<PAGE>
As filed with the Securities and Exchange Commission on February 10, 2000
Registration File No. 333-93137
============================================================================
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.
1065 Dobbs Ferry Road
White Plains, NY 10607
Telephone: (914) 674-4373
Facsimile: (914) 693-2963
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 7,073,257 $.27 $1,938,804.50 $511.84
$.0001 per share
========================================================================================================
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* Based upon the closing bid price of the Registrant's Common Stock as
reflected on the Over the Counter Bulletin Board on February 7, 2000 of $.48.
** Calculated pursuant to Rule 457(h).
*** $313.13 was previously paid and the balance of $198.71 is being paid upon
the filing of this registration statement.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective in such date as the Commission, acting pursuant to said Section 8(a)
shall determine.
<PAGE>
Cross Reference Sheet
Under Item 501 (c) of Regulation S-B
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Item and Number Location in Prospectus
- -------------------------------------------------------------------------------------------
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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 Directors, Executive Officers, Promoters and
and Control Persons Control Persons, compliance with Section 16(a)
of the Exchange Act
11. Security Ownership of Certain Security Ownership of Certain
Beneficial Owners and Management 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 Description of Business
16. Description of Business Description of Business
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 Description of Property
19. Certain Relationships and Related Transactions. Certain Relationships and Related Transactions
20. Market for Common Equity and Related Market for Common Equity and Related
Stockholder Matters Stockholder Matters
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure
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<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)
7,073,257 Shares of Common Stock
Offered by Certain Selling Stockholders
This Prospectus relates to 7,073,257 shares of Common Stock,
which consists of:
(a) 133,400 shares issuable upon exercise of options granted to
a lender in connection with a loan.
(b) 1,235,857 shares to be issued to a lender in connection with
the conversion of outstanding indebtedness.
(c) 300,000 shares issued in connection with the settlement of a
dispute with a lender.
(d) 4,154,000 shares issuable, if at all, upon exercise of
options and warrants granted to various vendors and
consultants.
(e) 1,250,000 shares issuable in connection with a Private
Placement which shares cannot be sold until June 2000.
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 February 7, 2000, the closing price bid for the Common
Stock on the OTC Electronic Bulletin Board was $.48 per share.
------------------------------------------------------------
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 9.
------------------------------------------------------------
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 February 11, 2000.
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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 creating niche brands in the snack food industry. These products
are marketed under Company developed brands such as "Peanut Squeeze" or licensed
brands procured by the Company such as "The Wizard of OZ" marshmallows. The
Company develops these products from the actual conception of the product idea
to the shipment of the product to the retailer. Over the last year the Company
has focused on its two primary product lines, "Peanut Squeeze" and "The Wizard
of Oz" marshmallows. These brands have already been shipped to retailers across
the country and are being presented to many others.
On September 13, 1999, pursuant to a share Exchange and Reorganization
Agreement, the Company exchanged all the issued and outstanding shares of
Hollywood Partners, Inc., a California corporation ("Operating Company") that
previously operated as a wholly owned subsidiary of Vitafort International
Corporation. In consideration for the shares of the Operating Company, the
Company received an aggregate of 5,000,000 shares of common stock from Hollywood
Partners.com, Inc. ("HP.com"), a publicly traded Delaware corporation. The
Operating Company is now a wholly owned subsidiary of HP.com and Vitafort is the
majority stockholder of HP.com, holding 62.5% of HP.com's issued and outstanding
common stock. This transaction gives Vitafort the flexibility to develop and
realize the potential of each area of its businesses. HP.com intends to develop
the potential of its e-commerce strategy for the benefit of all of our
shareholders, while Vitafort focuses on developing the market for its core
brands.
HP.com is implementing a strategy to create an online direct marketing
company that will leverage HP.com's current relationships in both the food and
entertainment industry. The HP.com web site is offering an entertainment
environment, while featuring promotions and sweepstakes that consumers may enter
to win vacations, gift certificates and other goods and services. In addition,
the HP.com will continue to develop and market licensed snack foods that will be
distributed by Vitafort.
2
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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.
MANUFACTURING & WAREHOUSING
The Company manufacturers its products by entering into agreements ("co-
packer 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
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. This arrangement is intended 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 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 and the Company has been materially affected in the past by problems
with its co-packers.
The Company has added a new co-packer this past year. Vegetable Juices,
Inc. is packing the Company's newest product "Peanut Squeeze." The bulk
ingredient is produced by Haarmann & Reimer ("H&R"), a wholly owned subsidiary
of Bayer AG. In addition, H&R will continue to develop other products for
Vitafort, working as the Research and Development arm of the Company.
The Company has recently changed its primary public warehouse location from
Laredo, TX to Underground Warehouse in Quincy, IL. This change was implemented
to reduce outbound trucking costs by consolidating the shipment of the Company's
two primary brands "Peanut Squeeze", produced in Chicago and "The Wizard of Oz"
marshmallows, produced in Mexico. This central location will lower these costs
by reducing the outbound trucking mileage and increasing the loads to the
customers who carry both brands.
THE FOOD BROKER NETWORK
The broker network, which is a key to establishing products in the
marketplace, is currently positioned to initiate the objectives of the Company
in over 85% of the United States. Vitafort's tier-one broker infrastructure
consists of many of the prominent food brokers in the industry, led by
Crossmark, who manages the majority of the Company's business to the trade.
These brokers represent many of the leading food processors in the world, such
as: Con Agra, Clorox, Ocean Spray, Hershey's, M&M Mars, along with hundreds of
others.
THE RETAIL TRADE
The Company's retail distribution strategy is to target the following
classes of trade: Supermarkets, mass merchandisers, drug stores, warehouse
clubs, convenience stores, natural food stores and military commissaries and
exchanges. Due to the consolidation in the industry, it is extremely important
to maintain strong relationships with the leading retailers. Our brokers are
currently positioned to present our products to these retailers within 90 days
of product launch dates in the majority of these chains. Since the beginning of
the year, the sales team has gained new distribution for both "Peanut Squeeze"
and "The Wizard of Oz" marshmallows to thousands of grocery stores across the
country. Many of the leading chains such as; Bi-Lo (Ahold, Inc), Albertsons (FL&
TX), Atlantic &
3
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Pacific Tea Co. (A&P New Orleans) and Wal-Mart Supercenters, now carry both
brands. In addition, Food Lion, Wakefern (Shop-Rite), Winn Dixie (New Orleans),
Albertsons (OR), Randalls/Tom Thumb (Safeway), Vons (Safeway), along with many
others are now marketing "Peanut Squeeze." "The Wizard of Oz" marshmallow brand
is also currently being sold at Albertsons (CA), Ingles & Lowes (NC), Winn Dixie
(Tampa), Grand Union (NJ) and other leading retailers.
MARKETING
In 1998, the Company changed its marketing direction due to changing
consumer trends. Taste is now king and consumers will no longer sacrifice taste
to eat healthy. The new marketing direction of the Company focuses on taste
first and everything else second. All of the Company's healthy products are now
either low fat or reduced fat, rather than fat free, in order to increase the
taste profile. In addition, the packaging addresses the fat content with a much
more subtle approach.
The marketing strategy of the Company's licensed products is to establish
"The Wizard of Oz" marshmallows as the leading brand in the marshmallow
category. This can be accomplished by providing unique superior tasting
products, high impact packaging and strong promotional support from Warner Bros.
Management feels it has these ingredients in place and is positioned to take
advantage of this opportunity.
The Company is also evaluating additional licenses and will be making those
decisions in the upcoming year.
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 Company's trademarks and licenses
are detailed below:
4
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Trademarks & Description and Status
Licenses
<S> <C>
Vitafort This is an active trademark currently being used on all Company material;
however, the Company is in the process of setting up all industry communications
through Visionary Brands.
Visionary Brands The name of the wholly owned subsidiary that is currently marketing all products
for the Company.
Peanut Squeeze Brand is in current distribution in thousands of supermarket peanut butter
sections across the country.
Auburn Farms Trade name acquired in May 1996 with existing presence in the natural foods class
of trade. Brand is being utilized on a very limited basis in natural foods.
Natures Warehouse Trade name acquired in May 1996 with existing presence in the natural food class
of trade. Brand is being utilized on a very limited basis in natural Foods.
