277) (172,896)
Advances to Global International (193,818) -
----------- -----------
Cash and cash equivalents used in investing activities (214,095) (172,896)
----------- -----------
Cash flows from financing activities:
Proceeds from line of credit 838,426 599,715
Repayment of line of credit (1,217,691) ( 75,000)
Proceeds from notes payable 307,871 -
Repayment of notes payable (625,695) (171,053)
Proceeds from issuance of stock 1,123,000 3,499,841
Exercise of stock options and warrants 7,460 715,316
----------- -----------
Cash and cash equivalents provided by financing activities 433,371 4,568,819
----------- -----------
Increase (decrease) in cash and cash equivalents 2,010,169 (1,127,539)
Cash and cash equivalents at beginning of year 188,867 1,316,406
----------- -----------
Cash and cash equivalents at end of year $ 2,199,036 $ 188,867
=========== ===========
</TABLE>
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
---- ----
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 215,126 $ 50,509
Income taxes 3,200 2,854
Supplemental disclosure of non-cash operating, investing and
financing activities:
Issuance of common stock for:
Conversion of accounts payable to equity $1,030,335 $ -
Conversion of accrued interest - 59,694
Conversion of preferred stock to common stock - 14,999
Payment of consulting contract - (300,000)
Conversion of accounts payable to notes payable 601,723 -
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
F-8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements of Vitafort
International Corporation (the "Company") include the accounts of the Company
and its subsidiaries: Nutrifish Corporation (90.5% owned as of December 31,
1997 and 1996); Hollywood Partners, Inc. (formerly Vitafort Distributors, Inc.);
and Crystal Clear Farms. All subsidiaries were inactive in 1997. All material
intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATION AND PRESENTATION
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are investments with original maturities of three
months or less and short-term, highly liquid investments that are both readily
convertible to known amounts of cash and are so near their maturity that they
present insignificant risk of changes in value because of changes in interest
rates.
INVENTORY
Inventory consists of merchandise available for sale, packaging supplies
and raw materials, and are stated at the lower of cost (first-in, first-out) or
market.
EQUIPMENT
Equipment is comprised of manufacturing equipment, furniture, office
equipment and computer equipment and is recorded at cost. Depreciation is
computed on a straight-line basis over the estimated useful life not in excess
of five years.
PREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets, which include product introduction
expenses, are recorded at cost and amortized over the economic life thereof, but
not in excess of twelve months.
F-9
<PAGE>
ADVERTISING
General costs are expenses as incurred or prepaid until the advertisement
is published, at which time the related costs are expensed.
OTHER INTANGIBLE ASSETS
Intangible assets are composed of acquisition costs of Auburn Farms and
Natures Warehouse trademarks and debt issuance costs and are recorded at cost.
The acquisition costs associated with trademarks are being amortized on a
straight-line basis over twenty years. All other intangible assets are being
amortized on a straight-line basis over periods not exceeding five years.
These costs are reviewed by management periodically and written down to the
value of the future benefit expected to be derived.
REVENUE
Product sales and related costs are recognized when the Company's products
are shipped from the commercial warehouse used by the Company or the contract
manufacturer to the customer.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121") establishes guidelines regarding when impairment losses on
long-lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured. The Company periodically reviews such assets for possible impairment
and expected losses, if any, are recorded currently.
INCOME (LOSS) PER SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") issued by the FASB is effective for financial statements with
fiscal years and interim periods ending after December 15, 1997. SFAS 128
provides for the calculation of Basic and Diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity, such as
stock options, warrants or convertible debentures. The Company adopted SFAS 128
on December 15, 1997 and it had no effect on income (loss) per share.
F-10
<PAGE>
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is provided when management
cannot determine whether or not it is more likely that the net deferred tax
asset will be realized. The effect on deferred tax assets and liabilities of a
change in the rates is recognized in income in the period that includes the
enactment date.
STATEMENT OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers cash
and cash equivalents to include cash on hand and cash equivalents with original
maturities of three months or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's debt instruments is based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities.
STOCK COMPENSATION
As of January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"). SFAS 123 allows an entity to elect to continue to measure compensation
cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), but requires pro forma disclosures of net
earnings and earnings per share as if the fair-valued-based method of accounting
had been applied. In accordance with FASB 123, the Company elected to continue
to measure compensation cost under APB No. 25, and comply with the pro forma
disclosure requirements.
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE
Statement of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements with fiscal years ending after December 15,
1997. The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15, which has
been superceded by SFAS No. 128. The Company adopted SFAS No. 129 on December
15, 1997 and it did not have any effect on its financial position or results of
operations.
REPORTING COMPREHENSIVE INCOME
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," ("SFAS 130") issued by the FASB is effective for
financial statements with fiscal years ending after December 15, 1997. Earlier
application is permitted. SFAS 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general-
purpose financial statements. The Company does not expect adoption of SFAS 130
to have any effect on its financial position or results of operations.
F-11
<PAGE>
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years ending after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company does not expect
adoption of SFAS 131 to have any effect on its financial position or results of
operations; however, disclosures with respect to the aforementioned items may be
increased.
F-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, 1989 in the State of Delaware to succeed to the business of a
California corporation of the same name which was organized on February 7, 1986.
The Company is presently engaged in formulating and marketing fat-free foods.
NOTE 2 - LIQUIDITY AND GOING CONCERN
For the past several years, the Company has suffered recurring losses from
operations, including $4,151,305 for the year ended December 31, 1997. Although
the Company has raised additional capital after year-end 1997 (see Note 15), it
has not generated sufficient revenue-producing activity to sustain its
operations. Accordingly, there is substantial doubt regarding the Company's
ability to continue as a going concern. The Company is attempting to raise
additional capital to meet future financial obligations, but may not be able to
do so. Should the Company not be able to raise additional capital, it may have
to severely curtail operations.
The Company has reduced its cost of sales by centralizing the warehousing
of its products in a single location and negotiated lower rates with existing
manufacturers or by selecting another competent less expensive producer. In
addition, the Company increased prices on the majority of its products effective
August 1 of this year and changed its terms of sale to F.O.B. the Company's
warehouse. The Company also eliminated the cash discount for prompt payment
since most customers were taking the discount beyond the terms. The Company has
also introduced reformulated products at the end of 1997 and plans to introduce
new products in 1998. These steps, coupled with improvements in subcontract
manufacturing quality control and quality assurance, monitoring improvements in
Company internal control and communications with respect to product returns and
deductions, should improve the Company's prospects to achieve profitability.
NOTE 3 - INVENTORY
Inventory is stated at the lower of cost (first in, first out) or market.
Market-based valuations are based upon estimates and assumptions, and are
generally limited to slow moving product offerings. Inventory consists of the
following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Finished goods $ 30,188 $168,709
Packaging and raw material 217,423 192,487
-------- --------
$247,611 $361,196
======== ========
</TABLE>
F-13
<PAGE>
NOTE 4 - PREPAID AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets, as of December 31, 1997 and
1996, are detailed as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Deposits $ 1,100 $ 10,000
Product introduction costs 10,711 177,865
Insurance 36,377 14,897
Consulting 108,080 -
Other prepaids 113,000 68,969
-------- --------
Total prepaid and other current assets $269,268 $271,731
======== ========
</TABLE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Accrued compensation $156,764 $ 90,753
Accrued interest payable - 436
Accrued legal fees 40,112 120,811
Accrued consulting fees 4,919 13,500
Other accrued expenses 140,642 115,980
-------- --------
Total accrued expenses $342,437 $341,480
======== ========
</TABLE>
NOTE 6 - NOTES PAYABLE
BANK
----
In August 1996, the Company entered into a revolving credit facility with a
financing institution that provides a credit line of up to $4,000,000 subject to
certain covenants. Advances made to the Company under the facility are based on
a certain percentage of eligible accounts receivable, as defined, and a certain
percentage of eligible inventory, as defined. The amount of inventory advances
under the facility cannot exceed $500,000. The initial term of the facility
ends August 1998, with automatic renewals thereafter for one year periods.
Advances under the facility bear an interest rate at the Bank of America NT
prime plus 3%, and are secured by a first priority lien on all of the Company's
assets. Minimum interest charges are currently $15,000 per month. The Company
paid $40,000 to the institution upon execution of the agreement and $40,000 to a
facilitator in connection with the placement of the loan. The Company was in
violation of certain covenants with respect to working capital and tangible net
worth requirements during the first half of 1997. Upon receipt of the Keebler
award, the Company was no longer in violation of any of the covenants. No
assurance can be given that the Company will not be in violation of such
covenants in the future.
OTHER
-----
Notes payable - other, represents the current balance of the original
conversion of $601,723 of trade accounts payable. These notes are unsecured and
payable in various monthly installments with a maximum
F-14
<PAGE>
repayment of approximately $64,000 in January 1998 (including interest at
various rates). The notes have various maturity dates through December 1998.
NOTE 7 - LONG-TERM DEBT
The Company's long-term debt, which approximates fair value, as of December
31, 1997 and 1996 consists of a 14% note payable in the amount of $37,859, due
in monthly installments of $4,033, secured by certain of the Company's
equipment. The entire amount is classified as a current liability. Under the
Debt Subordination Agreement between Coast Business Credit and the long-term
debt holders, payments on this note ceased until the loan with Coast is fully
paid.
NOTE 8 - INCOME TAXES
As the Company has incurred significant operating losses since inception,
its current tax provision has been limited to minimum California tax payments.
The difference between the Federal income tax rate and the effective income
tax rate on net income (loss) from continuing operations is as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C> <C> <C>
Estimated Federal income taxes 34.0% $ 162,000 (34.0)% $(2,760,000)
State income taxes, net of Federal
income tax benefit 6.0 28,000 (6.0) (498,000)
Change in valuation allowance (44.0) (206,800) 39.1 3,172,000
Other, net 4.0 20,000 .9 89,159
----- --------- ----- -----------
-% $ 3,200 -% $ 3,159
===== ========= ==== ===========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryforwards $ 7,230,000 $ 7,259,000
Tax credit carryforwards 70,000 70,000
Allowance for bad debts 70,000 32,000
Inventory reserves 200,000 473,000
Other 55,000 26,000
----------- -----------
Total gross deferred income tax assets 7,625,000 7,860,000
Deferred income tax liabilities (20,000) (24,000)
----------- -----------
7,605,000 7,836,000
Less valuation allowance (7,605,000) (7,836,000)
----------- -----------
Net deferred income taxes $ - $ -
=========== ===========
</TABLE>
Net deferred tax assets of approximately $7,605,000 resulting from net
operating losses, tax credits and other temporary differences have been offset
by a valuation allowance since management does not believe that it is more
likely than not that such assets will be realized.
F-15
<PAGE>
As of December 31, 1997, the Company had unused Federal and California net
operating loss carryforwards of approximately $19,600,000 and $6,400,000,
respectively, available to offset against future Federal taxable income and
future California taxable income. In addition, the Company had unused research
and experimental credits of $44,000 and $26,000 for Federal and California state
purposes. The unused net operating loss and credit carryforwards expire in
various amounts through the year 2012. In contrast to Federal net operating
losses, only 50% of the California net operating losses incurred subsequent to
December 31, 1986 may be carried forward. The California net operating losses
will expire in various amounts through the year 2002.
Due to restrictions imposed by the Internal Revenue Code regarding
substantial changes in ownership of companies with loss carryforwards, the
utilization of the above-mentioned net operating losses may be limited as a
result of changes in stock ownership. The annual utilization of these losses is
limited to an amount equal to the estimated fair value (for income tax purposes)
of the Company at the point of stock ownership change, multiplied by the long-
term tax-exempt rate then in effect. The annual limitation has not been
quantified at this time.
NOTE 9 - STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company entered into a subscription agreement in the amount of $500,000
in April 1997 with an unrelated investor for 500 shares of 1997 Series A
Preferred Stock. The preferred stock has a cumulative dividend rate of 6% with
no voting rights. The conversion price is the lower of $1.25 per share or a 30%
discount to the market price at the time of conversion. The preferred stock is
convertible at any time. For accounting purposes, the original issue discount
of $214,286 is being treated as a deemed dividend. The facilitator received a
10% fee from the proceeds, as well as warrants to purchase 35,000 shares of
common stock at an exercise price of $1.00 per share. Cumulative unpaid
dividends amounted to $22,500 at December 31, 1997.
The Company entered into a subscription agreement in the amount of $250,000
in May 1997 with another investor for 250 shares of 1997 Series A Preferred
Stock. The series has a cumulative dividend rate of 6%, no voting rights, and
is convertible at any time at the lower of $1.25 or a 30% discount to the market
price at the time of conversion. For accounting purposes, the original issue
discount of $91,463 is being treated as a deemed dividend. The facilitator
received a 10% fee from the proceeds and a warrant to purchase 17,500 shares of
common stock at an exercise price of $1.00 per share. Cumulative unpaid
dividends amounted to $10,000 at December 31, 1997.
Each share of Series B 10% Cumulative Convertible Preferred stock is
convertible into 1.667 shares of common stock, and cumulative convertible
dividends of 10% per annum are payable annually commencing October 1992. The
Series B 10% Cumulative Preferred stock has a liquidation preference of $50 per
share plus all accrued and unpaid dividends. It is subject to optional
redemption by the Company at any time at $50 per share plus accrued and unpaid
dividends. Cumulative unpaid dividends amounted to $25,000 and $20,000 at
December 31, 1997 and 1996, respectively.
During 1996, the Company offered the holders of Series B Cumulated
Convertible Preferred Stock more favorable exchange rates to encourage
conversion of the shares to common stock. As a result, in August 1996, the
holder of 500 shares of Series B Cumulative Convertible Preferred Stock
exchanged his shares and accumulated accrued and unpaid dividends for 2,500
shares of common stock. The value of the inducement to the Series B holders was
not material.
F-16
<PAGE>
Each share of Series C Convertible Preferred Stock is convertible into 100
shares of common stock and 100 warrants. Series C Convertible Preferred Stock
does not carry any dividend rights. The warrants expired in June 1994.
Additionally, the Series C Convertible Stock has a dilutive conversion factor.
The Series C Convertible Preferred Stock has a liquidation preference of $1,000
per share after Series B Cumulative Convertible Preferred Stock, and to holders
of common stock.
The shares of Series A, Series B and Series C Preferred stock are not
currently registered under the Securities Exchange Act of 1934.
COMMON STOCK
The Company entered into a subscription agreement in February 1997 with an
investor who purchased 500,000 shares of common stock at $1.00 per share. At
funding, a 10% fee was paid to a facilitator and warrants were given to that
same facilitator to purchase 125,000 shares of common stock at a price of $1.375
per share which was later reduced to $1.00.
The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
The Company issued 126,000 shares of common stock in March 1997 and 350,589
shares of common stock in August 1997 under an S-8 filing as payment for
services rendered by various consultants and employees. The shares of common
stock were valued at the amount received by the consultants and employees upon
sale of these shares. As a result, the Company reduced the amount owed to these
consultants and employees by $461,782.
In August 1997, the Company issued 100,000 shares of common stock at $.93
per share to a professional firm for previous services rendered.
The Company issued 61,000 shares of common stock at $.96 per share in
September 1997 under an S-8 filing and 25,000 shares of restricted common stock
at $1.00 per share in November 1997 as payment for $83,581 of services rendered
by various employees and consultants.
The Company issued 20,000 shares at a value of $1.125 per share and 10,000
shares at a value of $1.06 per share upon the exercise of options granted to a
former employee as compensation for consulting services and past unpaid accrued
vacation.
The Company issued 176,600 shares at $.875 per share and 6,000 shares at
$.91 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.
During 1997, a consultant exercised options for 60,000 shares of common
stock at $.93 per share and 40,000 shares of common stock at $1.00 per share as
payment for services rendered. No cash was received by the Company.
In July 1997, another consultant exercised options for 30,000 shares of
common stock at $1.00 per share as payment for services rendered. No cash was
received by the Company.
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.
F-17
<PAGE>
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.
During 1996 the Company issued 579,957 shares of common stock valued at
$1,377,644 to attorneys, consultants and employees as payment for services.
During September 1995, pursuant to a contractual agreement, the Company
issued 100,000 shares of its common stock to a public relations/financial
consulting firm and authorized an additional 100,000 shares to be issued to the
consulting firm upon performance under the contract for $600,000 of prepaid
consulting fees. In 1996, this contract was terminated. As a result, the final
100,000 shares representing $300,000 were never issued and were eliminated from
subscribed stock.
On October 4, 1996, a 1 for 20 reverse stock split was effected. All share
amounts in this report have been retroactively adjusted to reflect this stock
split.
NOTE 10 - STOCK OPTIONS
The 1989 Stock Option Plan, as amended (the "Plan") reserved 50,000 shares
of common stock (as adjusted for the reverse split effected in 1996) to grant
either nonqualified or incentive stock options. All directors, officers, key
employees and consultants to the Company or its subsidiaries are eligible under
the terms of the Plan. Such options may not be granted at less than 100% of the
fair market value at the date of grant (110% for an owner of 10% or more of the
outstanding stock). Upon termination of service, the options, which an
individual was entitled to exercise at the date of termination may be exercised
at any time within six months of such termination. If an employee is terminated
with cause, the options are canceled upon termination. As of December 31, 1997,
no options are outstanding under this plan.