Toast `N Jammers A repositioned brand name with specialty grocery and natural food presence.
Jammers One of the all-natural fat free cookie brands in natural food class of trade.
Brand is being utilized on a very limited basis in natural foods.
Avenue of the Stars Trade name used for all Hollywood Partners licensed products.
Juliette's Private Trade name used for both low fat cookies and low fat chocolate truffles.
Collection
"The Wizard of Oz" The licensed marshmallow brand currently being marketed throughout the
Marshmallows retail trade. Currently on the shelf of thousands of grocery stores
across the country.
"The Wizard of Oz" The licensed brand currently being marketed to retailers across the
Lollipops & Gummy country. The initial distribution went to Wal-Mart late in 1998.
Collectors Tins
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PROSPECTUS SUMMARY
The Company
Vitafort International Corporation (the "Company" or "Vitafort") is in the
business of creating niche brands in the snack food industry. These products are
marketed under Company developed brands such as "Peanut Squeeze" or licensed
brands procured by the Company such as "The Wizard of Oz" marshmallows. The
Company develops these products from the actual conception of the product idea
to the shipment of the product to the retailer. Over the last year the Company
has focused on its two primary product lines, "Peanut Squeeze" and "The Wizard
of Oz" marshmallows. These brands have already been shipped to retailers across
the country and are being presented to many others.
5
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On September 13, 1999, pursuant to a share Exchange and Reorganization
Agreement, the Company exchanged all the issued and outstanding shares of
Hollywood Partners, Inc., a California corporation ("Operating Company") that
previously operated as a wholly owned subsidiary of Vitafort International
Corporation. In consideration of the shares of the Operating Company, the
Company received an aggregate of 5,000,000 shares of common stock from Hollywood
Partners.com, Inc. ("HP.com"), a publicly traded Delaware corporation. The
Operating Company is now a wholly owned subsidiary of HP.com and Vitafort is the
majority stockholder of HP.com, holding 62.5% of HP.com's issued and outstanding
common stock. This transaction gives Vitafort the flexibility to develop and
realize the potential of each area of its businesses. HP.com will be able to
develop the potential of its e-commerce strategy for the benefit of all of our
shareholders while Vitafort can focus on developing the market for its core
brands.
Hollywood Partners.com is implementing a strategy to create an online
direct marketing company that will leverage HP.com's current relationships in
both the food and entertainment industry. The HP.com Web site is offering an
entertainment environment, while featuring promotions and sweepstakes that
consumers may enter to win vacations, gift certificates and other goods and
services. In addition, HP.com will continue to develop and market licensed
snack foods that will be distributed by Vitafort.
The Company in March 1998 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 7,073,257 shares offered by the Selling Security Holders.
Shares Outstanding
Before the Offering After the Offering
18,127,346 (1) 25,200,603 (1)
(1) Includes 2,535,857 previously issued shares which are offered hereby,
1,328,400 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 that have occurred or may occur in the future, 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, 1998 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
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, 1998 for additional information.
6
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Consolidated Statement of Operations Data:
Years ended Nine months ended
December 31, September 30,
1998 1997 1999 1998
---- ---- ---- ----
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Net revenues $ 2,861,392 $ 1,995,317 $ 1,851,685 $ 1,555,505
Cost of sales 1,876,319 1,896,410 1,161,653 951,407
------------ ----------- ----------- -----------
Gross profit (loss) 985,073 98,907 690,032 604,098
------------ ----------- ----------- -----------
Operating expenses:
Research and development 362,770 337,806 56,315 280,251
Sales and marketing 2,035,125 1,239,460 1,279,950 1,368,052
General and administrative 2,557,890 2,672,946 1,394,384 2,121,027
------------ ----------- ----------- -----------
Total operating expenses 4,955,785 4,250,212 2,730,649 3,769,330
------------ ----------- ----------- -----------
Loss from operations (3,970,712) (4,151,305) (2,040,617) (3,165,232)
Interest income 39,591 78,070 6,498 38,851
Interest expense (221,547) (214,690) (253,723) (149,202)
Other income (expense) (59,684) 15,210 - (60,000)
Loss on disposal of assets (42,246) - - -
Minority interest in net loss of
consolidated subsidiary - - 6,835 -
Litigation recovery , net of costs - 4,748,946 1,260,632 -
------------ ----------- ----------- -----------
Income (loss) before income taxes (4,254,598) 476,231 (1,020,375) (3,335,583)
State income taxes 3,407 3,200 - 3,407
------------ ----------- ----------- -----------
Net income (loss) after tax, before (4,258,005) 473,031 (1,020,375) (3,338,990)
extraordinary item
Extraordinary item - - 315,827 -
------------ ----------- ----------- -----------
Deemed dividends to preferred shareholders (629,148) (305,749) - (629,148)
------------ ----------- ----------- -----------
Net income (loss) allocable to
common shareholders $ (4,887,153) $ 167,282 $ 704,548 $(3,968,138)
============ =========== =========== ===========
Basic and diluted loss per common share
Loss before extraordinary item $ - $ - $ (.07) $ -
Extraordinary gain on extinguishment
of debt $ - $ - $ .02 $ -
------------ ----------- ----------- -----------
Basic and diluted income (loss) per
common share $ (0.66) $ .03 $ (.05) $ (0.55)
============ =========== =========== ===========
Basic weighted average shares
of common stock 7,348,093 5,831,404 14,785,893 7,178,791
============ =========== =========== ===========
Diluted weighted average shares
of common stock 7,348,093 6,343,397 14,785,893 7,178,791
============ =========== =========== ===========
</TABLE>
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Consolidated Balance Sheet Data:
December 31, September 30,
1998 1997 1999
<S> <C> <C> <C>
Working capital (deficit) $ (615,028) $ 1,503,938 $ (296,151)
Total assets 3,387,530 3,912,263 3,965,508
Total liabilities 5,091,795 1,634,266 3,377,117
Stockholders' equity (deficit) (1 ,704,265) 2,277,997 404,725
</TABLE>
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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 1997, 1998, nor in the first three quarters of 1999.
Continuing Losses
The Company incurred losses from operations of $4,151,305 in 1997,
$3,970,712 in 1998, and $2,040,617 for the nine months ended September 30, 1999
and continues not to generate an operating profit. As of September 30, 1999, the
Company had working capital deficit of ($296,151) and stockholders' equity of
$404,725. For the year ended December 31, 1998, the Company had working capital
of ($615,028) and a stockholders' equity of ($1,704,265). Management anticipates
that at December 31, 1999, 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, 1998,
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.
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,
9
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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 and from the Barbara's
settlement, the likelihood that a working capital shortage will occur in the
future is high based on the present level operating results. The Company
continued to suffer working capital shortages during 1998 and continues to
suffer working capital shortages in 1999, which may, if the shortages continue,
adversely impact the Company's ability to meet its obligations.
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 1998, the Company derived approximately 35% of its revenues from the
sale of the Auburn Farms and Natures Warehouse lines of products and
approximately 65% of its revenues from the sale of marshmallows and other Wizard
of Oz products introduced during 1998. In August 1999, the Company introduced
its line of "Peanut Squeeze" into several major grocery chains and leading
retailers. There can be no assurance that the Company's products will a) achieve
a significant degree of market acceptance; b) will be sustained for any
significant period; or c) that the product life cycles will be sufficient to
permit the Company to recover start-up and other associated costs. Failure of
the Company's products to achieve or sustain market acceptance could have a
material adverse effect on the Company's business, financial condition and
results of operations. Certain of the Company's products, particularly Fudgets
and Caketts, had their market acceptance materially adversely affected by the
mold problem, principally associated with Keebler.
Competition
The market for snacks is large and highly competitive. Competitive factors
in the snack industry include product quality and taste, brand awareness among
consumers, access to supermarket shelf space, price, advertising and promotion
and variety of snacks offered. The Company's fat-free and low-fat products are
priced higher than traditional snacks. As a result, price erosion due to
competitive factors could have a material adverse effect on the Company.
The Company also competes with a number of manufacturers in the fat-free
and low-fat portion of the industry, including Health Valley Foods, Nabisco
(Snackwell's) and Pepperidge Farms (Greenfield). Additional competitors include
regional and private label snack companies. Potential entrants in the fat-free
and low-fat snack food market segment include the national competitors and
private label competitors.
Dependence on Key Executive Officers and Other Qualified Personnel
The Company is highly dependent on certain key personnel, including Mark
Beychok, its Chairman of the Board. Another key employee is John Coppolino,
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
10
<PAGE>
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. No
assurance can be given that the Company will not, in the future, have its
results again adversely affected by disputes with its contract manufacturers.
Pendency of Legal Proceedings
As set forth under the heading "Legal Proceedings," the Company is engaged
in several legal proceedings. An adverse finding in certain of these proceedings
could have a material adverse effect on the Company. See Note 14 to the
consolidated financial statements for the year ended December 31, 1998 and Note
8 to the consolidated financial statements for the nine months ended September
30, 1999 for additional information concerning all legal proceedings.
Management of Possible Growth
The Company intends to expand its operations during 2000 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.
11
<PAGE>
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 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.
12
<PAGE>
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, among other things, the price of the Common Stock
came to exceed $3.00 per share. Accordingly, no assurance can be given that the
Common Stock will be included in NASDAQ in the foreseeable future. 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, stockholders' equity in
excess of $1,000,000 and assets in excess of $2,000,000. Consequently, the
effect of these rules may restrict the ability of broker-dealers to sell the
Common Stock and may affect the ability of holders of Common Stock to sell their
shares in the secondary market.
Possible Illiquidity of Shares
The market for the Company's Common Stock on the OTC Bulletin Board has at
times been limited and sporadic. The OTC market is smaller than other
securities markets, and prices for OTC securities are not generally published in
the news media. Information about the Company and transactions in the Company's
shares may be more limited on the OTC market. The limitations of the trading
market for the Company's Common Stock and of the OTC Bulletin Board may
materially adversely affect the liquidity of the market for the Company's
Common Stock.
Lack of Dividends
The Company has never paid any dividends on its Common Stock and does not
anticipate paying any dividends in the foreseeable future. Any future dividends
on the Common Stock will be dependent on the earnings of the Company, if any,
and its financial requirements as well as the dividend priorities of the
outstanding Series of Preferred Stock.
13
<PAGE>
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.
14
<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.
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
February 7, 2000: (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>
Broadbent, Valerie 0 25,000 (5) 0 0
Buckley Friedman 0 200,000 (1) 0 0
Business Law Group, P.C. 0 25,000 (1) 0 0
Carolina Marketing 0 10,000 (1) 0 0
Catalyst Capital, LLC 0 29,000 (1) 0 0
Catalyst Capital, LLC 0 100,000 (1) 0 0
Catalyst Capital, LLC 0 7,500 (6) 0 0
Chinn, Lisa 0 20,000 (5) 0 0
DeCaprio, Beth 0 28,000 (5) 0 0
Dellavechia, Linda 0 35,000 (5) 0 0
Dellavechia, Linda 0 165,000 (1) 0 0
Donahue Mesereau & Leids, LLP 0 30,000 (4) 0 0
DYDX Consulting, LLC 0 100,000 (6) 0 0
Fink, Keith 0 6,500 (5) 0 0
Finkelstein, Donald 0 50,000 (1) 0 0
Hall, Douglas 0 20,000 (2) 0 0
Hariton, Frank J. 27,700 250,000 (1) 27,700 0
Hawk, Dennis J. 0 5,000 (1) 0 0
Jenuine, Dan 0 75,000 (1) 0 0
Konstant, Nikolas 0 340,000 (6) 0 0
Krishel, Daniel L. 0 200,000 (1) 0 0
LJD Consulting 0 150,000 (6) 0 0
LJD Consulting 0 100,000 (1) 0 0
Luke, Robert 0 82,000 (6) 0 0
Mambo Sprouts, Inc. 0 5.000 (5) 0 0
McKendry, Steve 0 85,000 (6) 0 0
Millbrook Distribution Services, Inc. 0 50,000 (1) 0 0
Reboot Corporation 0 200,000 (1) 0 0
Newport Capital Consultants, Inc. 0 300,000 (1) 0 0
NCVC, LLC 0 150,000 (6) 0 0
Nida & Maloney, LLC 0 200,000 (1) 0 0
Perlman, Dana 0 5,000 (1) 0 0
Professional Container Corporation 0 150,000 (1) 0 0
Rigaud, Fred 0 50,000 (6) 0 0
Salberg, Larry 0 100,000 (1) 0 0
Salberg, Larry 0 60,000 (6) 0 0
Spinneret Financial Systems, Ltd. 0 1,250,000 (7) 0 0
Spinneret Financial Systems, Ltd. 0 126,000 (6) 0 0
Terra Healthy Living, Ltd. 7,103,000 1,369,257 (3) 5,733,743
Thomas and Associates 0 50,000 (1) 0 0
Thompson, John 0 150,000 (1) 0 0
Williams, Wayne 300,000 300,000 0 0
Corporate Identities Inc. 0 300,000 (1) 0 0
Zackler, Allan 0 20,000 (5) 0 0
Zackler, Allan 0 100,000 (1) 0 0
----------
7,073,257
==========
</TABLE>
(1) Issuable upon exercise of options or warrants with an exercise
price of $.25 per share.
(2) Issuable upon exercise of options or warrants with an exercise
price of $.48 per share.
(3) Includes 133,400 shares underlying a currently exercisable option
with an exercise price of $.30 per share; and 1,235,857 shares
issuable upon conversion of debt.
(4) Issuable upon exercise of options or warrants with an exercise
price of $.50 per share.
(5) Issuable upon exercise of options or warrants with an exercise
price of $.085 per share.
(6) Issuable upon exercise of options or warrants with an exercise
price of $.10 per share.
(7) Represents shares issued in connection with a Private Placement
during February 2000 at $.40 per share which shares cannot be sold
until June 2000.
15
<PAGE>
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. 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 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
16
<PAGE>
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 Company's redeemable warrants and units expired on
October 31, 1998 and there were no quotations for the warrants or units after
such date. The quotations represent inter-dealer quotations without adjustment
for retail mark-ups, mark-downs or commissions and may not represent actual
transactions:
17
<PAGE>
<TABLE>
<CAPTION>
Period Common Stock Warrants Units
High Low High Low High Low
<S> <C> <C> <C> <C> <C> <C>
1st Quarter 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
4th Quarter 1998 $ 0.250 $0.080 $0.000** * ** **
1st Quarter 1999 $ 0.90 $ 0.34 $0.000** * ** **
2nd Quarter 1999 $ 0.53 $ 0.33 $0.000** * ** **
3rd Quarter 1999 $ 0.59 $ 0.33 $0.000** * ** **
</TABLE>
* Less than $ 0.010
** The Company's redeemable warrants expired on October 31, 1998 and there
were no quotations for the warrants after such date. There were no quotations
for the units in the fourth quarter of 1998.
The above amounts have been retroactively adjusted for a 1 for 20 reverse stock
split, which occurred on October 4, 1996.
On February 7, 2000, the closing bid price for the common stock, as
reported by the Over The Counter Electronic Bulletin Board, was $.48.
At the close of business on February 7, 2000, there were approximately
513 holders of record of the common stock.
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.
18
<PAGE>
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.
SELECTED FINANCIAL DATA
The following selected financial data for each of the periods presented for
the two years in the period ended December 31, 1997 and 1998 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 nine month period ended September 30, 1999 and 1998,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Statement of Operations
Years Ended Nine Months Ended
December 31, September 30,
------------ -------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 2,861,392 $ 1,995,317 $ 1,851,685 $ 1,555,505
Gross profit (loss) 985,073 98,907 690,032 604,098
Net income (loss) (4,258,005) 473,031 704,548 (3,338,990)
Net income (loss) allocable to common $ (4,887,153) $ 167,282 704,548 (3,968,138)
shareholders
Net income (loss) per share $ (.66) $ .03 $ (.05) $ (.55)
Weighted average common shares 7,348,093 5,831,404 14,785,893 7,178,791
</TABLE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet Data:
December 31, September 30,
1998 1997 1999
<S> <C> <C> <C>
Working capital (deficit) $ (615,028) $ 1,503,938 $ (296,151)
Total assets 3,387,530 3,912,263 3,965,508
Total liabilities 3,026,795 1,634,266 3,377,117
Stockholders' equity (deficit) (1,704,265) 2,277,997 404,725
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995.