In 1995, the Company adopted the 1995 Stock Option Plan (the "1995 Plan")
pursuant to which 2,000,000 shares of Common Stock (as adjusted for the reverse
stock split effected in 1996) were reserved for issuance upon the exercise of
options. The 1995 Plan is similar to the 1989 Plan in many respects and in the
discussion below, each is referred to as a "Plan" and they are collectively
referred to as the "Plans".
The Company has also granted stock options outside the Plans to other
individuals, such as employees and consultants, in consideration for services
performed. The options were granted at fair market value and at various terms
and vesting periods. The following table on the next page summarizes all option
activity for the years ended December 31, 1997 and 1996:
F-18
<PAGE>
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price
------------ ------------ -------
<S> <C> <C> <C>
Outstanding as of 2,000,000 794,222 $2.73
January 1, 1996
Granted 22,500 79,750 1.11
Exercised ( 53,725) (120,490) 1.47
Canceled (423,775) (42,250) 3.78
--------- --------- -----
Outstanding as of
December 31, 1996 1,545,000 711,232 3.54
Granted 185,600 3,343,500 0.93
Exercised (182,600) (160,000) 1.24
Canceled (316,292) (8,750) 2.02
--------- --------- -----
Outstanding as of
December 31, 1997 1,231,708 3,885,982 $1.55
========= ========= =====
Exercisable as of
December 31, 1997 1,131,708 3,095,872 $1.69
========= ========= =====
</TABLE>
FASB Statement 123, "Accounting for Stock-Based Compensation," requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for the Company's stock option plans had been
determined in accordance with the fair value based method prescribed in FASB
Statement 123. The Company estimates the fair value of each stock option, using
the Black-Scholes method, at the weighted-average assumption used for grants in
fiscal 1997 and 1996 dividend yield of zero percent; expected volatility of 28
percent and 36 percent; risk-free interest rate of seven percent; and expected
lives of 5.1 and 5.0 years, respectively.
The weighted average fair value of options granted during 1997 and 1996 was
$.39 and $.38, respectively.
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and income (loss) per share for 1997 and 1996 would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Net Income (Loss) 1997 1996
--------------------------------------------------------
<S> <C> <C>
As reported $167,282 ($8,122,815)
Pro forma $(68,466) ($8,122,815)
Basic income (loss) per share
-----------------------------
As reported $ 0.03 ($ 1.58)
Pro forma $ (0.01) ($ 1.58)
Diluted income (loss) per share
-------------------------------
As reported $ 0.03 ($ 1.58)
Pro forma $ (0.01) ($ 1.58)
</TABLE>
F-19
<PAGE>
Due to the fact that the Company's stock option programs vest over many
years and additionally awards may be made each year, the above pro forma numbers
are not indicative of the financial impact had the disclosure provisions of FASB
123 been applicable to all years of previous grants. The numbers above do not
include the effect of options granted prior to 1995 that vested in 1996 and
1997.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options
Outstanding Options Exercisable
-------------------
Number Weighted-Average Number Weighted
Range of Outstanding Remaining Weighted-Average Exercisable Average
Exercisable Prices At 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- ------------------ ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
$ 0.80 - $ 2.80 4,197,010 1.8 $ 0.94 3,306,900 $ 0.95
- ---------------------------------------------------------------------------------------------------------
$ 3.00 362,333 1.1 3.00 362,333 3.00
- ---------------------------------------------------------------------------------------------------------
$ 3.30 - $ 7.50 520,597 0.6 4.67 520,597 4.67
- ---------------------------------------------------------------------------------------------------------
$10.00 - $20.00 37,750 9.93 12.52 37,750 12.52
- ---------------------------------------------------------------------------------------------------------
Totals 5,117,690 1.2 $ 1.55 4,227,580 $ 1.69
- -------------------------================================================================================
- ---------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 11 - COMMITMENTS
LEASE AGREEMENT
The Company was obligated under a lease agreement for its executive offices
through August 1997. From September 1997 forward, the Company is renting the
offices on a month-to-month basis at a rate of $6,250 per month.
Rent expense for the years ended December 31, 1997 and 1996 including
parking, included in selling, general and administrative expenses, was $98,538
and $75,743, respectively.
EMPLOYMENT AGREEMENTS
On December 1, 1993, the Company entered into a three-year employment
agreement with Mark Beychok which provided for an annual base salary of
$150,000, the grant of an option to purchase 100,000 shares of common stock at
$5.00 per share (as adjusted for the reverse stock split effected in 1996), and
$1,000,000 of life insurance, the proceeds of which will be split equally
between the employee's beneficiary and the Company. In December 1995, in
recognition of Mr. Beychok's deferral of his compensation during 1995 and his
assuming additional responsibilities within the Company, Mr. Beychok's
employment agreement was amended to grant him an additional 62,500 five-year
options with an exercise price of $3.00 (as adjusted for the reverse stock split
effected in 1996), a price equal to the offering price in the Company's then on-
going private placement. In November 1995, Mr. Beychok agreed to convert his
accrued salary to stock and options on the same terms as the Company's on-going
equity bridge financing. The Company's Board of Directors approved this
transaction in December 1995. In such connection, Mr. Beychok converted $45,821
of accrued salary into 19,092 shares; 9,547 options with an exercise price of
$4.50; and 9,547 options with an exercise price of $6.00. In September 1997,
Mr. Beychok entered into a
F-20
<PAGE>
new employment agreement ("Agreement") with the Company for three years. Under
the Agreement, Mr. Beychok receives an annual base salary of $150,000 and was
granted options for 450,000 shares of stock at an exercise price of $0.87 per
share. Such options vest 75,000 each on September 3, 1997, March 3, 1998,
September 3, 1998, March 3, 1999, September 3, 1999, and March 3, 2000. In May
1997 the price of all options other than those related to the private placement
were repriced to $0.91. In September 1997 Mr. Beychok was given a successful
litigation reward of $51,535 plus 100,000 shares of common stock at fair market
value of $1.00.
In August 1996, the Company entered into an employment agreement with John
Coppolino, which was dated January 1, 1996. Under his agreement, which is for a
one year term, with two one year renewal terms at the option of the Company, Mr.
Coppolino received an initial salary of $102,000; and, is entitled to annual
increases of 5-6% based on increases in the cost of living. Mr. Coppolino's
employment agreement provided for the grant of 225,000 options, expiring
December 31, 2000 for the purchase of common stock at $3.00 (as adjusted for the
reverse stock split effected in October 1996). Of these options: (i) 56,250
have vested (ii) 56,250 have lapsed and (iii) 56,250 will vest on each of
January 1, 1998 and January 1, 1999, subject to the Company meeting certain
performance criteria. In May 1997 the Board of Directors reduced the option
price of all unlapsed options to $0.91 and removed the vesting requirement. In
September 1997, Mr. Coppolino entered into a new employment agreement
("Agreement") with the Company for two years. Under the Agreement, Mr.
Coppolino receives an annual base salary of $120,000, and was granted options
for 300,000 shares of stock at an exercise price of $0.87 per share. Such
options vest 75,000 each on September 3, 1997, March 3, 1998, September 3, 1998,
and March 3, 1999. In September 1997, Mr. Coppolino was given a successful
litigation reward of $25,000, forgiveness of debt of $25,000, plus 25,000 shares
of common stock at $1.00, being the fair market value at the date of the award.
In June 1997, the Company entered into a two year employment agreement with
Jack B. Spencer under which Mr. Spencer will serve the Company as its Chief
Operating Officer and Chief Financial Officer. The agreement provides for
compensation to Mr. Spencer in the amount of $125,000 per annum and the grant of
an aggregate of 300,000 five year incentive stock options with an exercise price
of $ 0.91 per share (such being the market price of the common stock on the date
the agreement was executed). The options vest as to 109,890 shares on September
15, 1997 and 109,890 shares on June 16, 1998, and 80,220 shares on June 16,
1999. Mr. Spencer's employment agreement provides that if Mr. Spencer's
employment by the Company is terminated without cause after September 15, 1997,
then Mr. Spencer shall be entitled to six months severance pay. Mr. Spencer's
employment agreement also provides that upon the occurrence of certain events
constituting a change in control of the Company, as defined therein, followed by
certain changes in Mr. Spencer's duties, Mr. Spencer shall be entitled to
receive a severance equal to one and one half times his then current annual
salary plus certain other benefits designed, in part, to offset any special
taxes that might be imposed upon Mr. Spencer in connection with such payments.
AUBURN FARMS TRADEMARK ACQUISITION
The Company entered into a purchase agreement in 1996 whereby it acquired
the Auburn Farms trademark and other related trademarks. Deferred payments,
which will be accounted for as royalties under the agreement, amount to 3-1/2%
of gross sales of products sold using these trademarks during the 30 months
beginning May 1, 1996, with gradually reducing percentages over the next
successive three thirty-month periods. Deferred payments under the agreement
made in 1996 were $45,612 and in 1997 were $18,801 and were expensed as
royalties during the year.
NOTE 12 - MAJOR CUSTOMERS
The Company derived the following revenue from major customers, each of
which provided 10% or more of total revenues during the year ended December 31,
1997 and 1996:
F-21
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
K-Mart $ - $606,199
A-1 International, Inc. 320,235 -
-------- --------
Total $320,235 $606,199
======== ========
</TABLE>
NOTE 13 - LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, several companies in which he had invested; and, certain of those
company's officers. Included among the defendants was the Company and its then
Chief Executive Officer. The complaint seeks damages in an unspecified amount
in excess of $500,000 and punitive damages in an unspecified amount in excess of
$5,000,000. The Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration. The Plaintiff has appealed that
ruling. The Company denies any liability to the plaintiff and intends to
vigorously defend this action. The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff's losses might be as little as $15,000.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-packer
and against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company, Auburn Farms and Mark Beychok alleging
various tort and contract claims. The litigation is in the early stages and the
Company intends to vigorously pursue the same, with trial scheduled to begin
September 14, 1998.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other similar
claims arising out of the consulting relationship that previously existed
between the Company and Mr. Ellis. The Complaint seeks damages in an
unspecified amount. The court dismissed the complaint against Mark Beychok
without leave to amend. Mr. Ellis recently filed an amended complaint against
the Company. The Company is defending the action vigorously and trial was
scheduled for March 31, 1998.
The Company filed a counter-claim against Ellis charging violations of
Section 16(b) of the Securities Exchange Act of 1934 (short swing profits).
Ellis sold stock in violation of that section and, therefore, the profits,
estimated at $20,000, belong to the Company. In March 1998, the court ruled in
favor of the Company in this matter and awarded $21,260.
On June 2, 1998, the parties resolved both the Ellis issues. Under the
terms of the agreement, the settlement is treated as confidential and the public
response has been agreed to as follows: "The matter has been resolved."
F-22
<PAGE>
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company has entered into related party transactions during 1996 and
1997. See Notes 9, 10, 11 and 16 for further detailed information.
NOTE 15 - SUBSEQUENT EVENTS
In March 1998, the Company entered into a subscription agreement in the
amount of $500,000 for 500 shares of Series A 1997 Preferred Stock. The
preferred stock has a cumulative dividend rate of 6% with no voting rights. The
conversion price is at a discount of 21.5% if the market price of the stock is
below $0.6875. If the market price is above $0.6875, the exercise price is the
fair market value on the day of exercise; however, the holder receives warrants
in sufficient quantity to achieve a profit equal to the computed 21.5% discount.
The holder has agreed not to convert before August 10, 1998 in exchange for
these terms.
During 1998, the Company negotiated the acquisition of Global International
Sourcing, Inc., ("Global") a Nevada corporation, by acquiring the stock of the
corporation from its sole shareholder. Global is a company with international
contacts to provide natural and low fat food products for Vitafort to sell into
the United States market at a cost significantly below those found in the United
States for similar products. The Company advanced $193,818 to Global as of
December 31, 1997 to meet Global's operating expenses and fund inventory
purchases for future sales. The Company believes that the acquisition cost will
not be a material amount. Global was formed in October 1997 and its financial
position and results of operations are not material compared to the Company's
financial position at December 31, 1997 or its results of operations for the
year ended December 31, 1997.
NOTE 16 - LITIGATION RECOVERY, NET OF COSTS
On June 20, 1997, the Company received notice of the interim award under
the arbitration with the Keebler Company. The award was for $5,983,923 as well
as compensation for all legal fees and costs associated with the arbitration
proceedings. Based on the agreement with ATCOLP INVESTMENT PARTNERS (the
"Lender"), in which Donald Wohl, a Director of the Company, is the general
partner, the Company agreed to pay the Lender a sliding percentage of the
proceeds from the settlement in exchange for advancing $300,000 to the Company
to meet the litigation expenses. The Board of Directors, with Mr. Wohl
abstaining, considered two bids and found his to be the more reasonable of the
two.
On July 15, 1997, the Company received $6,750,000 in full and final
settlement. Of that amount, $1,055,608 was paid for legal fees and costs, plus
$1,236,885 to ATCOLP INVESTMENT PARTNERS under the existing agreement and
$300,000 to repay the loan. Also, the Company issued a warrant for 200,000
shares of common stock to ATCOLP INVESTMENT PARTNERS as additional
consideration. The Company recorded $138,000 as additional fees to ATCOLP for
the warrant, that amount being the estimated fair value of non-registered
securities on that day. Additionally, the Company was able to cancel $140,829
in debt due to the Keebler Company. The amount of the award, $5,983,000, has
been reported as income, under the heading litigation, net of costs, while the
difference between the $6,750,000 award and the $5,983,000 recovery, or
$767,000, has been treated as a reimbursement of expenses in the general and
administrative expenses for the year ended December 31, 1997.
F-23
<PAGE>
NOTE 17 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted earnings per share computation:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
BASIC EARNINGS (LOSS) PER SHARE
Net income (loss) $ 473,031 $(8,122,815)
Deemed dividends (305,749) -
----------- -----------
Income (loss) available to common stockholders (numerator) $ 167,282 $(8,122,815)
=========== ===========
Weighted average common shares outstanding (denominator) 5,831,404 5,133,665
=========== ===========
Basic earnings (loss) per share $ 0.03 $ (1.58)
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders (numerator) $ 167,282 $(8,122,815)
=========== ===========
Weighted average common shares outstanding 5,831,404 5,133,665
Weighted average options outstanding 2,511,516 -
Weighted average convertible preferred stock 6,667 -
Stock acquired with proceeds (2,006,190) -
----------- -----------
Weighted average common shares and
assumed conversions outstanding (denominator) 6,343,397 5,133,665
=========== ===========
Diluted earnings (loss) per share $ 0.03 $ (1.58)
=========== ===========
</TABLE>
Options and warrants to purchase 958,565 and 2,256,232 shares of common
stock at various prices per share, at December 31, 1997 and 1996, respectively,
were not included in the computation of diluted earnings (loss) per share
because the effect would be antidilutive.