Except for historical facts, all matters discussed in this prospectus, which are
forward looking, involve a high degree of risk and uncertainty. Potential risks
and uncertainties include, but are not limited to, competitive pressures from
other food companies and within the grocery industry, the impact of quality
problems experienced in 1996, difficulties encountered with the acquisition of
Auburn Farms and Nature's Warehouse brands 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, 1998 AND 1997
- --------------------------------------
RESULTS OF OPERATIONS
The past year has seen many exciting developments from Vitafort. Hollywood
Partners, the Company's wholly owned subsidiary formed in late 1997, agreed to
terms with Warner Bros. for the licensing rights to "The Wizard of Oz" for
marshmallows, gummy candy, lollipops and collectors tins. The Company continued
the development of "Peanut Squeeze," the first product in the category to be
dispensed from a squeeze bottle. The Company's manufacturing partner in this
endeavor is Haarmann & Reimer, a wholly owned subsidiary of Bayer AG. The direct
distribution infrastructure has been improved dramatically from 1997, as new
tier-one brokers have been appointed to represent the Company's products
throughout the country. However, the most encouraging news of the year was the
actual orders shipped to leading retailers such as: Wal-Mart, Sam's Club, Vons,
Albertsons, Winn-Dixie, A&P and others. Management has focused throughout the
year on establishing goodwill in the marketplace and the shipment of new
products in 1998 to retailers across the country certainly helped validate the
success of these efforts. Another important development this past year was the
acquisition of Global International Sourcing, Inc. ("Global"). Global would be
responsible for product sourcing and development. This would allow the balance
of the management team to focus on the sales and marketing of these new
products.
After discontinuing both Fudgets and Caketts, the two brands that had
provided the majority of the Company's sales over the prior two years, it became
apparent that the first half of 1998 would be one of product development.
Significant losses were incurred during this period, but three product lines
were being prepared for launch in the second half of 1998 and the first half of
1999. The first rollout, "The Wizard of Oz" marshmallows shipped initial orders
in late June. These fruit flavored marshmallows were the top selling product
line of the Company in 1998 and hold great promise in 1999, as Hollywood
Partners added white marshmallows to the mix. In the fourth quarter, Wal-Mart
placed a $425,000 purchase order for "The Wizard of Oz" gummy candy and lollipop
collectors' tins. These tins were presented for distribution in the third and
fourth quarter of 1999. The Company test marketed "Juliette's Private
Collection" cookies in the fourth quarter and looks to roll out additional
distribution in 1999.
The most significant product development of the year was the final stages
of the development process for "Peanut Squeeze," the Company's entree into the
peanut butter section. Management feels that this product launch has a
tremendous opportunity to gain market share in this one billion-dollar category.
"Peanut Squeeze" was introduced in the second quarter of 1999 at the FMI trade
show in Chicago. Buckley/Friedman, a leading advertising agency, will handle the
advertising, public relations and packaging design for the product. They will
also assist management in the overall marketing direction of the product launch.
Buckley/Friedman established itself as a leader in the field by initiating the
marketing direction of Balance Bar that led to sales increases from 1.5 million
to 80 million units.
The manufacturing and product development aspects of the Company have been
greatly improved over the past year with the relationships established in
Mexico. These manufacturers have provided the
20
<PAGE>
Company with innovative great tasting products that have resulted in new
distribution and strong margins. Haarmann & Reimer will also play a significant
role in the upcoming year as "Peanut Squeeze" is introduced and additional new
items are developed. The Company will continue to source additional suppliers
and products from around the world in the upcoming year to increase quality,
lower costs and increase revenue. However, management feels the immediate
opportunities in the marshmallow and peanut butter categories should provide the
momentum needed to achieve critical mass.
NET SALES
In 1998 the net sales of the Company were $2,861,392 compared to $1,995,317
in 1997. This increase of 43.4% was primarily due to the new product
introductions of "The Wizard of Oz" brands products in the second half of 1998.
"The Wizard of Oz" marshmallow line accounted for $1,320,624 and the "The Wizard
of Oz" collectors' tins accounted for $422,275. Toast `N Jammers sales were
$773,920 in 1998, an increase of 12.1% over the prior year. Caketts and Fudgets
combined for 1997 revenues of $754,408, but, both brands were discontinued in
1998 due to the recurring quality control problems of the past and the damage
done to both brands.
GROSS PROFIT
Gross profit in 1998 was $985,073 or 34.4% of sales, compared to a gross
profit of $98,907 in 1997 or 5.0% of sales. This increase of $886,166 was due to
two significant factors. The gross profit margin of the new "The Wizard of Oz"
brand products manufactured in Mexico provides a higher profit margin than the
product mix from 1997 and the returns and allowances caused by the quality
control problems associated with Keebler's manufacturing were greatly reduced
from 1997 to 1998.
OPERATING EXPENSES
Research and Development
In 1998, product development expenses were $362,770 compared to $337,806 in
1997, an increase of $24,964, or 7.4%.
Sales and Marketing
The Company experienced an increase in sales and marketing expenses from
$1,239,460 in 1997 to $2,035,125 in 1998. Part of this 64.2% increase was due to
the additional sales and marketing costs associated with the acquisition of
Global International in 1998, which accounted for $576,706 of the total cost.
Additional cost increases included the commission and royalties paid to Warner
Bros. for the licensing rights to "The Wizard of Oz" and the broker commission
for selling these products. These licensing and commission expenses were
$132,299 in 1998. There was also a 43% increase in promotional expenses from
$116,393 in 1997 to $184,792 in 1998; this was due primarily to the off-invoice
promotions of "The Wizard of Oz" marshmallows.
General and Administrative
General and Administrative costs in 1997 were $2,672,946, compared to costs
in 1998 of $2,557,890. This 4.3% decrease is primarily due to a reduction in
consulting and professional services.
21
<PAGE>
INCOME TAXES
As of December 31, 1998, the Company had unused Federal and California net
operating loss carryforwards of approximately $24,300,000 and $11,100,000,
respectively, available to offset future Federal taxable income and future
California taxable income. The unused net operating loss and credit
carryforwards expire in various amounts through the year 2013. 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 2003.
Net deferred tax assets of approximately $ 8,600,000 resulting from net
operating losses 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 $39,591 in 1998 and $78,070 in 1997. The 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. These proceeds
have been used to fund the Company's operations in 1998.
Interest expense was $221,547 in 1998 compared to $214,690 in 1997. In
1998, the amount of $143,549 was paid to Coast Business Bank as per the lending
agreement. The initial agreement has been amended so that the minimum amount of
monthly interest charged is based on a minimum borrowing base of $1,000,000 and
an interest rate of 3% over the Bank of America NT-rate. The current agreement
has been extended to April 1999, and the Company plans to negotiate new terms
for the lending agreement. The balance of interest of $ 113,016 paid in 1998
relates to the cost of purchase order financing and various other notes given to
suppliers.
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES December 31,
1998 1997
---- ----
<S> <C> <C>
Net Cash Provided By (Used In) Operations $ (3,569,962) $ 1,790,893
Net Cash Used in Investing Activities (282,164) (214,095)
Net Cash Provided By Financing Activities 2,556,739 433,371
Working Capital (Deficit) (615,028) 1,503,758
</TABLE>
At December 31, 1998 the Company had cash of $903,649. This reflects a
significant decrease from the prior year cash balance of $2,199,036. This
decrease is due to the $4,258,005 operating loss suffered by the Company in
1998. This loss was financed by borrowings of approximately $2,100,000, proceeds
of $499,000 from issuance of preferred shares, and approximately $750,000
realized from the issuance of common stock in exchange for services and in
repayment of liabilities.
The Company is continuing to improve its relationships with its brokers and
customers (distributors), but the effort must be focused in accelerating the
sales process to the Company to a break-even position. Although the vendor
relationships are more stable, the Company may again jeopardize this area should
the liquidity problem continue.
22
<PAGE>
The Company has suffered recurring losses from operations as of December
31, 1998. Although the Company has raised additional capital at the end of 1998
(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.
23
<PAGE>
Three Months and Nine Months Ended September 30, 1999 and 1998
- --------------------------------------------------------------
Results of Operations:
In the third quarter, management achieved the objective that it had set in
the second quarter as critical issues to resolve in order to establish a sound
base for the launch of its new products. First, the network of food brokers was
significantly improved with the appointment of Crossmark Sales and Marketing in
several markets in the Midwest, Southeast and Southwest regions. As such, the
Company increased its broker representation to over 85% of U.S. markets. At the
beginning of the quarter, the broker coverage for Vitafort's products was less
than 35%. Crossmark is one of the leading brokerage companies in the food
industry and will provide the Vitafort sales team with the support needed to
execute the upcoming distribution initiatives of the new product introductions.
During the third quarter, the Company introduced its new "Peanut Squeeze"
line, as well as the repackaged "The Wizard of Oz" marshmallows and a new white
marshmallow, to ten major grocery and leading retail chains across the country.
The initial reception of the product in the market place has been positive and
reorders have already been received from Wal-Mart and other wholesalers.
The new sales force is aggressively continuing its presentations of "Peanut
Squeeze" and the repackaged marshmallows to supermarket chain buyers and is
generating new distribution. The initial response to both the new package design
and the while marshmallow has been very positive, as the Company recently
shipped its initial orders to Albertsons and Save-mart. Management feels the
Company has a tremendous opportunity in this category due to certain competitive
advantages and market conditions, superior tasting white marshmallow, unique
shapes and flavors, "The Wizard of Oz" branded strategy. Management notes that
the category leader recently filed for bankruptcy protection under Chapter 11.
Management believes that, with the combined rollout of "Peanut Squeeze" and
"The Wizard of Oz," the Company will enjoy additional leverage and attention
from both its brokers and retailers.
Management believes that with the settlement of the Barbara's litigation,
the increased logistics efficiencies, the improved broker representation and the
continued rollout of the Company's two key product lines (Peanut Squeeze and The
Wizard of Oz), the Company will experience significant increase in revenue in
the upcoming months. However, no assurance can be given that difficulties will
not be encountered and increases will in fact occur.
Net Revenues:
For the three months ended September 30, 1999, net sales were $738,437
compared to $805,511 for the same period in 1998, a decrease of $67,074, or
approximately 8%. This decrease in revenue was due to delay in the redesigning
of the packaging for "The Wizard of Oz" marshmallows.
For the nine months ended September 30, 1999, net sales were $1,851,685
compared to $1,555,505 for the same period in 1998, an increase of $296,180 or
19%. This was due primarily to sales of "Peanut Squeeze," the Companys' new
product line.
Gross Profit:
Gross profit decreased from $402,419 for the three months ended September
30, 1998 to $213,760 for the three months ended September 30, 1999, a decrease
of $188,659 or 47%. Gross profit was 29% of net revenues for the quarter ended
September 30, 1999, compared to 50% for the same period of 1998. This is due to
start-up costs incurred as a result of the launch of "Peanut Squeeze."
24
<PAGE>
Gross profit increased from $604,098 for the nine months ended September
30, 1998 to $690,032 for the nine months ended September 30, 1999, an increase
of $85,934 or 14%. The increase is due to the favorable mix of selling
marshmallows and "Peanut Squeeze" which have lower cost of goods ratios.
Operating Expenses:
Research and Development - Total expenses for product development in the
three months ended September 30, 1999 were $34,159 compared to $140,667 for the
same period in 1998, a decrease of $106,508 or 76%. This is in line with the
Company's on-going strategy to source from existing manufacturers and use their
internal research and technical staff to develop the new products.
Research and Development - Total expenses for product development in the
nine months ended September 30, 1999 were $56,315 compared to $280,251 for the
same period in 1998, a decrease of $223,936 or 80%. This is in line with the
Company's on-going strategy to source from existing manufacturers and use their
internal research and technical staff to develop the new products.
Sales and Marketing:
Total sales and marketing expenses for the three months ended September 30,
1999 were $496,873 compared to $621,708 for the three months ended September 30,
1998, a decrease of $124,835 or 20%. This decrease in expenses was primarily due
to lower staffing costs and consultant expenses.
Total sales and marketing expenses for the nine months ended September 30,
1999 were $1,279,950 compared to $1,368,052 for the nine months ended September
30, 1998, a decrease of $88,102 or 6%. This decrease in expenses was primarily
due to lower staffing costs and consultant expenses.
General and Administrative:
For the three months ended September 30, 1999, total general and
administrative expenses were $520,616 compared to $647,295 for the same quarter
ended September 30, 1998, a decrease of $126,679 or 20%. Significant cost
reductions were primarily achieved in the following areas: wages, $74,000 due to
reduction of staff; consultants, $50,000; legal and accounting, $15,000.
For the nine months ended September 30, 1999, total general and
administrative expenses were $1,394,384 compared to $2,121,027 for the same
period ended September 30, 1998, a decrease of $726,743. Significant cost
reductions were primarily achieved in the following areas: legal, $468,691, due
to off balance sheet financing of a litigation; consultants, $290,810, as part
of the cost reduction program.
Other Income (Expense):
The interest expenses decreased from $50,911 for the same period in 1998 to
$36,871 in the three months ended September 30, 1999, due to the forgiveness of
interest accrued on a note payable to Terra Healthy Living, Ltd. ("Terra").
Interest expenses increased from $149,202 for the same period in 1998 to
$253,723 for the nine months ended September 30, 1999. This increase is due to
higher costs of lines of credit required to fund the Company's working capital
needs.
Other income was $1,636,147 for the three months ended September 30, 1999,
compared to $3,219 for the three months ended September 30, 1998. The increase
of $1,632,928 is due to a partial forgiveness
25
<PAGE>
of debt by Terra Healthy Living, Ltd. of $1,521,225 of a note payable in the
amount of $2,065,000 and to additional forgiveness of payables to vendors.
Other income was $3,110,196 for the nine months ended September 30, 1999 is
due primarily to a litigation recovery from Barbara's Bakery of $1,260,632 and
the forgiveness of debt by vendors and consultants in the amount of $315,827. As
of September 29, 1999, Terra forgave debt in the amount of $1,521,225 due to it
by the Company. Although forgiveness of debt is normally presented as an extra-
ordinary item, since Terra is a related party, generally accepted accounting
principles requires the forgiveness to be recorded as a contribution to capital.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
---- ----
<S> <C> <C>
Net Cash Used for Operations $ 629,503 $ (2,938,595)
Net Cash Provided by Investing Activities 104,058 (252,783)
Net Cash Provided by (Used in) Financing Activities 948,829 1,219,726
Working Capital (Deficit) (296,151) (615,028)
</TABLE>
The Company has introduced its new line of "Peanut Squeeze" as well as the
repackaged "The Wizard of Oz" marshmallows. The initial reaction to these
products has been favorable, as new distribution is being achieved and reorders
have been received from existing customers. However, there is no guarantee that
these products, once introduced in the market, will achieve the anticipated
level of sales forecast by the Company nor reach the gross profit margin
targeted by the Company for each of the products. In addition, while the
Company's financial condition has improved over the past twelve months, there is
no guarantee that new co-packers will provide the Company with credit terms. 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. While the Company has made significant improvement in rebuilding
customer relationships, the process has been slow and costly, and there is no
guarantee that these customers will purchase products from the Company with the
same enthusiasm that they have in the past.
The Company continues to suffer recurring losses from operations as of
September 30, 1999 and 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 5" to the consolidated financial statements for additional
information. The Company is attempting to raise additional capital to meet
future working capital requirements and launch new products, but may not be able
to do so. Should the Company not be able to raise additional capital, it may
have to curtail operations.
CREDIT FACILITY
In August 1996, the Company entered into a revolving credit facility with
Coast Business Credit, which 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 ended August 1998, and has been extended to April 30, 1999. Advances
under the facility bear an interest rate at prime at the Bank of America NT (7-
3/4% at December 31, 1998) plus 3%, and are secured by a first priority lien on
all of the Company's assets. Minimum interest charges are currently based on a
minimum-borrowing base of $1,000,000 at the same interest rate per month.
26
<PAGE>
In June 1999, the Company paid off its line of credit, but the assets are
still collateralized.
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.