F-24
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
TABLE OF CONTENTS
-----------------
PART 1 - FINANCIAL INFORMATION
<TABLE>
- -----------------------------------------------------------------------------------------
<S> <C>
Consolidated Financial Statements:
Balance Sheets - June 30, 1998 (unaudited) and December 31, 1997....... F-26-F-27
Statements of Operations --
Six Month Period Ended June 30, 1998 and 1997 (unaudited)............... F-28
Statements of Cash Flows --
Three and Six Month Periods Ended June 30, 1998 and 1997 (unaudited).... F-29
Statement of Stockholders' Equity --
Six Month Period Ended June 30, 1998 (unaudited)........................ F-30
Notes to the Financial Statements (unaudited)........................... F-31
</TABLE>
F-25
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 1998 and December 31, 1997
ASSETS
------
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---------- -----------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 467,806 $ 2,199,306
Accounts receivable, less allowance
for doubtful accounts of $25,743 426,557 412,289
Inventories (Notes 3 and 8) 517,856 247,611
Notes receivable - related party 118,244 10,000
Prepaid expenses and other current assets (Note 4) 374,172 269,268
----------- -----------
Total Current Assets 1,904,635 3,138,204
----------- -----------
Equipment (Note 7)
Manufacturing equipment 290,912 290,912
Furniture and equipment 125,417 105,160
Computer equipment 209,574 193,571
----------- -----------
625,903 589,643
Less accumulated depreciation (406,724) (347,493)
----------- -----------
219,179 242,150
----------- -----------
Other assets
Intangible assets, net of accumulated amortization
of $123,775 and $73,163 (Notes 2 and 6) 596,254 338,091
Advances to Global International Sourcing (Note 6) 193,818
Other assets 1,475 --
----------- -----------
Total Other Assets 597,729 531,909
----------- -----------
$ 2,721,543 $ 3,912,263
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-26
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
-------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1988 1997
--------- --------------
(Unaudited)
<S> <C> <C>
Current liabilities
Notes payable - bank (Notes 8) $ 86,582 $ 60,757
Notes payable - others (Note 8) 437,763 283,898
Accounts payable 724,005 909,315
Accrued expenses (Note 5) 235,881 342,437
Current maturities of long-term debt (Note 7) 37,859 37,859
----------- -----------
Total Current Liabilities 1,522,090 1,634,266
----------- -----------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity
Series A, 6% Cumulative Convertible Preferred Stock,
$0.01 par value cumulative; 1,701 shares authorized, 17 8
issued & outstanding, 1,701 and 750 shares,
liquidation preference of $1,701,000 and $750,000 (Note 9)
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued and 10 10
outstanding 1,000 shares, aggregate liquidation preference
of $50,000
Series C, Convertible Preferred Stock, $.01 par value; 1 1
authorized 450 shares; issued and outstanding 50 shares,
aggregate liquidation preference of $50,000
Common stock, $.0001 par value; authorized 30,000,000 8,939 8,863
shares; issued and outstanding 7,440,350 and 6,683,853
shares (Note 9)
Additional paid-in-capital (Note 9) 24,800,058 23,152,312
Accumulated deficit (23,609,572) (20,883,197)
----------- -----------
Total Stockholders' Equity 1,199,453 2,277,997
----------- -----------
$ 2,721,543 $ 3,912,263
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-27
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net revenues $ 749,994 $ 1,175,107
Costs of sales 543,315 882,628
---------- -----------
Gross profit 201,679 292,479
---------- -----------
Operating expenses
Research and development 139,584 56,131
Sales and marketing 746,344 739,226
General and administrative 1,473,731 1,890,887
---------- -----------
Total operating expenses 2,359,659 2,686,244
---------- -----------
Loss from operations (2,157,980) (2,470,199)
Other income (expense)
Other income (expense) (60,385) 23,119
Interest income 36,017 --
Interest expense (97,906) (99,553)
---------- -----------
Total other income (expense) (122,274) (76,434)
---------- -----------
Loss before income tax expense (2,280,254) (2,470,199)
State income tax expense 3,143 --
---------- -----------
Net loss (2,283,397) (2,470,199)
Deemed dividend to preferred shareholder (Note 9) (442,978) (305,749)
---------- -----------
Net loss allocable to common shareholders (2,726,375) (2,775,948)
========== ===========
Loss per share $ (0.39) $ (0.51)
========== ===========
Weighted average number of common shares outstanding 6,994,639 5,390,957
========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-28
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $(2,283,397) $(2,470,199)
Depreciation and amortization 111,094 83,138
Stock issued for services 109,336 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade, net 308,274 46,160
Inventories (265,245) 120,452
Prepaid expenses and other current assets 95,350 54,865
Other assets (1,475) -
Increase (decrease) in:
Accounts payable (130,912) 611,433
Accrued expenses (106,558) (128,936)
----------- -----------
Cash and cash equivalents used in operating activities (2,163,533) (1,683,087)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (22,510) (378)
Advances to related parties (13,954) -
Advances to Global International (285,385)
Cash acquired through acquisition of Global International Sourcing 75,462 -
----------- -----------
Cash and cash equivalents used in investing activities (246,387) (378)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 499,000 1,542,444
Proceeds from notes payable, short term 400,000 300,000
Repayments of line of credit 25,825 (115,183)
Repayments of notes payable (246,135) -
----------- -----------
Cash and cash equivalents provided by financing activities 678,690 1,727,261
----------- -----------
Increase (decrease) in cash and cash equivalents (1,731,230) 43,796
Cash and cash equivalents, beginning of period 2,199,036 188,867
----------- -----------
Cash and cash equivalents, end of period $ 467,806 $ 232,663
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 97,906 $ 45,000
Income taxes $ 3,143 $ -
Supplemental disclosure of non-cash operating, investing, and
financial activities
Stock issued for accounts payable $ 361,504 $ 683,870
Stock issued for prepaid consulting services $ 191,889 -
Stock issued for acquisition of marketing contract $ 43,124 -
Acquisition of Global International Sourcing:
Assets acquired, net of cash $ 535,786
Liabilities assumed, including $522,328 due to Vitafort $ 829,461
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-29
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Series A
Cumulative Series B Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock
--------------- --------------- ---------------
Share Amount Share Amount Share Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 750 $ 8 1,000 $10 50 $1
Series A Preferred issued in connection with
a private placement, net of expenses 500 5
Common stock issued as settlement of contact
disputes
Exercise of stock options
Stock issued for acquisition of marketing contract
Stock issued for services
Preferred stock dividends 451 4
Net Loss
----- --- ----- ----- -- --
Balance, June 30, 1998 1,701 $17 1,000 $10 50 $1
===== === ===== ===== == ==
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
------------------ Paid-In Accumulated
Share Amount Capital Deficit Total
--------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 6,683,853 $8,863 $23,152,312 $(20,883,197) $ 2,277,997
Series A Preferred issued in connection with
a private placement, net of expenses 498,995 499,000
Common Stock issued as settlement of contact
disputes 115,000 12 116,738 116,750
Exercise of stock options 192,500 19 166,639 166,658
Stock issued for acquisition of marketing contract 60,000 6 43,118 43,124
Stock issued for services 389,000 39 379,282 379,321
Preferred stock dividends 442,974 (442,978) --
Net Loss (2,283,397) (2,283,397)
--------- ------ ----------- ------------ -----------
Balance, June 30, 1998 7,440,353 $8,939 $24,800,058 $(23,609,572) $ 1,199,453
========= ====== =========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-30
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - GENERAL
The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and, in the opinion
of management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation for each of the periods
presented. The results of operations for interim periods are not necessarily
indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial statements and
related footnotes do not contain certain information that will be included in
the 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, 1997 which appear on pages F-1
to F-24.
The Company is presently engaged in formulating, marketing and distributing
fat-free, low fat and reduced fat foods.
NOTE 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.
(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, which are recorded at cost, are composed of debt
issuance costs, acquisition costs of Auburn Farms and Natures Warehouse
trademarks, and goodwill associated with the acquisition of Global
International Sourcing, Inc. The acquisition costs associated with
trademarks and goodwill are being amortized on a straight-line basis
over twenty years. All other intangible assets are being amortized on
a straight-line basis over periods not exceeding five years. These
costs are reviewed by management periodically and written down to the
value of the future benefit expected to be derived.
(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) For the three and six months ended June 30, 1998 and 1997, basic and
diluted loss per share have been compiled using the weighted average
number of common shares outstanding during the period. Options and
warrants outstanding to purchase shares of common stock at various
prices
F-31
<PAGE>
per share at June 30, 1998 and 1997, were not included in the
computation of diluted loss per share, as the effect would be
antidilutive. For the loss at June 30, 1998 and 1997, the numerator in
the computation was adjusted by deducting the preferred deemed dividend
to arrive at the net loss allocable to common shareholders. Dividends
on cumulative preferred stock are not material.
(h) Advertising: Costs are expensed as incurred or prepaid until the
advertisement is published, at which time the related costs are
expensed.
(i) Reporting on the Cost of Start-Up Activities: Statement of Position 98-
5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5") issued
by the Accounting Standards Executive Committee is effective for
financial statements with fiscal years beginning after December 15,
1998. SOP 98-5 requires that the costs of start-up activities should be
expensed as incurred. At the time of adopting this SOP, the initial
application should be reported as the cumulative effect of a change in
accounting principles. At June 30, 1998, and December 31, 1997, the
Company capitalized product introduction costs of $9,500 and $10,711,
respectively. These costs are considered as start-up activities under
SOP 98-5. The Company does not believe that the adoption of this SOP
will have a material effect on its financial position, results of
operations or cash flows.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or market.
Market-based valuations are based upon estimates and assumptions, and are
generally limited to slow moving product offerings. Inventory consists of the
following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Finished goods $383,770 $ 30,188
Packaging and raw material 134,086 217,423
------- --------
$517,856 $247,611
======== ========
</TABLE>
NOTE 4 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Deposits $ - $ 1,100
Product introduction costs 9,500 10,711
Insurance 66,032 36,377
Consulting 246,909 108,080
Other prepaids 51,731 113,000
-------- --------
Total prepaid expenses and other current assets $374,172 $269,268
======== ========
</TABLE>
F-32
<PAGE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Accrued compensation $154,179 $156,764
Accrued commissions 12,235 -
Accrued legal fees - 40,112
Accrued consulting fees 69,467 4,919
Other accrued expenses - 140,642
-------- --------
Total accrued expenses $235,881 $342,437
======== ========
</TABLE>
NOTE 6 - ACQUISITION OF GLOBAL INTERNATIONAL SOURCING, INC.
As of March 31, 1998, the Company acquired 100% of the outstanding stock of
Global International Sourcing, Inc. (Global) for $25. The acquisition was
accounted for as a purchase and the operations of Global are included herein
commencing April 1, 1998. The assets and liabilities of Global were recorded at
fair value and resulted in goodwill of $218,213, which included advances of
$___________ which the Company previously made to Global. Had the Company
consolidated its operating performance for the six months ended June 30, 1998,
the results would have been as follows:
<TABLE>
<S> <C>
Net Sales $ 1,135,799
Gross Profit 246,534
Net Loss (2,398,744)
Net Loss Allocable to Common Shareholders (2,841,752)
Net Loss Per Share ($0.40)
</TABLE>
Global was formed in October 1997 and its financial position and results of
operations are not material compared to the Company's financial position at
December 31, 1997 or its results of operations for the year ended December 31,
1997.
NOTE 7 - CURRENT MATURITIES OF LONG-TERM DEBT
The note 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. The agreement with the secured lender,
Coast Business Credit, included a provision that halted payments on this note.
NOTE 8 - NOTES PAYABLE
Bank
----
On June 26, 1998, the Company's current lender, Coast Business Credit
("Bank") notified the Company that it would not renew the credit line when it
expires on August 31, 1998. The Bank also agreed to eliminate from its
collateral the inventory to be used for the Purchase Order Financing discussed
below.
As of June 30, 1998, the Company was in violation of the tangible net worth
covenant in that it had fallen below the $1,500,000 requirement and the working
capital covenant in that it had fallen below the requirement. In addition, the
facility which expired on August 31, 1998 has not been renewed, although the
lender has extended the term until September 30, 1998. As of September 30, 1998,
the amount due under this credit facility was $91,043. The Company is in
negotiations with a new lender and the original lender has indicated it will
provide an extension. Should the Company be unable to secure a replacement
lender, it could seriously jeopardize the future ability of the Company to fund
operations.
F-33
<PAGE>
The Company is in negotiations with other lenders to replace Coast Business
Credit and believes it will do so at rates and terms similar to those of Coast
Business Credit.
Other
-----
In June 1998, the Company entered into purchase order financing agreements
with accredited investors which provided the Company with $400,000 to purchase
inventory. These advances bear interest at 15% per annum and are to be repaid
from the proceeds of the related sales of the inventory if the inventory level
falls below the amount of the financing. In addition, the lender received
options to purchase 100,000 shares of the Company's common stock at $1.00 per
share, which was fair market value at the time. The Company has pledged its
inventory as collateral for these advances.
NOTE 9 - STOCKHOLDERS' EQUITY
During the six month period ended June 30, 1998, the following stock
transactions occurred, all of which were valued at fair market:
(a) The Company issued 85,000 shares of common stock at a value of $1.00
per share as settlement for contract disputes previously recorded as a
liability.
(b) The Company issued 30,000 shares of common stock at a value of $1.058
per share as settlement of a contract dispute related to consulting
services previously recorded as a liability.
(c) The Company issued 60,000 shares of common stock at a value of $.71875
per share and forgave a $25,000 note receivable in exchange for the
distribution rights with respect to all marshmallow products in North
America. The Company also received $5,000 of sample inventory and
$15,000 of furniture and equipment as part of this transaction.
(d) The Company issued 100,000 shares of common stock at a value of $0.74
per share upon the exercise of an option granted a consultant in
exchange for future consulting services.
(e) The Company issued 15,000 shares of common stock at a value of $1.00
per share upon the exercise of an option granted a consultant in
exchange for services rendered previously recorded as a liability.
(f) The Company entered into a subscription agreement in March 1998 with
an unrelated investor for $500,000 for 500 shares of 1997 Series A
Preferred Stock. The preferred stock has a cumulative dividend of 6%
with no voting rights. The preferred stock is convertible beginning
August 10, 1998 at a 21.5% discount if the fair market value of the
stock on the date of conversion is $0.6875 per share or less. If the
fair market value of the stock on the date of conversion is more than
$0.6875 per share, the preferred stock is convertible at fair market
value. However, if the preferred shares are converted at fair market
value, the preferred shareholder will receive sufficient warrants upon
conversion to purchase common stock at $0.6875 per share to generate a
$275 profit per share of preferred stock converted.
As part of this transaction, the Company also issued 451 shares of
preferred stock, as well as warrants to purchase 282,422 shares of
common stock at $0.6875 per share to the holders of the 1997 Series A
Preferred Stock in exchange for the preferred stockholders accepting
an
F-34
<PAGE>
adjustment in the terms of the 1997 Series A Preferred Stock. The
warrants may be exercised over a five year period beginning August 10,
1998.
For accounting purposes, the issuance of the warrants to the 1997
Series A Preferred stockholders results in a deemed dividend of
$147,381 which will be recognized as a deemed dividend at a rate of
$24,564 per month through August 10, 1998.
The modified terms of the 1,701 total shares of 1997 Series A
Preferred Stock outstanding would result in an issuance of 787,563
warrants to purchase shares of common stock. The value of these
potential warrants issued is reflected as an original issued discount
of $411,128 at the time of the transaction. This original issue
discount is being treated as a deemed dividend that will be recognized
at a rate of $68,521 per month through August 10, 1998.
(g) The Company issued 40,000 shares of common stock at a value of $1.00
per share upon the exercise of an option granted to a consultant in
exchange for future consulting services.
(h) The Company issued 37,500 shares of common stock at a value of $1.004
per share upon the exercise of an option granted a previous employee
as part of a litigation settlement.
(i) The Company issued 339,500 shares of common stock at a value of $1.00
per share in June 1998 under an S-8 filing as payment for services
rendered and to be rendered.
(j) The Company issued 49,500 shares of common stock at a value of $.805
per share to various consultants and professional firms for previous
services rendered.
NOTE 10 - 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 proceeds from the Keebler arbitration in 1997 and has raised
additional capital in 1998, it needs to raise additional capital and realize a
satisfactory level of profitability from its current and future operations in
order to remain a viable entity. The Company's auditors have included an
explanatory paragraph in their report for the year ended December 31, 1997
indicating there is substantial doubt regarding the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
do not include any adjustments that might result from the outcome of any
uncertainty. The Company is attempting to raise additional capital to meet
future financial obligations, but may not be able to do so. Should the Company
not be able to raise additional capital, it may have to severely curtail
operations.
NOTE 11 - LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, several companies in which he had invested; and, certain of those
company's officers. Included among the defendants was the Company and its then
Chief Executive Officer. The complaint seeks damages in an unspecified amount
in excess of $500,000 and punitive damages in an
F-35
<PAGE>
unspecified amount in excess of $5,000,000. The Court has dismissed the class
action claims as to the Company and granted a motion that the claims against the
brokerage firms and associated persons must be submitted to arbitration. The
Plaintiff has appealed that ruling. The Company denies any liability to the
plaintiff and intends to vigorously defend this action. The Company notes that
the plaintiff sold a portion of the securities he purchased from the Company,
realizing a profit; that the balance of the securities became salable under Rule
144; and that, if sold, the Plaintiff's losses might be as little as $15,000.
In connection with the acquisition of assets of Auburn Farms, Inc.,
("AFI"), the Company acquired the intellectual property and certain claims of
AFI which it was asserting against AFI's co-packer, New Life Bakers ("New Life")
and against a customer of New Life, Barbara's Bakery ("Barbara's"). In May 1996,
the Company filed an action in federal court alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition, conspiracy and related
claims arising out of New Life and Barbara's misappropriation of Auburn Farms'
principal products. Although no trial date has been set, the Company expects the
case to proceed to a jury trial in the first half of 1999.
On March 25, 1998, New Life and Barbara's purported to purchase from AFI's
bankruptcy estate certain claims against Barbara's and New Life for $300,000.
The purchased claims do not include any of the claims previously acquired by the
Company. The Company has been advised by outside litigation counsel that
evidence supports a claim for damages in excess of $3 million for the
destruction of AFI's and Vitafort's business and intellectual property rights.
The Company may be obligated to pay a portion of any recovery against New Life
to AFI's bankruptcy estate and/or its creditors. The Company intends to pursue
this litigation vigorously. There is no assurance given that the Company will
receive any recovery.
On October 9, 1996, a complaint was filed in Superior Court, the
County of Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort,
Inc., a Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The
complaint alleges Breach of Oral Contract, Breach of Written Contract, and other
similar claims arising out of the consulting relationship that previously
existed between the Company and Mr. Ellis. The Complaint seeks damages in an
unspecified amount. The court dismissed the complaint against Mark Beychok
without leave to amend. Mr. Ellis recently filed an amended complaint against
the Company. The Company is defending the action vigorously and trial is
imminent. In a related action, the Company filed a lawsuit against Ellis
charging violations of Section 16(b) of the Securities Exchange Act of 1934
(short swing profits). Ellis sold stock in violation of that section and,
therefore, the profits, estimated at $20,000, belong to the Company. In March
1998, the court ruled in favor of the Company in this matter and awarded
$21,260. Ellis has appealed the ruling. On June 2, 1998 the parties resolved
both the Ellis issues. Under the terms of the agreement, the settlement is
treated as confidential and the public response has been agreed to as follows:
"The matter has been resolved."