The Company is in the process of contacting its key suppliers and other
important parties with whom business occurs with respect to their year 2000
compliance. If inquiries of these key suppliers indicate they may have
significant year 2000 issues, the Company will need to develop a contingency
plan for obtaining supplies should those sources be interrupted. If year 2000
issues prevent these key suppliers from timely filling the Company's needs, and
if alternative sources of such supplies or services are not readily available,
the Company may be forced to curtail its operations. An extended interruption in
the Company's operations would have a material adverse impact.
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. 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.
27
<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 adopted SFAS 131 on
January 1, 1998, and it did not have any effect on its financial position or
results of operations as the Company operates in one business segment. The
Company is providing the other footnote disclosures required by SFAS 131.
DESCRIPTION OF THE BUSINESS.
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
began developing fat free and low fat bakery snacks that would be marketed under
Company owned trademarks.
In the spring of 1994, 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. 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. 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) 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.
During the second quarter of 1996, the Company made a strategic acquisition
of the intangibles of Auburn Farms, a successful national food distributor.
These intangibles included the right to market successful breakfast pastry, fig
bars and healthy cookie products. During the same quarter, the Company
experienced mold on Caketts made at Keebler and the Fudgets at Michel's Bakery.
In 1996, Vitafort sought to promote the brands acquired from Auburn Farms
both because they were historically successful and because its distribution
network required good quality product. The quality problems experienced with
product produced by Keebler made it imperative that Vitafort successfully
introduce the Auburn Farms products to sustain its distribution network.
Unfortunately, the Company's efforts to do so were impeded by the refusal of
Auburn Farms' contract manufacturer (New Life Bakery) to produce that product
pursuant to contract, and by the conduct of Barbara's Bakery. The Company
believes that Barbara's and New Life entered into an illegal agreement whereby
New Life illegally made the Auburn Farms' products for Barbara's and Barbara's
misrepresented the source and origin of this product to distributors by falsely
claiming exclusive distribution rights. The Company believes that Barbara's
marketed the imitation products in a confusingly similar manner.
28
<PAGE>
During the third quarter of 1996, the Company shipped orders of Caketts
and Fudgets produced by its new co-packer. However, complaints from retailers
about mold on products produced by Keebler (Caketts) and Michel's (Fudgets)
continued. By December the Company learned that the damage to the consumer
acceptance of these brands caused by the defective product already shipped was
greater than previously realized. As a result, fourth quarter sales were
significantly adversely affected and costs relating to this problem were much
greater than previously anticipated.
By early 1998, it had become apparent that the severe damage done to both
Caketts and Fudgets was irreversible and both lines would have to be
discontinued. The acquisition of the Auburn Farms and Nature's Warehouse brands
in 1996 did provide the sales team with products to sell and market in 1998.
However, these brands had also been damaged due to the disruption of business
created by Barbara's Bakery.
The Company now believes that the conduct of Barbara's and New Life
described above not only foreclosed it from successfully distributing the Auburn
Farms product, but also caused Vitafort to suffer the loss of most of its
distributor network. The Company believes that this network would have survived
the mold problems with products produced at Keebler had Vitafort been able to
offer a viable alternative, i.e., the Auburn Farms products, without the market
confusion and apparently illegal sales by Barbara's of imitation products.
The Company filed an arbitration proceeding against Keebler related to the
mold and a lawsuit against Barbara's Bakery and New Life in federal court
related to the unfair competition. In 1997, the Company was awarded and received
approximately $6,750,000 from Keebler in that arbitration proceeding. These
damages did not include lost profits and lost business opportunities related to
the Auburn Farms products. The Auburn Farms case is set for a jury trial in May
2000. The Company expects that it will request an award of approximately $10
million in compensatory damages and significantly more in punitive and other
damages. See Legal Proceedings for further discussion.
The need for new products led the Company to the acquisition of Global
International Sourcing and the formation of Hollywood Partners in 1998. The
mission of Hollywood Partners was to develop unique snacks that could utilize
the brand equity of intellectual property rights of established licenses.
Global's mission was to source new innovative products from around the world and
negotiate favorable co-packing agreements for the Company. The first products
sourced through Global were the Company's line of fruit flavor marshmallows,
which the Company markets under "The Wizard of Oz" brand. This license was
secured by Hollywood Partners through Warner Bros. and introduced at the All
Candy Expo in Chicago in late June. In addition, Hollywood Partners has also
secured the rights for "The Wizard of Oz" brand for collectors tins filled with
both gummy candy and lollipops. This product was introduced in the fourth
quarter at Wal-Mart, with a $425,000 purchase order.
Throughout the year the sales team continued to re-build the infrastructure
that would support the rollout of these products. New brokers were hired to
represent the Company to retailers across the country. However, there was still
considerable damage to repair, especially among the distributors that had
handled both Auburn Farms and Vitafort products. Management decided to focus the
resources of the sales team towards gaining distribution of marshmallows, which
is a category that sells directly to the retailer, rather than through a
distributor. This allowed for immediate distribution of "The Wizard of Oz" brand
marshmallows into thousands of stores in the third and fourth quarter of 1998.
These chains included; Vons, Bi-Lo, H.E. Butt, Albertsons, Winn Dixie, A&P,
Super Fresh, Walbaums, Pamida, Fleming, Wakefern, Big Y and many others.
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>
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 1999 and beyond is to work with manufacturers from the outset and
utilize their internal research and technical staff to develop new products. In
addition, the Company will also work closely with ingredient suppliers such as
Haarmann & Reimer to develop new innovative products, especially in the value-
added neutraceutical category. This strategy will reduce research and
development costs in the future and allow the Company to focus its resources on
the sales and marketing of new products. Research and development expenses were
$362,770 in 1998 and $337,806 in 1997.
COMPETITION
The Company is engaged in the highly competitive health food marketplace.
There are numerous companies with financial and business resources far greater
than Vitafort who are currently marketing competitive products. The Company
seeks to compete based on the unique taste, texture and quality of its products
and by obtaining recognition for its trademarks and licenses.
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 within the classes of trade.
30
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
VITAFORT BRAND CLASS OF TRADE PRINCIPAL COMPETITION MARKET NICHE
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Juliette's Private Natural foods and There is no known direct Appeal to those consumers who
Collection grocery stores. competition for boxed low are not willing to sacrifice
Chocolate Truffles fat chocolate cream the taste of real chocolates,
candies. but demand a nutritional
profile that provides lower
fat than traditional
chocolates.
- ------------------------------------------------------------------------------------------------------------
Juliette's Private Natural foods and Westbrae, Appeal to consumers who want
Collection grocery stores. Pepperidge Farms, a premium cookie with great
Super Premium Cookies Barbara's, taste and just the right
Pamela's amount of fat to ensure great
taste.
- ------------------------------------------------------------------------------------------------------------
Toast `N Jammers Low Natural food stores, Health Valley Healthy Toast `N Jammers may have a
Fat Toaster Pastries grocery stores and Tarts, and Natures' competitive edge in taste and
club stores. Choice Toaster Pastries all natural ingredients, but
has been injured by unfair
competition.
- ------------------------------------------------------------------------------------------------------------
Jammers Fat Free Natural foods and Health Valley Cookies, The brand has been injured by
Cookies and Brownies grocery stores. Westbrae Cookies, unfair competition.
Heaven Scent Cookies,
Barbara's 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 used as an ingredient or
discount drug stores everyday snack.
- ------------------------------------------------------------------------------------------------------------
The Wizard of Oz Grocery, mass Exclusive license, other Presenting for sales in the
Gummy Candies merchants, club and candy tins available 3rd and 4/th/ quarter tied to
discount drug stores during the holidays. Fall video release and 60/th/
anniversary.
- ------------------------------------------------------------------------------------------------------------
The Wizard of Oz Grocery, mass Exclusive license, other Presenting for sales in the
Lollipops merchants, club and candy tins available 3rd and 4/th/ quarter tied to
discount drug stores during the holidays. Fall video release and 60/th/
anniversary
- ------------------------------------------------------------------------------------------------------------
</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 30, 1999, the Company had 10 employees of whom 3 were
executive officers, 1 was engaged in sales and marketing, and 6 were clerical
and administrative.
31
<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 was
leased pursuant to a three-year lease which expired August 31, 1997. The Company
entered into an Assignment and Assumption of Lease with Hollywood Partners, Inc.
and a two-year 1st Amendment and Lease Extension Agreement with the landlord
changing the name of the new tenant to Hollywood Partners. The base rent under
said lease extension is $87,000 for the first year of the term; and $88,800 for
the second year of the term. The Company is now sharing the space with Hollywood
Partners.com and sub-leasing half of the space at a base monthly rate of $3,625
per month. The Company believes that it could find adequate space at similar
cost were it required to do so. The Company believes its current facilities are
suitable for its needs.
LEGAL PROCEEDINGS
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, several companies in which he had invested; and, certain of those
company's officers. Included among the defendants were the Company and its then
Chief Executive Officer, Steve Westlund. 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 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 appealed
that ruling and the appellate court affirmed the lower court ruling. The Company
denies any liability to the plaintiff and intends to vigorously defend this
action in the event the plaintiff seeks to pursue the arbitration. 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 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. 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.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI")
in 1996, the Company acquired the intellectual property and certain claims of
AFI. In May 1996, the Company filed an action in federal court alleging Lanham
Act violations, misappropriation of trade secrets, unfair competition,
32
<PAGE>
conspiracy and related claims arising out of misappropriation of Auburn Farms'
principal products by Auburn Farms co-packer, New Life Bakery ("New Life") and a
principal competitor, Barbara's Bakery ("Barbara's").
On August 3, 1999, the Company entered into litigation settlement
agreements with Barbara's Bakery, Inc. ("Barbara's Bakery"), New Life Bakery,
Inc. ("New Life"), Gil Pritchard, David Marson, James Marson, and Kim Walters
(collectively the "Defendants") and resolved the Company's disputes with its
insurers over coverage for Defendants' counterclaims against the Company and
Mark Beychok. The lawsuit alleged that Barbara's Bakery had violated the Federal
Lanham Act, and the California Unfair Competition Act, by improperly marketing
toaster pastries, fruit juice sweetened cookies, and fig bars, and that New Life
Bakery had breached an agreement with Auburn Farms, Inc., whose claims Vitafort
purchased in 1996. Barbara's Bakery further agreed to withdraw from the toaster
pastry business by discontinuing its Nature's Choice Toaster Pastry line by no
later than November 30, 1999. Vitafort had secured up to $800,000 in off balance
sheet financing for the litigation against New Life and Barbara's Bakery,
including $600,000 from an investment partnership, Auburn Farms Vindication
Partners, LLC, for the purpose of paying the legal fees and expenses of the
pending litigation. The fee arrangement included a limited, partial contingency
arrangement with the Chicago-based law firm of Jenner & Block. After paying
attorneys' fees and making payments to outside investors who funded the
litigation, the Company has received approximately $1,200,000. Each party to the
litigation denies all liability and wrongdoing in connection with the claims
asserted in the pending litigation. The Company intends to use the proceeds of
the settlement towards its working capital requirements.
In addition to the items discussed in this note, the Company is a party to
legal proceedings (which generally relate to disputes between the Company and
its suppliers or customers regarding payment for products sold or supplied) are
typical for a company of its size and scope and financial condition, and that
none of these proceedings are believed to be material to its financial condition
or results of operations.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during 1998.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Positions Held
- ------------------------- --- ---------------------------------------
<S> <C> <C>
Mark Beychok 42 President, CEO, CFO and a Director
Benjamin Tabatchnick 46 Director
John Coppolino 39 Executive Vice President and a Director
Valerie A. Broadbent 60 Secretary
</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).
33
<PAGE>
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 was elected a Director in February 1999. Mr. Coppolino
--------------
began as Director of Sales in 1994 and became Executive Vice President during
September 1997. Mr. Coppolino has over ten years experience in the food
industry, including experience as a food broker and in product manufacture. Mr.
Coppolino graduated from the Pennsylvania State University School of Business in
1983 with a degree in Business Logistics.
Valerie A. Broadbent was elected as Secretary of the Company in
--------------------
February 1999. Ms. Broadbent began as Assistant to the COO/CFO in October 1997
and became Executive Administrator in February 1999. Ms. Broadbent has over
twenty-five years experience working in corporate administration and as
executive assistant to senior management for both public and private companies.
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 November 1998 the price of all
options other than those related to the private placement were repriced to
$0.10. 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
December 1999 Mr. Beychok was appointed as Chairman of the Board and resigned as
President. Mr. Beychok remained as Chief Executive Officer. In February 2000 Mr.
Beychok resigned as Chief Executive Officer and will continue as Chairman of the
Board. Mr. Beychok intends to settle his and the Company's obligations under the
employment agreement and will enter into a consulting agreement with the
Company.
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 November 1998 the price of all options were repriced to
$0.10. In September 1997, Mr. Coppolino was given a successful litigation
34
<PAGE>
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
December 1999 Mr. Coppolino was appointed as President.
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 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Principal Position All Other Annual
& Name Year Salary Other Compensation
<S> <C> <C> <C> <C>
CEO / President
Mark Beychok 1998 $150,000 $ - $ 28,317 (1)
1997 150,000 12,500 (2) $102,467 (3)
1996 137,500 12,500 (4) 8,864 (5)
Executive Vice President
John Coppolino 1998 $120,000 $ - $ 19,003 (6)
1997 120,000 20,750 (7) 59,000 (8)
1996 87,500 14,500 (9) 9,000 (10)
</TABLE>
(1) Comprised of $15,600 car allowance and accrued vacation of $12,717.
(2) A portion of Mr. Beychok's salary was deferred in 1996 and paid in 1997.
(3) Comprised of $9,584 car allowance, accrued vacation of $41,348, plus
$51,535 as a successful litigation reward.
(4) A portion of Mr. Beychok's salary was deferred in 1995 and paid in 1996.
(5) Comprised of $8,204 car allowance and $660 in medical insurance benefits.
(6) Comprised of $9,000 car allowance and accrued vacation of $10,003.
(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 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,
35
<PAGE>
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. In November 1998, the Company reduced the exercise price
of all outstanding options held by officers and directors to $.10, the then
market price of the Company's common stock.
The following chart sets forth the options granted to directors and
officers in 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Percent of Potential realized value
Number of total at assumed annual rate of
securities options/SARs Exercise appreciation for option
underlying granted to of base term
options/ employees in price Expiration
Name SARs granted fiscal year ($/Share) Date 5% 10%
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Benjamin Tabatchnick 50,000 5.6% $ 0.10 02/17/02 823 1,735
- -----------------------------------------------------------------------------------------------------------------
Paul Cowen * 50,000 5.6% $ 0.10 01/29/03 1,103 2,381
- -----------------------------------------------------------------------------------------------------------------
Paul Cowen * 150,000 17.1% $ 0.10 04/30/01 1,814 3,749
- -----------------------------------------------------------------------------------------------------------------
Valerie Broadbent 21,000 2.4% $0.085 01/29/03 394 850
- -----------------------------------------------------------------------------------------------------------------
Valerie Broadbent 54,000 6.1% $0.085 10/29/03 1,013 2,186
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
* Mr. Cowen was a director of the Company from January 1998 until
June 30, 1999.
The following chart sets forth certain information with respect to
options/warrants outstanding at December 31, 1998 to the named individuals:
36
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options/SAR's at
Shares Options/SARs at FY-End
Acquired on Value FY-End Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mark Beychok -0- $ -0- 1,155,625/225,000 $ 346,688 / $ 67,500
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
John Coppolino -0- $ -0- 493,750/75,000 $ 139,125 / $ 22,500
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Benjamin Tabatchnick -0- $ -0- 150,000/100,000 $ 45,000 / $ 30,000
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Paul Cowen * -0- $ -0- 100,000/100,000 $ 30,000 / $ 30,000
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
Valerie Broadbent -0- $ -0- 50,000/25,000 $ 15,750 / $ 7,875
- ------------------------------------------------------------------------------------------------------
</TABLE>
* Mr. Cowen was a director of the Company from January 1998 until
June 30, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the ownership of the common stock by each
director and by entities or persons known to the Company to own beneficially in
excess of 5% of such stock and by all officers and directors as a group, as of
December 31, 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) 1,555,625 (2) 5.9%
Benjamin Tabatchnick (1) 100,000 (3) .5%
John Coppolino (1) 493,750 (4) 2.5%
Valerie A. Broadbent (1) 50,000 (5) .2%
Terra Healthy Living, Ltd. 5,733,743 (6) 29.2%
All directors and officers as a group.