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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
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(b) of this section, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
(d) Any indemnification under subsections (a) and (b) of this
section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper
in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b) of this section. Such
determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties
to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors
so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.
(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.
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(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.
Securities and Exchange Commission filing fee $ 590.20
National Association of Securities Dealers, Inc. filing fee $ 300.07
Transfer Agent's and Registrar's Fees $ *
Legal fees and expenses $ *
Accounting fees and expenses $ *
Miscellaneous $ *
--------
TOTAL $ *
* To be provided by amendment
All amounts estimated except for Securities and Exchange Commission and National
Association of Securities Dealers, Inc. filing fee.
As required by agreements between the Company and the Selling Stockholders, all
of these expenses of issuance and distribution will be paid by the Company.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During February 1995, the Registrant issued $500,000 principal amount of
its secured promissory notes and 450,000 options to purchase its common stock at
a price of $.07 per share (22,500 options to purchase shares at $1.40 as
adjusted for a reverse stock split effected October 4, 1997) in a private
placement pursuant to Regulation D under the Securities Act to six accredited
investors. The notes were sold for $500,000 and the options for $10,000. The
Company paid a commission of 7% to a broker dealer in connection with such
notes.
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During June 1995, the Registrant issued 107,486 shares of its common stock
(5,374 shares as adjusted for the reverse stock split effected October 4, 1996)
to a note holder in exchange for the accrued principal and interest on a note.
The note had been issued for cash consideration equal to its face value. The
conversion price was $.40 per share ($8.00 as adjusted for a reverse stock split
effected October 4, 1996). The transaction was exempt from registration under
the Securities Act by reason of Section 4(2) thereof and the Registrant obtained
representations with respect to investment intent from the note holder.
During July 1995, the Registrant issued 90,000 shares of its common
stock (2,250 shares as adjusted for the reverse stock split effected October 4,
1996) for $.07 per share ($1.40 per share as adjusted for the reverse stock
split effected October 4, 1996) upon the exercise of an option granted in
connection with the February 1995 private placement described above. The
transaction was exempt from registration under the Securities Act by reason of
Section 4(2) thereof and the Registrant obtained representations with respect to
investment intent from the option holder. The Company did not pay any commission
with respect to such exercise.
During October 1995, the Registrant issued 4,320,000 shares of its
common stock (216,000 shares as adjusted for a reverse stock split effected
October 4, 1996) to a note holder upon conversion of a note. $500,000 principal
amount of note and $40,000 of accrued interest were converted in such
transaction. The conversion price was $.125 per share ($2.50 as adjusted for the
reverse stock split effected October 4, 1996). The issuance of the note was
exempt from registration by reason of Regulation S promulgated under the
Securities Act. The sale was to a non-US person located outside the United
States.
During November 1995, the Registrant issued 5,208,333 shares of its common
stock (260,417 shares as adjusted for the reverse stock split effected October
4, 1996) at $.125 per share ($2.50 as adjusted for the reverse stock split
effected October 4, 1996) in a private placement pursuant to Regulation D under
the Securities Act to accredited investors. The Registrant realized net proceeds
of $563,960 from this private placement. For each share purchased in the private
placement, the investors also received 1/2 warrant at $.225 ($4.50 as adjusted
for the reverse split effected on October 4, 1996) and 1/2 warrant at $.30
($6.00 as adjusted for the reverse stock split effected on October 4, 1996).
During December 1995, the registrant issued 64,284 shares of its
common stock (3,214 shares as adjusted for a reverse stock split effected on
October 4, 1996) to an investor in exchange for 50 shares of its Series B
Convertible Preferred Stock and all of the dividends thereon. The transaction
was exempt from registration under the Securities Act by reason of Section
3(a)(9) thereof as a transaction with an existing security holder.
During June and December 1995, the Registrant issued an aggregate of
475,680 shares of its common stock (18,410 shares as adjusted for a reverse
stock split effected October 4, 1996) to note holders in exchange for the
accrued principal and interest on a note. The note had been issued for cash
consideration equal to its face value. The principal amount of the notes was
$162,500. 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.
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During January 1996, the Registrant issued 357,143 shares of its
common stock (17,856 as adjusted for a reverse stock split effected October 4,
1996) to a consultant in connection with the exercise of an option with an
exercise price of $.10 ($2.00 as adjusted for a reverse stock split effected
October 4, 1996). The transaction was exempt from registration under the
Securities Act by reason of Section 4(2) thereof and the Registrant obtained
representations with respect to investment intent from the exercising option
holder.
During November 1995 to February 1996, the Registrant sold an
aggregate of 22,433,334 shares of its common stock (1,201,667 shares as adjusted
for the reverse stock split effected October 4, 1996) at $.15 per share ($3.00
as adjusted for the reverse stock split effected October 4, 1996) in a private
placement pursuant to Regulation D under the Securities Act to accredited
investors. The Registrant realized net proceeds of $3,028,500 from these private
placement and paid the placement agent commissions of $336,500. For each share
purchased in these private placements, the investors also received 1/2 warrant
at $.225 ($4.50 as 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
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Series B Convertible Preferred Stock and all of the dividends thereon. The
transaction was exempt from registration under the Securities Act by reason of
Section 3(a)(9) thereof as a transaction with an existing security holder.
During October 1996, the Registrant issued 80,000 shares of its common
stock at $5.00 per share to eight accredited investors in a transaction exempt
from the registration requirements of the Securities Act pursuant to Regulation
D promulgated thereunder.
During February 1997, the Registrant sold 500,000 shares of its common
stock to an accredited investor for $1.00 per share. The transaction was exempt
from registration under the Securities Act by reason of Regulation D promulgated
thereunder.
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.
During September 1998, the Registrant sold $548,352 principal amount of its
convertible debentures to an accredited investor at their face value. The
transaction was exempt from registration under the Securities Act by reason of
Regulation D promulgated thereunder.
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Item 27. Exhibits.
(a) The following exhibits are submitted herewith:
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3.1 Certificate of Incorporation of Registrant(i)
3.2 By-laws of Registrant(i)
3.3 Agreement and Plan of Merger between the Registrant and Vitafort International Corporation, a California corporation(i)
3.4 Certificate of Designation - Series A Preferred Stock(v)
3.5 Certificate of Designation - Series B Preferred Stock(v)
3.6 Certificate of Amendment to the Certificate of Incorporation, November 1991(v)
3.7 Certificate of Designation - Series C Preferred Stock(v)
3.8 Certificate of Amendment to the Certificate of Incorporation, filed February 8, 1994 (vi)
3.9 Certificate of Designation - Series D Preferred Stock(vi)
3.10 Certificate of Amendment to the Registrant's Certificate of Incorporation, filed November, 1995. Incorporated by
reference to Exhibit 4.10 filed with the Registrant's Registration Statement on Form S-8 filed January 25, 1996 File
Number 33-300435 (the "January 1996 S-8").
3.11 Certificate of Elimination - Series A Preferred Stock. Incorporated by reference to Exhibit 4.24 to the Registrant's
Registration Statement on Form S-8 Filed May 22, 1996 File Number 333-04271 (the "May 1996 S-8").
3.12 Certificate of Elimination - Series D Preferred Stock. Incorporated by reference to Exhibit 4.25 to the May 1996 S-8.
3.13 Certificate of Amendment to the Registrant's Certificate of Incorporation, filed October 4, 1996. Incorporated by
reference to Exhibit 4.29 to the Registrant's Registration Statement on Form S-8 Filed December 12, 1996, File Number
333-17763 (the "December 1996 S-8").
3.14 Amended Certificate of Designation of the Registrant's 1997 Series A Preferred Stock filed May 1997 (ix)
3.15 Amended Certificate of Designation of the Registrant's 1997 Series A Preferred Stock filed March 1998 (xii)
3.16 Amended Certificate of Designation of the Registrant's 1997 Series A Preferred Stock filed October 1998 (filed herewith)
3.17 Convertible Debenture dated August 1998 (filed herewith)
4.1 Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 Filed with the Registrant's Annual Report on Form
10K-SB for the Year ended December 31, 1996 (the "1996 10K-SB")
4.2 Specimen Redeemable Common Stock Purchase Warrant(i)
4.3 Form of Warrant Agreement(i)
4.4 Proposed form of Underwriters Warrant Agreement(i)
4.5
4.6 Warrant Extension Agreement, December 18, 1992(v)
4.7 Warrant Extension Agreement, December 18, 1994(vi)
4.8 Warrant Extension Agreement, January 18, 1995(vi)
4.9 Warrant Extension Agreement, April 3, 1995(vi)
4.10 Warrant Extension Agreement, May 3, 1995. Incorporated by reference to Exhibit 4.18 to the January 1996 S-8.
4.11 Warrant Extension Agreement, June 15, 1995. Incorporated by reference to Exhibit 4.19 to the January 1996 S-8.
4.12 Warrant Extension Agreement, July 17, 1995. Incorporated by reference to Exhibit 4.20 to the January 1996 S-8.
4.13 Warrant Extension Agreement, August 16, 1995. Incorporated by reference to Exhibit 4.21 to the January 1996 S-8.
4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by reference to Exhibit 4.21 to the January 1996 S-8.
4.15 Warrant Extension Agreement, April 30, 1996. Incorporated by reference to Exhibit 4.23 to the May 1996 S-8.
</TABLE>
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4.16 Warrant Extension Agreement, July 31, 1996. Incorporated by reference to Exhibit 4.26 to the December 1996 S-8.
4.17 Warrant Extension Agreement, September 30, 1996. Incorporated by reference to Exhibit 4.27 to the December 1996 S-8.
4.18 Warrant Extension Agreement, November 11, 1996. Incorporated by reference to Exhibit 4.28 to the December 1996 S-8.
4.19 Warrant Extension Agreement, April 15, 1997. Incorporated by reference to Exhibit 4.19 to the 1996 10K-SB.
4.20 Warrant Extension Agreement, October 31, 1997.(x)
5.1 Opinion of Frank J. Hariton, Esq. (filed herewith)
10.1 Loan Agreement, dated August 19, 1988, between the Registrant and Bishop Capital, L.P. and promissory note in the
principal amount of $150,000(i)
10.2 License Agreement, dated April 25, 1986, between the Registrant and Crystal Geyser Water Registrant and amendment, dated
January 7, 1988(i)
10.3 Demand Promissory Note, dated July 10, 1987, from Registrant to Joseph R. Daly in the principal amount of $300,000
and Modification, dated October 11, 1989(i)
10.4 License Agreement, dated as of October 9, 1987, between the Registrant and Good Health Beverage, Inc. and amendment,
dated November 23, 1988(i)
10.5 Product Development Agreement, dated as of January 21, 1988, between the Registrant and International Multifoods,
Inc.(i)
10.6 Beverage Agreement, dated as of October 31, 1988, between the Registrant and PowerBurst Corporation(i)
10.7 Amended and Restated Agreement, dated August 2, 1989, between the Registrant and Vitafort Far East Co., Ltd.(i)
10.8 Agreement, dated August 11, 1989, between Barry Saltzman, MD. and Yoshio Tanaka(i)
10.9 Lease, dated June 13, 1988, between Registrant and Shelterpoint Equities, Ltd. for offices at 591 Redwood Highway, Mill
Valley, California(i)
10.10 Agreement, dated July 25, 1989, between Nutrifish Corporation and Mt. Lassen Trout Farms(i)
10.11 Salmon Rondelles Joint Development and Marketing Agreement, dated as of September 18, 1989, between Nutrifish
Corporation and Norwegian Seafoods, Inc.(i)
10.12 Whole Salmon Joint Development and Marketing Agreement, dated as of
September 26, 1989, between Nutrifish Corporation and Norwegian Seafoods, Inc.(i)
10.13 Employment Agreement, dated September 13, between the Registrant and Barry K. Saltzman(i)
10.14 Employment Agreement, dated September 13, between the Registrant and Jeffrey Lewenthal(i)
10.15 The Registrant's 1989 Stock Option Plan(i)
10.16 Stock Option Agreement, dated as of July 17, 1989 between the Registrant and Jeffrey Lewenthal(i)
10.17 Secrecy Agreement, dated as of May 2, 1986, between the Registrant and Hoffman-LaRoche, Inc.(i)
10.18 Joint Venture Agreement, dated September 29, 1989, between the Registrant and Agrolife Technologies, Inc.(i)
10.19 Consulting Agreement, dated September 13, 1989, between the Registrant and Randall S. Reis(i)
10.20 Loan Agreement, dated June 15, 1989, between Union Bank and Joseph R. Daly(i)
10.21 Form of Employee Confidentiality Agreement.(ii)
10.23 Form of Escrow Agreement by and among the Registrant, Gilford Securities Corp., and certain stockholders of
Registrant(i)
10.24 Promissory Note, made November 21, 1989, by Nutrifish Corporation and payable to Joseph R. Daly(i)
10.25 Right of First Refusal Agreement, dated November 21, 1989, between Nutrifish Corporation and Joseph R. Daly(i)
</TABLE>
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10.26 Production License Agreement for Nutrifish Norwegian Salmon, dated February 2, 1990, between Nutrifish Corporation and
Norwegian Seafoods, Inc.(ii)
10.27 Test Market Agreement, dated December 19, 1989, between International Multifoods Corporation and the Registrant.(ii)
10.28 Amendment, dated as of December 19, 1989, to the Product Development Agreement between International Multifoods
Corporation and the Registrant.(ii)
10.29 Consulting Agreement, dated February 21, 1990, between the Registrant and Joseph R. Daly.(ii)
10.30 License Agreement between the Registrant and Nulaid Foods, Inc., dated April 30, 1990.(ii)
10.31 License Agreement between the Registrant and Vitafort Latin America, dated July 30, 1990.(ii)
10.32 Termination Agreement between the Registrant and Jeffrey D. Lewenthal, dated September 12, 1990.(ii)
10.33 Settlement Agreement and Full Release between Nicholas J. Caputo and Registrant, dated October 4, 1990.(ii)
10.34 Employment Agreement between the Registrant and Stephen D. Clow, dated December 1, 1990.(ii)
10.35 Employment Agreement between the Registrant and Frank A. Corsini, dated January 2, 1991.(ii)
10.36 Stock Option Agreement between the Registrant and Stephen D. Clow, dated January 2, 1991.(ii)
10.37 Stock Option Agreement between the Registrant and Frank A. Corsini, dated January 2, 1991.(ii)
10.38 Letter Agreement, dated February 1, 1991, amending Consulting Agreement between the Registrant and Joseph R. Daly.(ii)
10.39 Letter Agreement, dated March 12, 1991, between the Registrant and Joseph R. Daly regarding debt reorganization.(ii)
10.40 Consulting Agreement between Norman Kretchmer, MD., Ph.D., and the Registrant, dated December 20, 1988.(ii)
10.41 Settlement Agreement between the Registrant and PowerBurst Corporation, dated September 23, 1991.(ii)
10.42 Subscription Agreement between the Registrant and Societe Anonyme Financier Industrielle et Garantie, dated November 1,
1991. Incorporated by reference to Exhibit 1 to the Registrant's Report on Form 8-K dated November 1, 1991.
10.43 Exclusive Distribution Agreement between Registrant and Chicago Fish House, dated June 13, 1991.(ii)
10.44 Larry Lucas Settlement Agreement, dated March 25, 1993.(v)
10.45 Frank Corsini, Separation Agreement, dated May 18, 1993.(v)
10.46 Agreement dated October 5, 1993 between the Registrant and Second Nature Technologies, Inc.(iii)
10.47 Food and Beverage Technology Agreement(iii)
10.48 Asset Purchase and Sale Agreement, dated as of June 7, 1993 by and among Crystal Clear Farms, Inc., a Maine corporation,
the Registrant and Salmon Distribution Subsidiary, Inc. a Maine corporation which was formerly known as Crystal Clear
Farms, Inc.(iv)
10.49 Temporary Operating Agreement dated June 7, 1993 by and among Samuel L. Thompson & Associates, Inc., a Maine corporation,
the Registrant and Crystal Clear Farms, Inc. a Maine corporation (now known as Salmon distribution Subsidiary, Inc.)(iv)
10.50 Non-Competition Agreement dated July 27, 1993 by and between the Registrant and Crystal clear farms, Inc., a Maine
corporation.(iv)
10.51 Employment Agreement dated as of November 29, 1993, between the Registrant and Steven Westlund. Incorporated by reference
to exhibit 99.01 to Form S-8 filed by the Registrant on March 4, 1994 (the "1994 S-8").
10.52 Stock Option Agreement dated as of November 29, 1993 between the Registrant and Steven Westlund. Incorporated by
reference to exhibit 99.02 to the 1994 S-8.
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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.(vi)
10.64 Letter Agreement, dated September 14, 1995, between the Registrant and Peter T. Benz. Incorporated by reference to the
like numbered exhibit to the Registrant's Form 10-KSB for the year ended December 31, 1995.
10.65 Consulting Agreement and Mutual Release, dated as of March 1, 1995, between the Registrant and Steven R. Westlund.
Incorporated by reference to the like numbered exhibit to the Registrant's Form 10-KSB for the year ended December 31,
1995.
10.66 Letter Agreement, dated November 30, 1995, between the Registrant and Steven Westlund. Incorporated by reference to the
like numbered exhibit to the Registrant's Form 10-KSB for the year ended December 31, 1995.
10.67 The Vitafort International Corporation 1995 Stock Option Plan. Incorporated by reference to exhibit 99.01 to the January
1996 S-8.
10.68 Form of Option granted to directors under The Vitafort International Corporation 1995 Stock Option Plan and schedule of
grants to directors. Incorporated by reference to exhibit 99.02 to the January 1996 S-8.
10.69 Employee Option granted to Mark Beychok under The Vitafort International Corporation 1995 Stock Option Plan. Incorporated
by reference to exhibit 99.03 to the January 1996 S-8.
10.70 Amendment, dated December 16, 1995, to the Employment Agreement between the Registrant and Mark Beychok. Incorporated by
reference to exhibit 99.10 to the January 1996 S-8.
10.71 Option Agreement, dated December 16, 1995, between the Registrant and Mark Beychok. Incorporated by reference to exhibit
99.11 to the January 1996 S-8.
10.72 Conversion Agreement, dated as of December 30, 1995, between the Registrant and Mark Beychok. Incorporated by reference
to exhibit 99.20 to the January 1996 S-8.
10.73 Class A Option Agreement, dated as of December 30, 1995, between the Registrant and Mark Beychok. Incorporated by
reference to exhibit 99.21 to the January 1996 S-8.
10.74 Class B Option Agreement, dated as of December 30, 1995, between the Registrant and Mark Beychok. Incorporated by
reference to exhibit 99.22 to the January 1996 S-8.
10.75 Conversion Agreement, dated as of March 26, 1996, between the Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.18 to the May 1996 S-8.
10.76 Class A Option Agreement, dated as of March 26, 1996, between the Registrant and John Coppolino. Incorporated by
reference to Exhibit 9.19 to the May 1996 S-8.
</TABLE>
II-10
<PAGE>
<TABLE>
<C> <S>
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, 19 96.
10.81 Agreement, dated as of July 10, 1996, between the Registrant and Second Nature Technologies, Inc. Incorporated by
reference to Exhibit 10.81 to the 1996 Form 10-KSB.
10.82 Employment Agreement dated June 16, 1997 between Jack Spencer and the Registrant. Incorporated by reference to Exhibit
10.12 of the Registrant's Form SB-2 filed July 23,1997
10.83 Agreement, dated April 1997, between the Registrant and ATCOLP Investment Partners, a California Limited Partnership.
Incorporated by reference to the Registrant's Form SB-2 filed July 23, 1997
10.84 Employment Agreement dated September 1997 between the Registrant and Mark Beychok. (x)
10.85 Employment Agreement dated September 1997 between the Registrant and John Coppolino.(x)
10.86 Subscription Agreement with Global International Sourcing, Inc., a Nevada corporation (xii)
16.2 Letter on change in certifying accountant. (xi)
22. Subsidiaries of the Registrant: Global International Sourcing, Inc.(xii)
23.1 Consent of BDO Seidman, LLP (xiii)
23.2 Consent of Frank J. Hariton, Esq. (included in Exhibit 5.1)
</TABLE>
(i) Incorporated by reference to the same numbered exhibit to the
Registrant's Registration Statement on Form S-18, file number 33-31883.
(ii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1990 and 1989 Form 10-K's.
(iii) Incorporated by reference to exhibits 1 & 2 to the Registrant's September
30, 1993 Form 10-QSB.
(iv) Incorporated by reference to exhibits 1 through 4 to the Registrant's
August 7, 1993 Form 8-K.
(v) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1993 Form 10-KSB.
(vi) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1994 Form 10-KSB.
(vii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1995 Form 10-KSB.
(viii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1996 Form 10-KSB.
(ix) Incorporated by reference to the same numbered exhibit to the
Registrant's December 31, 1997 Form 10-KSB.
(x) Incorporated by reference to the same numbered exhibit to the
Registrant's January 14, 1998 Form SB-2/A.
(xi) Incorporated by reference to the same numbered exhibit to the
Registrant's June 24, 1998 Form SB-2/A.
(xii) Incorporated by reference to the same numbered exhibit to the
Registrant's August 14, 1998 Form SB-2/A.
(xiii) Incorporated by reference to the same numbered exhibit to the
Registrant's October 2, 1998 Form SB-2.
II-11
<PAGE>
Item 29. Undertakings.
A. Rule 415 Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement or the most recent
post-effective amendment thereof which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the registration statement is on Form S-3, Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
herein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
B. INDEMNIFICATION UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-12
<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 November 11, 1998.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
--------------------------------
Mark Beychok, President
II-13
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mark Beychok 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>
<C> <S> <C>
Director, Chief Executive
Officer and President
/s/ Mark Beychok (Principal Executive November 11, 1998
- ------------------------- Accounting and Financial
Mark Beychok Officer)
/s/ Benjamin Tabatchnick Director November 11, 1998
- ---------------------------
Benjamin Tabatchnick
/s/ Paul G. Cowen Director November 11, 1998
- ---------------------------
Paul G. Cowen
</TABLE>
II-14
<PAGE>
EXHIBIT 3.16
AMENDED CERTIFICATE OF DESIGNATION
OF 1997 SERIES A CONVERTIBLE PREFERRED STOCK
OF VITAFORT INTERNATIONAL CORPORATION.
_____________________________________________
Pursuant to Section 242 of the General
Corporation Law of the State of Delaware
_____________________________________________
We, the undersigned, Mark Beychok, being the President of Vitafort
International Corporation ("Corporation") and Frank J. Hariton, being the
Assistant Secretary of the Corporation, hereby certify pursuant to Section 242
of the General Corporation Law of the State of Delaware that:
1. The name of the Corporation is Vitafort International Corporation.
2. The Certificate of Incorporation of the Corporation was filed with the
Secretary of State on September 28, 1989.
3. On April 3, 1997, pursuant to authority vested in the Board of
Directors by Article 4(b) of the Corporation's Certificate of Incorporation, the
Board of Directors established a series of 500 shares of Preferred Stock of the
Corporation (the "1997 Series A Convertible Preferred Stock").
4. On April 9, 1997, a Certificate of Designation was filed by the
Corporation with respect to the 1997 Series A Preferred Stock
5. On May 27, 1997 the Board of Directors of the Corporation and the sole
holder of the 1997 Series A Preferred Stock each adopted resolutions by written
consent to amend the Certificate of Designation of the Series A Convertible
Preferred Stock.
6. On May 28, 1997, an Amended Certificate of Designation was filed by the
Corporation with respect to the 1997 Series A Preferred Stock.
7. On February 27, 1998 the Board of Directors of the Corporation and the
sole holder of the 1997 Series A Preferred Stock each adopted resolutions by
written consent to further amend the Certificate of Designation of the Series A
Convertible Preferred Stock.
8. On March 4, 1998, an Amended Certificate of Designation was filed by
the Corporation with respect to the 1997 Series A Preferred Stock.
9. On October 16, 1998 the Board of Directors of the Corporation and the
holders of the 1997 Series A Preferred Stock each adopted the following
resolutions by written consent to further amend the Certificate of Designation
of the Series A Convertible Preferred Stock:
RESOLVED, that pursuant to Section 242 of the General Corporation Law of
the State of Delaware, the Designations of the Corporation's 1997 Series A
Convertible Preferred Stock are amended and restated to be the following:
<PAGE>
Section 1. Designation and Amount. The shares of such series having a par
----------------------
value of $0.01 per share shall be designated as "1997 Series A Convertible
Preferred Stock" (the "1997 Series A Preferred Stock") and the number of shares
constituting such series shall be 1,701. The relative rights, preferences and
limitations of the 1997 Series A Preferred Stock shall be in all respects
identical, share for share, to the Common Stock of the Corporation, except as
otherwise provided herein.
Section 2. Dividends.
---------
Annual Dividends. The holders of 1997 Series A Preferred Stock shall be
-----------------
entitled to receive dividends and other distributions out of funds legally
available for such purposes at the annual rate of $60.00 per share (6%) per
annum, payable in annual installments. The first annual payment of dividends
shall be made on the earlier of (i) January 2, 1999 to holders of record on
December 31, 1998 or (ii) on the date of conversion or redemption based on the
number of days between the date of issue and the date of conversion or
redemption. The next annual payment of dividends shall be made on the first
business day of each year to the holders of record on the last business day of
each year. The Company shall have the right, in its sole discretion, to pay all
dividends on the 1997 Series A Preferred Stock in shares of its Common Stock, at
the average Market Price (as determined under Section 7(B) hereof) of its Common
Stock for the five trading days preceding the record date for such dividend.
The dividend payable on January 2, 1999, shall be pro-rated to apply only to
such period as the shares of 1997 Series A Preferred Stock was outstanding.
For purposes of this Certificate the term "junior stock" shall mean the
Common Stock and any other class or series of shares of the Corporation
hereafter authorized over which 1997 Series A Preferred Stock has preference or
priority in the payment of dividends or in the distribution of assets on any
liquidation, dissolution or winding up of the Corporation.
Section 3. Voting Rights. Except as otherwise provided by the General
-------------
Corporation Law of the State of Delaware, the 1997 Series A Preferred Stock have
no voting rights.
Section 4. Reacquired Shares. Any shares of the 1997 Series A Preferred
-----------------
Stock redeemed or purchased or otherwise acquired by the Corporation in any
manner whatsoever shall be retired and canceled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, unless otherwise provided for in the
Certificate of Incorporation of the Corporation, and may be reissued as part of
a new series of Preferred Stock to be created by resolution or resolutions of
the Board of Directors, subject to the conditions or restrictions on issuance
set forth herein.
Section 5. Liquidation, Dissolution or Winding Up.
--------------------------------------
(A) Upon the liquidation, dissolution or winding up of the Corporation, no
distribution shall be made: (i) to the holders of junior stock unless, prior
thereto, the holders of 1997 Series A Preferred Stock shall have received a
liquidation preference of $1,000.00 per share, plus an amount equal to
unpaid dividends thereon, if any, including accrued dividends, whether or not
declared, to the date of such payment or (ii) to the holders of stock ranking on
a parity (either as to dividends or upon liquidation, dissolution or winding up)
with the 1997 Series A Preferred Stock, except distributions made ratably on
2
<PAGE>
the 1997 Series A Preferred Stock and all other such parity stock in proportion
to the total amounts to which the holders of all such shares are entitled upon
such liquidation, dissolution or winding up. For purposes of this Certificate,
none of (1) the sale, conveyance, exchange or transfer of all or substantially
all of the property and assets of the Corporation, (2) the consolidation or
merger of the Corporation with or into any other corporation, or (3) the merger
or consolidation of any other corporation into or with the Corporation shall be
deemed to be a liquidation, dissolution or winding up of the Corporation,
provided that in each case, effective provision is made in the Certificate of
- --------
Incorporation of the resulting and surviving corporation or otherwise for the
protection of the rights of the holders of the 1997 Series A Preferred Stock.
(B) Upon any liquidation, dissolution or winding up of the Corporation, and
after full payment as provided in Section 5(A) above, the holders of 1997 Series
A Preferred Stock shall not be entitled to any further participation in any
distribution of assets by the Corporation.
Section 6. Conversion.
----------
(A) Subject to the provisions for adjustments hereinafter set forth, each
share of the 1997 Series A Preferred Stock, together with all accrued and unpaid
dividends thereon, shall, at the option of the holder thereof, be convertible at
any time from and after August 10, 1998, in the manner hereinafter set forth,
into: (A) fully paid and non-assessable shares of Common Stock ("Conversion
Shares") in an amount equal to the quotient determined by dividing (1) the sum
of $1,000.00 plus all accrued and unpaid dividends on such share of 1997 Series
A Preferred Stock by (2) the price ("Conversion Price") equal to (i) 78.75% of
the five day average Market Price per share (as defined in Section 7(B) below)
of the Common Stock for the five trading days immediately preceding the
Conversion Date (as defined in Section 6(D) below) if the Market Price is $.6875
or less or (ii) and at the Market Price per share (as defined in Section 7(B)
below) of the Common Stock for the five trading days immediately preceding the
Conversion Date (as defined in Section 6(D) below) if the Market Price is in
excess of $.6875.
(B) If, and only if, the Market Price (as defined in Section 7(B) below) of
the Common Stock for the five trading days immediately preceding the Conversion
Date (as defined in Section 6(B) below) is in excess of $.6875 the holder shall
also receive warrants (the "Conversion Warrants") upon conversion of the 1997
Series A Preferred Stock which shall be exercisable during the period commencing
on August 10, 1998 and ending on August 9, 2001 at a price of $.6875 per share,
subject to adjustment as set forth therein, the number of Conversion Warrants to
be issued to the holder on the conversion of each share of 1997 Series A
Preferred Stock to be equal to the quotient determined by dividing (1) $275.00
by (2) the remainder of the (a) Market Price (as defined in Section 7(B) below)
of the Common Stock on the Conversion Date (as defined in Section 6(D) below)
less (b) $.6875. The Holder(s) of the Preferred Shares shall not convert more
than ten per cent of the Shares originally acquired by them on any one day.
(C) The following examples illustrate the conversion ratios set forth in
Sections 6(A) and 6(B):
1. If, on the Conversion Date, as defined in Section 6(D), the five
day average Market Price of the Common Stock is $.50 and the accrued dividends
per share of Series A Preferred are $30.00, then each share of Series A
Preferred Stock that is converted will convert into:
($1,000.00 + $30.00 accrued dividends) = 2,624 shares of Common Stock issued
- --------------------------------------
3
<PAGE>
$.50 X .785 for each share of Series A Preferred
Stock that is converted.
2. If, on the Conversion Date, as defined in Section 6(D), the five
day average Market Price of the Common Stock is $2.00 and the accrued dividends
per share of Series A Preferred are $30.00, then each share of Series A
Preferred Stock that is converted will convert into:
($1,000 + $30.00 accrued dividends) = 515 shares of Common Stock issued
- ----------------------------------- for each share of Series A Preferred
$2.00 Stock that is converted.
AND, IN ADDITION
For each share of Series A Preferred Stock that is converted the holder
will receive the following number of warrants, exercisable during the period
commencing August 10, 1998 and ending on August 9, 2001:
$275.00 = $275.00 = 209.52 Warrants per
--------------------- --------------------- share of Series A
($2.00 - $.6875) $1.3125 Preferred Stock that is
converted.
(D) Conversion of the shares of 1997 Series A Preferred Stock may be
effected by the holder thereof surrendering to the Corporation at its principal
office in the State of California or at the office of any agent or agents of the
Corporation (collectively, the "Conversion Recipient"), as may be designated by
the Board of Directors of the Corporation for such purpose and written notice
thereof provided to such holder, the certificate for such 1997 Series A
Preferred Stock to be converted together with a written notice of conversion in
the form annexed hereto as Exhibit A (the "Conversion Notice") (1) stating that
such holder elects to convert all or a specified whole number of such shares in
accordance with the provisions of Section 6 of this Certificate of Designation,
(2) specifying the name or names in which such holder wishes the certificate of
certificates for Conversion Shares and Conversion Warrants to be issued. In case
the Conversion Notice shall specify a name or names other than that of the
holder, such notice shall be accompanied by payment of all transfer taxes
payable upon the issuance of Conversion Shares and Conversion Warrants in such
other name or names. (A copy of the Conversion Notice shall also be delivered to
counsel to the Corporation.) Within five (5) business days after the surrender
of such certificate or certificates and the receipt of the Conversion Notice
relating thereto and, if applicable, payment of all transfer taxes (or the taxes
having been paid), the Corporation shall deliver or cause to be delivered: (1)
certificates representing the number of validly issued fully paid and non-
assessable full Conversion Shares and Conversion Warrants to which the holder of
the shares of 1997 Series A Preferred Stock being converted shall be entitled
and (2) if less than the full number of the 1997 Series A Preferred Stock
evidenced by the surrendered certificate or certificates is being converted, a
new certificate or certificates, if so requested, of like tenor, for the number
of shares evidenced by such surrendered certificate or certificates less the
number of shares being converted. Such conversion shall be deemed to have been
made on the date (the "Conversion Date") that a copy of the Conversion Notice is
received by the Conversion Recipient by facsimile transmission as long as
certificate or certificates representing the shares of 1997 Series A Preferred
Stock to be converted are received by the Conversion Agent or the Company within
4
<PAGE>
three (3) business days thereafter; otherwise, and in all other cases, the
Conversion Date shall be the date on which the Conversion Recipient actually
receives the facsimile Conversion Notice and the original certificate or
certificates. Immediately prior to the close of business on the Conversion
Date, the rights of the holder of the shares of 1997 Series A Preferred Stock
being converted shall cease with respect to such shares, except for the right to
receive shares of Common Stock and Conversion Warrants in accordance herewith,
and the person entitled to receive the shares of Common Stock and Conversion
Warrants shall be treated for all purposes as having become the record holder of
such shares of Common Stock and Conversion Warrants at such time.
The Corporation shall be responsible for taking all action and bearing all
costs necessary to issue the Common Stock and Conversion Warrants as provided
herein, including the responsibility and cost for delivery of an opinion letter
to the transfer agent for the Common Stock, if so required. The place for the
delivery of the Common Stock and Conversion Warrants by the Corporation shall be
designated by the Holder and shall be within the Continental United States.
In the event that the Corporation does not make delivery of the Common
Stock and Conversion Warrants, as instructed in the Conversion Notice, within 5
business days after the Conversion Date, then, in such event, the Corporation
shall pay the Holder an amount, in cash, in accordance with the following
schedule, wherein "No. of Business Days Late" is defined as the number of
business days beyond the 5 business days delivery period.
<TABLE>
<CAPTION>
Late Payment for Each
share of 1997 Series A
No. of Business Days Late Preferred Stock Being Converted
- ------------------------- -------------------------------
<S> <C>
1 $5
2 $10
3 $15
4 $20
5 $25
6 $30
7 $35
8 $40
9 $45
10 $50
> 10 $50 + $10 for each Business Day
Late Beyond 10 Days.
</TABLE>
Nothing herein shall limit the Holder's right to pursue actual damages for
the Corporation's failure to deliver the Common Stock within ten days of the
Conversion Date or to maintain a sufficient number of authorized shares of
Common Stock or to cancel the Conversion Notice. Furthermore, if the sums due
in connection with the late delivery of the Common Stock and Conversion Warrants
are not paid upon the delivery of the Common Stock, the Holder shall have the
right, upon written notice given to the Company within twenty days, to rescind
the transaction. The Corporation acknowledges that its failure to so deliver
5
<PAGE>
the Common Stock within five business days after receipt of the Shares will
cause the Holder to suffer damages that are difficult to ascertain.
Accordingly, the Corporation has agreed that it is appropriate to include a
provision for liquidated damages. The Corporation and the original Holder of
the Shares have agreed that the liquidated damages provision set forth herein
represents their good faith effort to quantify such damages and have agreed that
the form and amount of such damages are reasonable and shall not constitute a
penalty. The payment of the liquidated damages provided herein shall not
relieve the Corporation of its obligation to deliver the Common Stock in
accordance with this Certificate of Designation or in accordance with the
Subscription Agreement between the Corporation and the original holder of the
Shares.
(E) In connection with the conversion of any shares of 1997 Series A
Preferred Stock, no fractions of shares of Common Stock shall be issued, but in
lieu thereof any fractional share shall be rounded up to the nearest whole
share. If more than one share of 1997 Series A Preferred Stock shall be
surrendered for conversion by the same holder at the same time, the number of
full shares of Common Stock issuable on conversion thereof shall be computed on
the basis of the total number of shares of 1997 Series A Preferred Stock so
stated to be converted in the Conversion Notice.
(F) The Conversion Price and/or the number of shares of Common Stock into
which each share of the 1997 Series A Preferred Stock is convertible shall be
adjusted from time to time as follows:
(i) In case the Corporation shall (a) subdivide the outstanding shares
of its Common Stock into a larger number of shares, (b) combine the
outstanding shares of its Common Stock into a smaller number of shares
or (c) issue by reclassification of its Common Stock any shares of the
Corporation, each holder of 1997 Series A Preferred Stock shall
thereafter be entitled upon conversion to receive for each share of
1997 Series A Preferred Stock held by him the number of shares of the
Corporation which he would have owned or have been entitled to receive
after the happening of one of the events described above in this
clause (i) had such share of 1997 Series A Preferred Stock been
converted immediately prior to the happening of such event. Such
adjustment shall become effective on the day next following the day
upon which such subdivision, combination or reclassification shall
become effective. Furthermore all references to $.6875 used in
Section 6(A) hereof shall also be proportionately adjusted to reflect
such adjustment.
(ii) In case the Corporation shall consolidate or merge into or with
another corporation, or in case the Corporation shall sell or convey
to any other person or persons all or substantially all the property
of the Corporation, or in case the Corporation shall effect a capital
reorganization or reclassification of its Common Stock, each holder of
1997 Series A Preferred Stock then outstanding shall have the right
thereafter to convert each share of 1997 Series A Preferred Stock held
by him into the kind and amount of shares of stock, other securities,
cash, and property receivable upon such consolidation, merger, sale,
conveyance, reorganization or reclassification by a holder of the
number of shares of Common Stock into which such share might have been
converted immediately prior to such consolidation, merger, sale,
conveyance, reorganization or reclassification and shall have no other
conversion rights. In any such event, effective provision shall be
made, in the
6
<PAGE>
certificate or articles of incorporation of the resulting or surviving
corporation or otherwise or in any contracts of sale and conveyance so
that, so far as appropriate and as nearly as reasonably may be, the
provisions set forth herein for the protection of the conversion
rights of the shares of 1997 Series A Preferred Stock shall thereafter
be made applicable.
Such adjustments shall be made successively whenever any event listed above
shall occur.
(G) In the event that at any time, as a result of an adjustment made
pursuant to this Section 6, the holder of any share of 1997 Series A Preferred
Stock thereafter converted shall become entitled to receive any shares of
capital stock or other securities of the Corporation other than shares of its
Common Stock, thereafter the number of such other shares of capital stock or
other securities so receivable upon conversion of 1997 Series A Preferred Stock
shall be subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to shares of the
Corporation's Common Stock contained in this Section 6, and the provisions of
this Certificate of Designation with respect to shares of the Corporation's
Common Stock shall apply, to the extent applicable, on like terms to any such
other shares of capital stock or warrants or other securities.
(H) If any adjustment in the number of shares of Common Stock into which
each share of the 1997 Series A Preferred Stock may be converted as required
pursuant to this Section 6 would result in an increase or decrease of less than
1% in the number of shares of Common Stock into which each share of the 1997
Series A Preferred Stock is then convertible, the amount of any such adjustment
shall be carried forward, and adjustment with respect thereto shall be made at
the time of and together with any subsequent adjustment which, together with
such amount and any other amount or amounts so carried forward, shall aggregate
at least 1% of the number of shares of Common Stock into which each share of the
1997 Series A Preferred Stock is then convertible. All calculations under this
Section 6(F) shall be made to the nearest one-hundredth of a share.
(I) The Board of Directors may, but shall not be required to, increase the
number of shares of Common Stock into which each share of the 1997 Series A
Preferred Stock may be converted, in addition to the adjustment required by this
Section 6, as shall be determined by it (as evidenced by a resolution of the
Board of Directors) to be advisable in order to avoid or diminish any income
deemed to be received by any holder of the Common Stock or 1997 Series A
Preferred Stock resulting from any dividend or distribution of stock or issuance
of rights or warrants to purchase or subscribe for stock or from any event
treated as such for federal income tax purposes.
(J) Upon conversion of any shares of the 1997 Series A Preferred Stock, the
holder thereof shall receive all accumulated, accrued or unpaid dividends in
respect of the shares so converted.
(K) The Corporation shall at all times reserve and keep available out of
its authorized but unissued shares of Common Stock the full number of shares of
Common Stock of the Corporation or other securities that may at any time be
issuable upon the conversion of all outstanding shares of the 1997 Series A
Preferred Stock and exercise of Conversion Warrants pursuant to this Certificate
of Designation.
(L) The right of the holder to conversion of the 1997 Series A Preferred
Stock shall be subject to the limitation that, other than for conversions at the
option of the Corporation Mandatory Conversions
7
<PAGE>
set forth in Section 7, and except (i) with respect to a conversion or (ii) if
the Corporation is in default of any of its obligations under this Certificate
of Designation, as amended, the Subscription Agreement between the Corporation
and the original Holder of the 1997 Series A Preferred Stock, or the
Registration Rights Agreement effecting the 1997 Series A Preferred Stock and
the Holder has asserted such default) shall the Holder be entitled to convert
any shares of 1997 Series A Preferred Stock to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock beneficially
owned by the Holder and its affiliates (other than shares of Common Stock which
may be deemed beneficially owned through the ownership of the unconverted shares
of 1997 Series A Preferred), and (2) the number of shares of Common Stock
issuable upon the conversion of the shares of 1997 Series A Preferred Stock with
respect to which the determination of this proviso is being made, would result
in beneficial ownership by the Holder and its affiliates of more than 9.99% of
the outstanding shares of Common Stock (after taking into account the shares to
be issued to the Holder upon such conversion). For purposes of the proviso to
the immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended
(the "1934 Act"), except as otherwise provided in clause (1) of such proviso.
The Holder further agrees that if the Holder transfers or assigns any of the
shares of 1997 Series A Preferred Stock to a party who or which would not be
considered such an affiliate, such assignment shall be made subject to the
transferee's or assignee's specific agreement to be bound by the provisions of
this Section as if such transferee or assignee were a signatory to the
Subscription Agreement executed by the original holder of the shares of 1997
Series A Preferred Stock.
Section 7. Conversion at the Option of the Corporation and Mandatory
---------------------------------------------------------
Redemption.
- -----------
(A) The Corporation shall have the right to require mandatory conversion of
the 1997 Series A Preferred Stock at any time at the then current Conversion
Price upon twenty days written notice to the record holders of the 1997 Series
A Preferred Stock, provided that the mandatory conversion provided in this
Section 7 shall only be effected if the average Market Price for the Common
Stock (as defined herein) for a five day period ending within ten days of the
giving of the notice shall equal or exceed 200% of the average Market Price (as
determined under Section 7(B) hereof) of its Common Stock for the five trading
days preceding the issue date of the Preferred Stock (subject to adjustments for
stock splits and the like) (the "Closing Date Market Price"). Upon the giving
of such notice, the passing of the twenty day period and the receipt of the
Conversion Shares and Conversion Warrants pursuant thereto, the holders of the
1997 Series A Preferred Stock will be deemed to have been converted and to have
the rights of holders of Common Stock and Conversion Warrants. Upon the giving
of a mandatory conversion notice by the Company under this Section 7(A), the
holders of the Series A Preferred Stock shall have no further rights other than
to receive the shares of Common Stock and Conversion Warrants set forth in the
notice of mandatory conversion upon the surrender of the certificates of their
Series A Preferred Stock.
(B) As used herein, the Market Price per share of the Common Stock at any
date shall be (i) if the principal trading market for such securities is an
exchange, the closing bid price on such exchange on such day provided if trading
of such Common Stock is listed on any consolidated tape, the price shall be the
closing bid price set forth on such consolidated tape, or (ii) if the principal
market for such securities is the over-the-counter market, the closing bid price
on such date as set forth by NASDAQ NMS, NASDAQ SmallCap, the NASDAQ Electronic
Bulletin Board or over the counter, as the case may be, or (iii) if the security
is not quoted on NASDAQ, the closing bid price as set forth in the NATIONAL
QUOTATION
8
<PAGE>
BUREAU sheet listing such securities for such day. Notwithstanding the
foregoing, if there is no reported closing price or closing bid price, as the
case may be, on a date prior to the event requiring a computation or adjustment
hereunder, then the Market Price shall be determined as of the latest date prior
to such day for which such closing price or closing bid price is available.
(C) In addition to the mandatory conversion provided under Section 7(A)
hereof, the Corporation shall have the right to redeem any or all of the Series
A Preferred Stock then outstanding for a cash payment equal to 127 1/2% of the
liquidation preference of said shares of Series A Preferred Stock (the "Cash
Redemption Price") on twenty days written notice (the "Cash Notice") to the
holders of said shares of Series A Preferred Stock. The Cash Notice shall
specify that the Company will deposit the Cash Redemption Price in an escrow
account specified in the Cash Redemption Notice prior to the expiration of the
twenty days. Upon the giving of the Cash Redemption Notice, the deposit of the
Cash Redemption Price in the account specified in the Cash Redemption Notice,
and the passing of the twenty day period without the Conversion of the Series A
Preferred Shares by the holder thereof, the holders of the 1997 Series A
Preferred Stock will be deemed to have been redeemed for cash and to only be
entitled to receive the Cash Redemption Price upon presentation of their shares
of Series A Preferred Stock to the Corporation.
(D) On March 31, 2000, the Corporation shall be required to redeem any then
outstanding Series A Preferred Shares at a price, based upon the conversion
formula set forth in Sections 6(A) and 6(B). Upon the Corporation's tendering
the redemption price to the record holder of the Series A Preferred Shares, all
rights as a holder, other than to receive said redemption price, shall cease.
If the Corporation is unable to locate any holder of Series A Preferred Shares,
the Corporation may deposit the redemption price in a non - interest bearing
account at any federally insured bank. Upon the Corporation's making such
deposit, all rights of such holder, other than to receive said redemption price,
shall cease.
Section 8. Adjustments for Consolidation, Merger, etc.
-------------------------------------------
Prior to the consummation of a consolidation or merger or a sale of
substantially all of the property of the Corporation as described in Section 6
(D)(ii) hereof, each corporation, including this Corporation, which may be
required to deliver any stock, securities, cash or other property to the holders
of shares of the 1997 Series A Preferred Stock shall assume, by written
instrument delivered to each transfer agent of the 1997 Series A Preferred
Stock, the obligation to deliver to such holder such shares of stock,
securities, cash or other property to which, in accordance with the provisions
of Section 6, such holder may be entitled and each such corporation shall have
furnished ,at such corporation's sole cost and expense, to each such transfer
agent or person acting in a similar capacity, including this Corporation, an
opinion of counsel for such corporation, stating that such assumption agreement
is legal, valid and binding upon such corporation.
Section 9. Reports as to Adjustments.
-------------------------
Whenever the Conversion Price and/or the number of shares of Common Stock
into which the shares of the 1997 Series A Preferred Stock are convertible is
adjusted as provided in Section 6, the Corporation shall (A) promptly compute
such adjustment and furnish to each transfer agent or person
9
<PAGE>
acting in a similar capacity, including the Corporation, for the 1997 Series A
Preferred Stock, a certificate, signed by a principal financial officer of the
Corporation, setting forth the adjusted Conversion Price and the new number of
shares of Common Stock into which each share of 1997 Series A Preferred Stock is
convertible as a result of such adjustment and the computation thereof and when
such adjustment will become effective and (B) promptly mail to the holders of
record of the outstanding shares of the 1997 Series A Preferred Stock a notice
stating that the Conversion Price and the number of shares into which the shares
of 1997 Series A Preferred Stock are convertible has been adjusted and setting
forth the new Conversion Price and number of shares into which each share of the
1997 Series A Preferred Stock is convertible as a result of such adjustment and
when such adjustment will become effective. However, no rights at law or in
equity shall accrue to the holders of the 1997 Series A Preferred Stock by
reason of any failure by the Corporation to give the notice required hereunder
nor shall such failure by the Corporation affect the validity of the event or
action giving rise to the requirement of such notice.
Section 10. Notices of Corporate Action.
---------------------------
In the event of:
(A) any taking by the Corporation of a record of the holders of its Common
Stock for the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a dividend payable solely in cash or shares of
common stock) or other distribution, or any right or warrant to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right;
(B) any capital reorganization, reclassification or recapitalization of the
Corporation (other than a subdivision or combination of the outstanding shares
of its Common Stock), any consolidation or merger involving the Corporation and
any other person (other than a consolidation or merger with a wholly-owned
subsidiary of the Corporation, provided that the Corporation is the surviving or
the continuing corporation and no change occurs in the common stock), or any
transfer of all or substantially all the assets of the Corporation to any other
person; or
10
<PAGE>
(C) any voluntary or involuntary dissolution, liquidation or winding up of
the Corporation; then, and in each such case, the Corporation shall cause to be
mailed to each transfer agent for the shares of the 1997 Series A Preferred
Stock and to the holders of record of the outstanding shares of the 1997 Series
A Preferred Stock, at least 20 days (or 10 days in case of any event specified
in clause (A) above) prior to the applicable record or effective date
hereinafter specified, a notice stating (i) the date or expected date on which
any such record is to be taken for the purpose of such dividend, distribution or
right or (ii) the date or expected date to which any such reorganization,
reclassification, recapitalization, consolidation, merger, transfer,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of record of Common Stock
shall be entitled to exchange their shares of Common Stock for the securities or
other property deliverable upon such reorganization, reclassification,
recapitalization, consolidation, merger, transfer, dissolution, liquidation or
winding up. Such notice shall also state whether such transaction will result
in any adjustment in the number of shares of Common Stock into which each share
of the 1997 Series A Preferred Stock shall be convertible upon such adjustment
and when such adjustment will become effective. The failure to give any notice
required by this Section 9, or any defect therein, shall not affect the legality
or validity of any event or such action requiring such notice.
Section 11. Registration Rights. The Company shall use its reasonable
--------------------
best efforts to include the resale of shares of Common Stock issuable upon
conversion of issued and outstanding share of the 1997 Series A convertible
Preferred Stock and issuable upon exercise of each Conversion Warrant in a
registration statement ordered effective under the Securities Act of 1933, as
amended (the "Act") on or before June 30, 1998. The holders of the 1997 Series
A Preferred Stock shall be deemed beneficiaries and deemed to be bound by an
agreement between the original holder of the 1997 Series A Preferred Stock and
the Corporation, provided however, that in lieu of any damages imposed under
such agreement or any other agreement for the Corporation's failure to effect a
registration under the Act, the Conversion Warrants shall provide that the
Conversion Warrants shall be exercisable by application of the intrinsic value
of surrendered Conversion Warrants ("cashless exercise") on any date that the
registration statement is not effective under the Act.
IN WITNESS WHEREOF, the undersigned, being the President and Assistant
Secretary of the Corporation, do hereby execute this Amended Certificate of
Designation, here declaring that this is their free act and deed and that the
facts stated herein are true and accordingly have hereunto set their hands as of
this 26th day of October, 1998.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ Mark Beychok
--------------------------------------------
ATTEST: Mark Beychok, President
/s/ Frank J. Hariton
- -----------------------------------------------------------
Frank J. Hariton, Assistant Secretary
11
<PAGE>
NOTICE OF CONVERSION
(To be executed by the Registered Holder in order to Convert the 1997 Series A
Preferred Stock)
The undersigned hereby irrevocably elects, as of ________________, ______,
to convert ______________ shares of the 1997 Series A Convertible Preferred
Stock ("1997 Series A Preferred Stock") of Vitafort International Corporation, a
Delaware corporation (the "Company"), into shares of Common Stock of the Company
and Conversion Warrants in accordance with the terms and conditions relating to
the conversion as set forth in Sections 6 and 7 of the Amended Certificate of
Designation for the 1997 Series A Preferred Stock on file with the Secretary of
State of the State of Delaware.
Certificate(s) representing the Common Stock and any Conversion Warrants
should be issued to the undersigned, or if otherwise indicated below, then to
the person(s) indicated below:
Name _______________________________________
Address _____________________________________
____________________________________________
Name _______________________________________
____________________________________________
(The Corporation reserves the right to require an investment representation
letter from any recipient of shares of Common Stock and Conversion Warrants
other than the Holder of the 1997 Series A Preferred Shares.)
The undersigned represents and warrants that it is the bona fide record and
beneficial owner of the 1997 Series A Preferred Shares herewith surrendered for
conversion.
Date of Conversion: ______________
Applicable Conversion Price ______________
Number of Shares of Common
Stock to be Issued ______________
Number of Conversion Warrants
to be Issued ______________
(If the above information is left blank, then Corporation will calculate the
conversion price for you.)
Signature ___________________________________
Print Name
(Name must match certificate) ___________________________________
12
<PAGE>
EXHIBIT 3.17
FORM OF DEBENTURE
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS AND ARE BEING OFFERED AND SOLD
IN RELIANCE ON EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS OF SUCH LAWS. THE
SECURITIES ARE SUBJECT TO RESTRICTIONS OF TRANSFERABILITY AND RESALE AND MAY NOT
BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER SUCH LAWS PURSUANT TO
REGISTRATION OR AN EXEMPTION THEREFROM. THE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE
MERITS OF THIS OFFERING OR THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS.
ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
CONVERTIBLE DEBENTURE DUE August 24, 1998
August 24, 2000
$ 548,352
Number AUGUST-1998-101
FOR VALUE RECEIVED, VITAFORT INTERNATIONAL CORPORATION, a Delaware
corporation (the "Company"), hereby promises to pay to DOMINION CAPITAL FUND,
LTD. or registered assigns (the "Holder") on August 24, 2000, (the "Maturity
Date"), the principal amount of FIVE HUNDRED FORTY-EIGHT THOUSAND THREE HUNDRED
FIFTY-TWO DOLLARS ($548,352) U.S., and to pay interest on the principal amount
hereof, in such amounts, at such times and on such terms and conditions as are
specified herein.
Article 1. Interest
The Company shall pay interest on the unpaid principal amount of this
Debenture (the "Debenture") at the rate of Six Percent (6.0%) per year, payable
quarterly or at the time of each conversion if such conversion is prior to the
quarter end until the principal amount hereof is paid in full or has been
converted. Interest shall be computed on the basis of a 360 day year of 12, 30
day months. Each payment shall be paid in cash or in freely trading Common Stock
of the Company, at the Company's option at the time of each conversion. If the
interest is to be paid in cash, the Company shall make such payment within 5
business days of the date of conversion or the quarter end, as the case may be.
If the interest is to be paid in Common Stock, said Common Stock shall be
delivered to the Holder, or per Holder's instructions, within 5 business days of
the date of conversion or the quarter end, as the case may be. This Debenture
shall mature at the end of two
1
<PAGE>
years from the date of issuance. The closing shall be deemed to have occurred
on the date the funds are received by the Company (the "Closing Date").
Article 2. Method of Payment
This Debenture must be surrendered to the Company in order for the Holder
to receive payment of the principal amount hereof. The Company shall have the
option of paying the interest on this Debenture in United States dollars or in
common stock upon conversion pursuant to Article 1 hereof. The Company may draw
a check for the payment of interest to the order of the Holder of this Debenture
and mail it to the Holder's address as shown on the Register (as defined in
Section 7.2 below). Interest and principal payments shall be subject to
withholding under applicable United States Federal Internal Revenue Service
Regulations.
Article 3. Conversion
Section 3.1. Conversion Privilege
(a) The Holder of this Debenture shall have the right, at its option, to
convert it into shares of common stock, par value $0.01 per share, of the
Company ("Common Stock") at any time which is before the close of business on
the Maturity Date, except as set forth in Section 3.1(c) below. The number of
shares of Common Stock issuable upon the conversion of this Debenture is
determined pursuant to Section 3.2 and rounding the result to the nearest whole
share.
(b) Less than all of the principal amount of this Debenture may be
converted into Common Stock if the portion converted is $5,000 or a whole
multiple of $5,000 and the provisions of this Article 3 that apply to the
conversion of all of the Debenture shall also apply to the conversion of a
portion of it. This Debenture may not be converted, whether in whole or in
part, except in accordance with Article 3.
Section 3.2. Conversion Procedure.
(a) Debentures. Upon receipt by the Company or its designated attorney of
a facsimile or original of Holder's signed Notice of Conversion and the original
Debenture to be converted in whole or in part, the Company shall instruct its
transfer agent to issue one or more Certificates representing that number of
shares of Common Stock into which the Debenture is convertible in accordance
with the provisions regarding conversion set forth in the Notice of Conversion.
The Seller's transfer agent or attorney shall act as Registrar and shall
maintain an appropriate ledger containing the necessary information with respect
to each Debenture.
(b) Conversion Procedures. The face amount of this Debenture may be
converted, in whole or in part, one hundred twenty (120) calendar days following
2
<PAGE>
the Closing Date. Such conversion shall be effectuated by surrendering to the
Company, or its attorney, this Debenture to be converted together with a
facsimile or original of the signed Notice of Conversion which evidences
Holder's intention to convert the Debenture indicated. The date on which the
Notice of Conversion is effective ("Conversion Date") shall be deemed to be the
date on which the Holder has delivered to the Company or its designated attorney
a facsimile or original of the signed Notice of Conversion, as long as the
original Debenture(s) to be converted are received by the Company or its
designated attorney within 5 business days thereafter. Unless otherwise
notified by the Company in writing via facsimile the Company's designated
attorney is Frank J. Hariton, Esq., The Empire State Building, 350 Fifth
Avenue, Suite 3000, New York, NY 10018 (P) (212) 695-6000; (914) 693-7353 (F)
(212) 695-6007; (914) 693-2963.
(c) Common Stock to be Issued. Upon the conversion of any Debentures and
upon receipt by the Company or its attorney of a facsimile or original of
Holder's signed Notice of Conversion Seller shall instruct Seller's transfer
agent to issue Stock Certificates without restrictive legend or stop transfer
instructions, if at that time the Registration Statement has been deemed
effective (or with proper restrictive legend if the Registration Statement has
not as yet been declared effective), in the name of Holder (or its nominee) and
in such denominations to be specified at conversion representing the number of
shares of Common Stock issuable upon such conversion, as applicable. Seller
warrants that no instructions, other than these instructions, have been given or
will be given to the transfer agent and that the Common Stock shall otherwise be
freely transferable on the books and records of Seller, except as may be set
forth herein.
(d) (i) Conversion Rate. Holder is entitled, at its option, to convert
---------------
all or a portion of the face amount of each Debenture representing the initial
two (2) funding tranches of $545,000 and $250,000 respectively, plus accrued
interest, one hundred twenty (120) calendar days following the Closing Date, at
75% of the 5 day average closing bid price, as reported by for the five (5)
consecutive trading days immediately preceding the applicable Conversion Date
(the "Conversion Price"). Holder is entitled, at its option, to convert the face
amount of each Debenture representing a subsequent funding tranche, plus accrued
interest, at the earlier of the effective date of the Registration Statement or
ninety (90) calendar days following the Closing Date of that subsequent funding
tranche, at 80% of the 5 day average closing bid price, as reported by
Bloomberg, LP for the 5 consecutive trading days immediately preceding the
applicable Conversion Date, (the "Conversion Price"). No fractional shares or
scrip representing fractions of shares will be issued on conversion, but the
number of shares issuable shall be rounded up or down, as the case may be, to
the nearest whole share.
(ii) Most Favored Financing. If after the Closing Date, but prior
----------------------
to the Holder's conversion of all the Debentures, the Company raises money under
Regulation D on terms that are more favorable than those terms set forth in this
Debenture, then in such event, the Holder at its sole option shall be entitled
to
3
<PAGE>
completely replace the terms of this Debenture with the terms of the more
beneficial Debenture as to that balance, including accrued interest and any
accumulated liquidated damages, remaining on Holder's original investment.
(e) Nothing contained in this Debenture shall be deemed to establish or
require the payment of interest to the Holder at a rate in excess of the maximum
rate permitted by governing law. In the event that the rate of interest
required to be paid exceeds the maximum rate permitted by governing law, the
rate of interest required to be paid thereunder shall be automatically reduced
to the maximum rate permitted under the governing law and such excess shall be
returned with reasonable promptness by the Holder to the Company.
(f) It shall be the Company's responsibility to take all necessary actions
and to bear all such costs to issue the Certificate of Common Stock as provided
herein, including the responsibility and cost for delivery of an opinion letter
to the transfer agent, if so required. The person in whose name the certificate
of Common Stock is to be registered shall be treated as a shareholder of record
on and after the conversion date. Upon surrender of any Debentures that are to
be converted in part, the Company shall issue to the Holder a new Debenture
equal to the unconverted amount, if so requested in writing by Holder.
(g) Within six (6) business days after receipt of the documentation
referred to above in Section 3.2(b) (the "Delivery Date"), the Company shall
deliver a certificate to the Holder, within the United States or Canada, without
stop transfer instructions, for the number of shares of Common Stock issuable
upon the conversion. It shall be the Company's responsibility to take all
necessary actions and to bear all such costs to issue to the Holder the Common
Stock as provided herein, including the cost for delivery of an opinion letter
to the transfer agent, if so required. The person in whose name the certificate
of Common Stock is to be registered shall be treated as a shareholder of record
on and after the conversion date. Upon surrender of any Debentures that are to
be converted in part, the Company shall issue to the Holder a new Debenture
equal to the unconverted amount, if so requested in writing by Holder.
In the event the Company does not make delivery of the Common Stock, as
instructed by Holder by the Delivery Date, then in such event the Company shall
pay to Holder an amount, in cash in accordance with the following schedule,
wherein "No. Business Days Late" is defined as the number of business days
beyond the Delivery Date.
<TABLE>
<CAPTION>
Late Payment for Each
$10,000 of Debenture
No. Business Days Late Amount Being Converted
- ---------------------- ----------------------
<S> <C>
1 $100
2 $200
3 $300
4 $400
5 $500
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 + $200 for each
Business Day Beyond 10
</TABLE>
The Company acknowledges that its failure to deliver the Common Stock by
the Delivery Date will cause the Holder to suffer damages in an amount that will
be difficult to ascertain. Accordingly, the parties agree that it is appropriate
to include in this Debenture a provision for liquidated damages. The parties
acknowledge and agree that the liquidated damages provision set forth in this
section represents the parties' good faith effort to qualify such damages and,
as such, agree that the form and amount of such liquidated damages are
reasonable and will not constitute a penalty. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Debenture.
To the extent that the failure of the Company to issue the Common Stock
pursuant to this Section 3.2(g) is due to the unavailability of authorized but
unissued shares of Common Stock, the provisions of this Section 3.2(g) shall not
apply but instead the provisions of Section 3.2(h) shall apply.
The Company shall make any payments incurred under this Section 3.2(g) in
immediately available funds within five (5) business days from the Conversion
Date if late. Nothing herein shall limit a Holder's right to pursue actual
damages or cancel the conversion for the Company's failure to issue and deliver
Common Stock to the Holder within 10 business days after the Conversion Date.
In the event the Company fails to deliver the Common Stock to the Holder within
15 business days after the Conversion Date, the Holder shall have the right to
demand redemption in accordance with the terms of Section 5 (f) (y) of the
Subscription Agreement, which Subscription Agreement is incorporated herein by
reference and made a part hereof, by sending the Company written notice by
facsimile transmission.
(h) The Company shall at all times reserve and have available all Common
Stock necessary to meet conversion of the Debentures by all Holders of the
entire amount of Debentures then outstanding. If, at any time Holder submits a
Notice of Conversion and the Company does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a conversion of
the Debentures (a "Conversion Default", the date of such default being referred
to herein as the "Conversion Default Date"), the Company shall issue to the
Holder all of the shares of Common Stock which are available, and the Notice of
Conversion as to any Debentures requested to be converted but not converted (the
"Unconverted Debentures"), upon Holder's sole option, may be deemed null and
void. The Company shall provide notice of such Conversion
5
<PAGE>
Default ("Notice of Conversion Default") to all existing Holders of outstanding
Debentures, by facsimile, within three (3) business day of such default (with
the original delivered by overnight or two day courier), and the Holder shall
give notice to the Company by facsimile within five business days of receipt of
the original Notice of Conversion Default (with the original delivered by
overnight or two day courier) of its election to either nullify or confirm the
Notice of Conversion.
The Company agrees to pay to all Holders of outstanding Debentures payments
for a Conversion Default ("Conversion Default Payments") in the amount of
(N/365) x (.24) x the initial issuance price of the outstanding and/or tendered
but not converted Debentures held by each Holder where N = the number of days
from the Conversion Default Date to the date (the "Authorization Date") that the
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of all remaining Debentures. The Company shall send notice
("Authorization Notice") to each Holder of outstanding Debentures that
additional shares of Common Stock have been authorized, the Authorization Date
and the amount of Holder's accrued Conversion Default Payments. The accrued
Conversion Default shall be paid in cash or shall be convertible into Common
Stock at the Conversion Rate, at the Holder's option, payable as follows: (i)
in the event Holder elects to take such payment in cash, cash payments shall be
made to such Holder of outstanding Debentures by the fifth day of the following
calendar month, or (ii) in the event Holder elects to take such payment in
stock, the Holder may convert such payment amount into Common Stock at the
conversion rate set forth in section 4(d) at anytime after the 5th day of the
calendar month following the month in which the Authorization Notice was
received.
The Company acknowledges that its failure to maintain a sufficient number
of authorized but unissued shares of Common Stock to effect in full a conversion
of the Debentures will cause the Holder to suffer damages in an amount that will
be difficult to ascertain. Accordingly, the parties agree that it is appropriate
to include in this Agreement a provision for liquidated damages. The parties
acknowledge and agree that the liquidated damages provision set forth in this
section represents the parties' good faith effort to quantify such damages and,
as such, agree that the form and amount of such liquidated damages are
reasonable and will not constitute a penalty. The payment of liquidated damages
shall not relieve the Company from its obligations to deliver the Common Stock
pursuant to the terms of this Debenture.
Nothing herein shall limit the Holder's right to pursue actual damages or
cancel a Notice of Conversion for the Company's failure to maintain a
sufficient number of authorized shares of Common Stock.
(i) The Company shall furnish to Holder such number of prospectuses
and other documents reasonably requested by Purchaser which
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are incidental to the registration of the shares of Common Stock underlying the
Debentures, including any amendment of or supplements thereto.
(j) Notwithstanding the provisions of this Debenture, in no event
except (i) with respect to a conversion or (ii) if the Company is in default of
any of its obligations under this Debenture, the Subscription Agreement, or the
Registration Rights Agreement and the Holder has asserted such default) shall
the Holder be entitled to convert any Debentures to the extent that, after such
conversion, the sum of (1) the number of shares of Common Stock beneficially
owned by the Holder and its affiliates (other than shares of Common Stock which
may be deemed beneficially owned through the ownership of the unconverted
portion of the Debentures), and (2) the number of shares of Common Stock
issuable upon the conversion of the Debentures with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 9.99% of the outstanding
shares of Common Stock (after taking into account the shares to be issued to the
Holder upon such conversion). For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), except as otherwise provided in clause (1) of such proviso. The Holder
further agrees that if the Holder transfers or assigns any of the Debentures to
a party who or which would not be considered such an affiliate, such assignment
shall be made subject to the transferee's or assignee's specific agreement to be
bound by the provisions of this Section as if such transferee or assignee were a
signatory to the Subscription Agreement.
(k) Certain Agreements. (i) The Company covenants and agrees that
it will not, without the prior written consent of the Holder, enter into any
subsequent or further offer or sale of Common Stock or securities convertible
into Common Stock with any third party unless such conversions into Common Stock
are restricted until four (4) months after the Registration Statement covering
this offering is deemed effective.
(ii) The provisions of subparagraph (l)(i) will not apply to (w)
Common Stock issued pursuant to Rule 144, provided the holder thereof holds such
Common Stock for at least one year from the date of issuance; (x) a secondary
public offering of shares of Common Stock at market; (y) an offering of
convertible debentures at market or above; or (z) the issuance of securities
(other than for cash) in connection with a merger, consolidation, sale of
assets, disposition or the exchange of the capital stock for assets, stock or
other joint venture interests; provided, such securities would not be included
in the Registration Statement relating to this offering and a registration
statement in respect of such stock shall not be filed prior to sixty (60) days
after the date the Registration Statement covering this offering is deemed
effective.
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(iii) In the event the Company breaches the provisions of this
Section, the Conversion Price shall be amended to 70% of the five (5) day
average closing bid for the five (5) days prior to the Conversion Notice or and
the Holder may require the Company to immediately redeem all outstanding
Debentures in accordance with the terms of Paragraph 5 (f) (y) of the
Subscription Agreement, which Subscription Agreement is incorporated herein by
reference and made a part hereof.
(l) Redemption Terms. The Company reserves the right, at its sole
option, to repurchase any portion of or all of the Debentures upon the terms set
forth in this subsection. If the Company exercises such right to repurchase on
or before the ninetieth (90th) calendar day following the Closing Date, it shall
pay the Holder, in U.S. currency One Hundred Fifteen Percent (115%) of the face
amount of the Debenture, or portion thereof, being so redeemed, plus accrued
interest. If the Company exercises such right to repurchase after the ninetieth
(90th) calendar day following the Closing Date, it shall pay the Holder, in U.S.
currency One Hundred Fifteen Percent (115%) of the face amount of the Debenture,
or portion thereof, being so redeemed, plus accrued interest, and .16667% of
that amount of the Debenture being redeemed for every calendar day following the
ninetieth (90th) calendar day after the Closing Date up to a maximum of One
Hundred Thirty-five Percent (135%), plus accrued interest. The Company may
exercise its repurchase rights hereunder by notifying the Holder by facsimile at
the number listed in the Subscription Agreement. The Company shall state in such
notice the dollar amount of Debenture(s) it intends to repurchase, the amount
that it will pay to effect such repurchase and the date by which the Holder must
deliver the Debentures to Joseph B. LaRocco, Escrow Agent (including the Escrow
Agent's address) unless the Company is already in receipt of those Debentures to
be repurchased. The Holder shall be prohibited from selling or trading the
Debentures subject to the repurchase notice after the notice has been received.
The Company shall give the Holder at least ten (10) business day's notice of the
above information. On or before the date by which the Holder is to deliver the
original Debentures to the Escrow Agent, the Company shall wire to the Escrow
Agent that amount necessary to pay the Holder to effect the repurchase. After
the Escrow Agent is in receipt of the original Debentures and those funds
necessary to effectuate the repurchase, the Escrow Agent shall wire those funds
to the Holder and deliver to the Company the original Debentures via overnight
courier. The Company shall make any payments required under the terms of this
subsection to the Escrow Agent within eight (8) business days following the date
the Company sends the Holder a notice to repurchase. In the event the Company
fails to wire said funds to the Escrow Agent within said eight (8) business day
period the Holder shall be free to convert any Debentures that were to be
repurchased by the Company.
Section 3.3. Investment Intent. The Holder of this Debenture by acceptance
hereof, agrees that this Debenture is being aquired for investment and that such
Holder will not offer, sell or otherwise dispose of the Debenture or
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the shares of Common Stock issuable upon conversion thereof except under
circumstances which will not result in violation of the 1933 Act or any
applicable state Blue Sky law or similar laws relating to the sale of
securities.
Section 3.4. Fractional Shares. The Company shall not issue fractional
shares of Common Stock, or scrip representing fractions of such shares, upon the
conversion of this Debenture. Instead, the Company shall round up or down, as
the case may be, to the nearest whole share.
Section 3.5. Taxes on Conversion. The Company shall pay any documentary,
stamp or similar issue or transfer tax due on the issue of shares of Common
Stock upon the conversion of this Debenture. However, the Holder shall pay any
such tax which is due because the shares are issued in a name other than its
name.
Section 3.6. Company to Reserve Stock. The Company shall reserve the
number of shares of Common Stock required pursuant to and upon the terms set
forth in Section 3(a) of the Subscription Agreement, to permit the conversion of
this Debenture. All shares of Common Stock which may be issued upon the
conversion hereof shall upon issuance be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof.
Section 3.7. Restrictions on Transfer. This Debenture has not been
registered under the Securities Act of 1933, as amended, (the "Act") and is
being issued under Section 4(2) of the Act and Rule 506 of Regulation D
promulgated under the Act. This Debenture and the Common Stock issuable upon
the conversion thereof may only be offered or sold pursuant to registration
under or an exemption from the Act.
Section 3.8. Mergers, Etc. If the Company merges or consolidates with
another corporation or sells or transfers all or substantially all of its assets
to another person and the holders of the Common Stock are entitled to receive
stock, securities or property in respect of or in exchange for Common Stock,
then as a condition of such merger, consolidation, sale or transfer, the Company
and any such successor, purchaser or transferee shall amend this Debenture to
provide that it may thereafter be converted on the terms and subject to the
conditions set forth above into the kind and amount of stock, securities or
property receivable upon such merger, consolidation, sale or transfer by a
holder of the number of shares of Common Stock into which this Debenture might
have been converted immediately before such merger, consolidation, sale or
transfer, subject to adjustments which shall be as nearly equivalent as may be
practicable to adjustments provided for in this Article 3.
Article 4. Mergers
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The Company shall not consolidate or merge into, or transfer all or
substantially all of its assets to, any person, unless such person assumes in
writing the obligations of the Company under this Debenture and immediately
after such transaction no Event of Default exists. Any reference herein to the
Company shall refer to such surviving or transferee corporation and the
obligations of the Company shall terminate upon such written assumption.
Article 5. Reports
The Company will mail to the Holder hereof at its address as shown on the
Register a copy of any annual, quarterly or current report that it files with
the Securities and Exchange Commission promptly after the filing thereof and a
copy of any annual, quarterly or other report or proxy statement that it gives
to its shareholders generally at the time such report or statement is sent to
shareholders.
Article 6. Defaults and Remedies
Section 6.1. Events of Default. An "Event of Default" occurs if (a) the
Company does not make the payment of the principal of this Debenture when the
same becomes due and payable at maturity, upon redemption or otherwise, (b) the
Company does not make a payment, other than a payment of principal, for a period
of 5 business days thereafter, (c) the Company fails to comply with any of its
other agreements in this Debenture and such failure continues for the period and
after the notice specified below, (d) the Company pursuant to or within the
meaning of any Bankruptcy Law (as hereinafter defined): (i) commences a
voluntary case; (ii) consents to the entry of an order for relief against it in
an involuntary case; (iii) consents to the appointment of a Custodian (as
hereinafter defined) of it or for all or substantially all of its property or
(iv) makes a general assignment for the benefit of its creditors or (v) a court
of competent jurisdiction enters an order or decree under any Bankruptcy Law
that: (A) is for relief against the Company in an involuntary case; (B)
appoints a Custodian of the Company or for all or substantially all of its
property or (C) orders the liquidation of the Company, and the order or decree
remains unstayed and in effect for 60 days, (e) the Company's Common Stock is no
longer listed on any recognized exchange including electronic over-the-counter
bulletin board. As used in this Section 6.1, the term "Bankruptcy Law" means
Title 11 of the United States Code or any similar federal or state law for the
relief of debtors. The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law. A default under clause
(c) above is not an Event of Default until the holders of at least 25% of the
aggregate principal amount of the Debentures outstanding notify the Company of
such default and the Company does not cure it within five (5) business days
after the receipt of such notice, which must specify the default, demand that it
be remedied and state that it is a "Notice of Default". In the event the Company
is in default of any of the provisions of this Debenture, the Holder may choose
any of the remedies or damages already provided herein or Holder may demand
immediate redemption in accordance with the terms of
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Section 5 (f) (y) of the Subscription Agreement, which Subscription Agreement is
incorporated herein by reference and made a part hereof.
Section 6.2. Acceleration. If an Event of Default occurs and is
continuing, the Holder hereof by notice to the Company, may declare the
remaining principal amount of this Debenture to be due and payable. Upon such
declaration, the remaining principal amount and accrued interest shall be due
and payable immediately
Article 7. Registered Debentures
Section 7.1. Series. This Debenture is one of a numbered series of
Debentures which are identical except as to the principal amount and date of
issuance thereof and as to any restriction on the transfer thereof in order to
comply with the Securities Act of 1933 and the regulations of the Securities and
Exchange Commission promulgated thereunder. Such Debentures are referred to
herein collectively as the "Debentures". The Debentures shall be issued in
whole multiples of $5,000.
Section 7.2. Record Ownership. The Company, or its attorney, shall
maintain a register of the holders of the Debentures (the "Register") showing
their names and addresses and the serial numbers and principal amounts of
Debentures issued to or transferred of record by them from time to time. The
Register may be maintained in electronic, magnetic or other computerized form.
The Company may treat the person named as the Holder of this Debenture in the
Register as the sole owner of this Debenture. The Holder of this Debenture is
the person exclusively entitled to receive payments of interest on this
Debenture, receive notifications with respect to this Debenture, convert it into
Common Stock and otherwise exercise all of the rights and powers as the absolute
owner hereof.
Section 7.3. Registration of Transfer. Transfers of this Debenture may be
registered on the books of the Company maintained for such purpose pursuant to
Section 7.2 above (i.e., the Register). Transfers shall be registered when this
Debenture is presented to the Company with a request to register the transfer
hereof and the Debenture is duly endorsed by the appropriate person, reasonable
assurances are given that the endorsements are genuine and effective, and the
Company has received evidence satisfactory to it that such transfer is rightful
and in compliance with all applicable laws, including tax laws and state and
federal securities laws. When this Debenture is presented for transfer and duly
transferred hereunder, it shall be canceled and a new Debenture showing the name
of the transferee as the record holder thereof shall be issued in lieu hereof.
When this Debenture is presented to the Company with a reasonable request to
exchange it for an equal principal amount of Debentures of other denominations,
the Company shall make such exchange and shall cancel this Debenture and issue
in lieu thereof Debentures having a total principal amount equal to this
Debenture in such denominations as agreed to by the Company and Holder.
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Section 7.4. Worn or Lost Debentures. If this Debenture becomes worn,
defaced or mutilated but is still substantially intact and recognizable, the
Company or its agent may issue a new Debenture in lieu hereof upon its
surrender. Where the Holder of this Debenture claims that the Debenture has
been lost, destroyed or wrongfully taken, the Company shall issue a new
Debenture in place of the original Debenture if the Holder so requests by
written notice to the Company actually received by the Company before it is
notified that the Debenture has been acquired by a bona fide purchaser and the
Holder has delivered to the Company an indemnity bond in such amount and issued
by such surety as the Company deems satisfactory together with an affidavit of
the Holder setting forth the facts concerning such loss, destruction or wrongful
taking and such other information in such form with such proof or verification
as the Company may request.
Article 8. Notices
Any notice which is required or convenient under the terms of this
Debenture shall be duly given if it is in writing and delivered in person or
mailed by first class mail, postage prepaid and directed to the Holder of the
Debenture at its address as it appears on the Register or if to the Company to
its principal executive offices. The time when such notice is sent shall be the
time of the giving of the notice.
Article 9. Time
Where this Debenture authorizes or requires the payment of money or the
performance of a condition or obligation on a Saturday or Sunday or a public
holiday, or authorizes or requires the payment of money or the performance of a
condition or obligation within, before or after a period of time computed from a
certain date, and such period of time ends on a Saturday or a Sunday or a public
holiday, such payment may be made or condition or obligation performed on the
next succeeding business day, and if the period ends at a specified hour, such
payment may be made or condition performed, at or before the same hour of such
next succeeding business day, with the same force and effect as if made or
performed in accordance with the terms of this Debenture. A "business day"
shall mean a day on which the banks in New York are not required or allowed to
be closed.
Article 10. Waivers
The holders of a majority in principal amount of the Debentures may waive a
default or rescind the declaration of an Event of Default and its consequences
except for a default in the payment of principal or conversion into Common
Stock.
Article 11. Rules of Construction
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In this Debenture, unless the context otherwise requires, words in the
singular number include the plural, and in the plural include the singular, and
words of the masculine gender include the feminine and the neuter, and when the
sense so indicates, words of the neuter gender may refer to any gender. The
numbers and titles of sections contained in the Debenture are inserted for
convenience of reference only, and they neither form a part of this Debenture
nor are they to be used in the construction or interpretation hereof. Wherever,
in this Debenture, a determination of the Company is required or allowed, such
determination shall be made by a majority of the Board of Directors of the
Company and if it is made in good faith, it shall be conclusive and binding upon
the Company and the Holder of this Debenture.
Article 12. Governing Law
The validity, terms, performance and enforcement of this Debenture shall be
governed and construed by the provisions hereof and in accordance with the laws
of the State of Delaware applicable to agreements that are negotiated, executed,
delivered and performed solely in the State of Delaware.
Article 13. Litigation
(a) Forum Selection and Consent to Jurisdiction. Any litigation based
thereon, or arising out of, under, or in connection with, this agreement or any
course of conduct, course of dealing, statements (whether oral or written) or
actions of the Company or Holder shall be brought and maintained exclusively in
the courts of the State of New York. The Company hereby expressly and
irrevocably submits to the jurisdiction of the state and federal courts of the
State of New York for the purpose of any such litigation as set forth above and
irrevocably agrees to be bound by any final judgment rendered thereby in
connection with such litigation. The Company further irrevocably consents to
the service of process by registered mail, postage prepaid, or by personal
service within or without the State of New York. The Company hereby expressly
and irrevocably waives, to the fullest extent permitted by law, any objection
which it may have or hereafter may have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that any
such litigation has been brought in any inconvenient forum. To the extent that
the Company has or hereafter may acquire any immunity from jurisdiction of any
court or from any legal process (whether through service or notice, attachment
prior to judgment, attachment in aid of execution or otherwise) with respect to
itself or its property. The Company hereby irrevocably waives such immunity in
respect of its obligations under this agreement and the other loan documents.
(b) Waiver of Jury Trial. The Holder and the Company hereby knowingly,
voluntarily and intentionally waive any rights they may have to a trial by jury
in respect of any litigation based hereon, or arising out of, under, or in
connection with, this agreement, or any course of conduct, course of dealing,
statements (whether oral or written) or actions of the Holder or the Company.
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The Company acknowledges and agrees that it has received full and sufficient
consideration for this provision and that this provision is a material
inducement for the Holder entering into this agreement.
(c) Submission To Jurisdiction. Any legal action or proceeding in
connection with this Agreement or the performance hereof may be brought in the
state and federal courts located in the State of Delaware and the parties hereby
irrevocably submit to the non-exclusive jurisdiction of such courts for the
purpose of any such action or proceeding.
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the date
first written above.
VITAFORT INTERNATIONAL CORPORATION
By_____________________________
Name:
Title:
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NOTICE OF CONVERSION
--------------------
(To be Executed by the Registered Holder in order to Convert the Debentures.)
The undersigned hereby irrevocably elects, as of ______________, 199_ to
convert $_________________ of the Debentures into Shares of Common Stock (the
"Shares") of VITAFORT INTERNATIONAL, CORPORATION (the "Company") according to
the conditions set forth in the Subscription Agreement dated August ____, 1998.
Date of Conversion_________________________________________
Applicable Conversion Price_________________________________
Number of Shares Issuable upon this conversion______________
Signature___________________________________________________
[Name]
Address_____________________________________________________
____________________________________________________________
Phone______________________ Fax___________________________
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Assignment of Debenture
The undersigned hereby sell(s) and assign(s) and transfer(s) unto
________________________________________________________________________________
(name, address and SSN or EIN of assignee)
Dollars ($ )
___________________________________________________________________________
(principal amount of Debenture, $10,000 or integral multiples of $10,000)
of principal amount of this Debenture together with all accrued and unpaid
interest hereon.
Date:______________ Signed:________________________________________________
(Signature must conform in all
respects to name of Holder shown
of face of Debenture)
Signature Guaranteed:
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EXHIBIT 5.1
November 11, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Vitafort International Corporation (the "Company")
Registration Statement on Form SB-2 Number 333-65273 relating to an
aggregate of 9,365,914 shares (the "Shares") of the Company's Common Stock,
par value $.0001 per share
Gentlemen:
I have been requested by the Company, a Delaware corporation, to furnish
you with my opinion as to the maters hereinafter set forth in connection with
the above captioned Registration Statement (the "Registration Statement")
covering the 9,365,914 Shares. All of the 9,365,914 Shares will be offered by
the Selling Shareholders who acquired the shares under various agreements or
will be acquired by the Selling Shareholders upon the conversion of debentures
or the exercise of options or warrants.
In connection with this opinion, I have examined the Registration Statement
(as amended through the date hereof), the Certificate of Incorporation and By-
Laws of the Company, each as amended to date, copies of the records of corporate
proceedings of the Company, and copies of such other agreements, instruments and
documents as I have deemed necessary to enable me to render the opinion
hereinafter expressed.
Based upon and subject to the foregoing, I am of the opinion that all of
the 9,365,914 Shares, when sold in the manner described in the Registration
Statement, will be legally issued fully paid and non-assessable.
I render no opinion as to the laws of any jurisdiction other than the
internal laws of the State of New York, the internal corporate laws of the State
of Delaware. I hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to my name under the caption "Legal
Opinions" in the prospectus included in the Registration Statement.
Very truly yours,
/s/ Frank J. Hariton
Frank J. Hariton