(4 persons) (2)(3)(4) and (5) 2,199,375 9.1%
</TABLE>
(1) The address of these persons is 1800 Avenue of the Stars, Suite 480,
Los Angeles, California 90067.
(2) Includes (i) 62,500 shares underlying a currently exercisable option with
an exercise price of $0.10 per share, which expires on December 16, 2000; (ii)
15,000 shares underlying a currently exercisable option with an exercise price
of $0.10 per share which expires on September 29, 1999; (iii) 100,000 shares
37
<PAGE>
underlying a currently exercisable option with an exercise price of $0.10 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 $0.10 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 $0.10 per share; (vi) 100,000 shares underlying a
currently exercisable option with an exercise price of $0.10 which expires on
June 16, 2002; (vii) 100,000 shares underlying a currently exercisable option
with an exercise price of $.10 which expires on December 31, 2002; and (viii)
225,000 shares underlying a currently exercisable option with an exercise price
of $0.10 which expires September 1, 2002 and does not include 225,000 shares
underlying options which are not currently exercisable with an exercise price of
$0.10 expiring September 1, 2002.
(3) Mr. Tabatchnick holds a currently exercisable option for the purchase of
50,000 shares at $0.10 granted in 1998. Mr. Tabatchnick holds a currently
exercisable option for an additional 50,000 shares at $0.10 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.
(4) Includes (i) 168,750 shares underlying a currently exercisable option with
an exercise price of $0.10 per share, which expires on December 16, 2000; (ii)
70,000 shares underlying a currently exercisable option with an exercise price
of $0.10 which expires on June 16, 2002; (iii) 225,000 shares underlying a
currently exercisable option with an exercise price of $0.10 which expires on
September 1, 2002; and does not include (iv) 75,000 shares with an exercise
price of $0.10 which are not currently exercisable expiring September 1, 2002.
(5) Includes (i) 21,000 shares underlying a currently exercisable option with
an exercise price of $0.085 per share, which expire on January 29, 2003; (ii)
4,000 shares underlying a currently exercisable option with an exercise price of
$0.085 which expire on October 29, 2003; (iii) 25,000 shares with a currently
exercisable price of $0.085 which expire on October 29, 2003. It does not
include 25,000 shares with an exercise price of $.085, which are not currently
exercisable, expiring October 29, 2003.
(6) Includes 500,000 shares underlying an option with an exercise price of $.25
per share which expires in December 2004. Includes 2,000,000 shares which are
subject to redemption by the Company pursuant to an agreement. See "Certain
Relationships and Related Transactions." The foregoing is based upon a report on
Schedule 13D filed by Terra Healthy Living, Ltd. on February 8, 1999.
The following table sets forth the ownership of the Series B 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.
38
<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 (5 persons) 0 0%
- ------------------------------------------------------------------------------------------------------
1997 Series A All officers and directors as a group
Preferred Stock (5persons) 0 0%
- ------------------------------------------------------------------------------------------------------
</TABLE>
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. The loan was
evidenced by a note which bears interest at the lesser of 15% per annum or the
highest rate allowed by law with recourse solely to the net proceeds of the
arbitration, if any. If the Company did not realize any net proceeds from the
arbitration, the Loan would be canceled and the Lender would receive a warrant
for the purchase of 400,000 shares of the Company's Common Stock at $.01 per
share. If the Loan was repaid through the application of the net proceeds of the
arbitration, the Lender would receive warrants for the purchase of 200,000
shares of Common Stock at $.01 per share and a percentage of net proceeds of the
arbitration equal to 15% of the first $1,000,000 of net proceeds, but not less
than $100,000; 20% of the net proceeds greater than $1,000,000 and less than
$3,000,000; and, 25% of net proceeds above $3,000,000. The Loan was approved by
the disinterested members of the Company's Board of Directors, and was on terms
no less favorable to the Company than were available from non-affiliated
lenders. A second proposal, from another source, contained terms which would
have required the Company to pay $2,050,000 in fees based on the actual award,
repay the $300,000 advance, and be granted a warrant for 1,000,000 shares of the
Company's common stock at an exercise price of $1.00. The loan amount of
$300,000 was repaid upon settlement of the litigation in June 1997 and receipt
of funds in July 1997, plus $1,236,883 in conformity with the agreed upon
formula, plus a warrant for 200,000 shares of the Company's common stock at a
$0.01 per share. See Note 16 to the Consolidated Financial Statements for the
recording of the entire transaction.
The Company entered into a one year consulting agreement with Benjamin
Tabatchnick, a Director of the Company, on April 1, 1997. Mr. Tabatchnick, in
exchange for 50,000 shares of the Company's common stock plus 2% of the new
sales endeavors in the school and food service business areas, agreed to assist
the Company in developing programs, formulations, marketing and sales in the
above mentioned business areas.
39
<PAGE>
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.
On January 22, 1999, the Company completed the Closing under a series of
agreements including a Common Stock Purchase Agreement (the "CSPA"), dated as of
December 30, 1998, by and among the Company; Terra Healthy Living, Ltd, a B.V.I.
corporation ("Terra"); Sovereign Partners, a Connecticut limited partnership
("Sov"); and Dominion Capital Fund, Ltd., a Bahamian corporation ("Dom"). All of
the transactions contemplated by the CSPA were deemed to have occurred on
December 31, 1998. Pursuant to the CSPA:
Terra acquired 2,712,843 shares of the Company's common stock from Sov and
Dom for $235,000. Such shares were issued upon the conversion by Sov and Dom of
an aggregate of 235 shares of the Company's 1997 Series A Convertible Preferred
Stock ("Series A Preferred").
The Company borrowed $2,065,000 from Terra pursuant to a Promissory Note
With Warrant and Registration Rights (the "Terra Note"). The Terra Note is a
five year note bearing interest at 6% per annum. Interest on the Terra Note is
payable annually. The Terra Note provided for the issuance to Terra of a five
year warrant (the "Terra Warrant") for the purchase of 500,000 shares of the
Company's common stock at $.25 per share. The Terra Note further provides that
the first year's interest on the Terra Note shall be applied to the partial
exercise of the Terra Warrant. The Company and Terra have entered into a
Registration Rights Agreement requiring the registration under the Securities
Act of 1933, as amended (the "Act") of the securities issuable upon exercise of
the Terra Warrant.
The Company applied the $2,065,000 proceeds of the Terra Note to redeem all
1,351 remaining shares of Series A Preferred held by Sov and Dom as well as a
convertible debenture in the amount of $548,352 held by Dom pursuant to an
Agreement and Consent to Redeem Series A Preferred Stock and Debentures (the
"Redemption Agreement").
The aggregate of $2,300,000 paid by Terra in connection with its purchase
of the 2,712,843 shares of the Company's common stock from Sov and Dom and in
connection with the Terra Note was satisfied through the delivery to Sov and Dom
of marketable securities having a value of $2,300,000. Under the CSPA, Terra
made certain assurances to Sov and Dom and assumed certain obligations to assure
that Sov and Dom would realize $2,300,000 on the sale of the marketable
securities including the delivery of additional securities to them.
The Company borrowed $300,000 from each of Sov and Dom pursuant to a
non-negotiable nine month promissory note bearing interest at 8% per annum (the
"Sov Note" and the "Dom Note"). These notes provide for their repayment, at the
option of the Company, in free trading registered common stock which shall be
valued at the then market for such stock. The Sov Note and the Dom Note provide
for the issuance to each of Sov and Dom of 60,000 warrants which expire on
December 31, 2003, half of which are exercisable at $.40 and half of which are
exercisable at $.25. If the Company repays the Sov Note or the Dom Note with
common stock, then the exercise price of the $.25 warrant is reduced to $.01.
The Company entered into a Registration Rights Agreement with Sov and Dom.
The CSPA granted the Company the right to redeem up to 2,000,000 of the
shares of its common stock acquired by Terra through June 30, 2000 based upon a
formula related to the market price of the common stock at the time of
conversion.
The Company issued 571,232 shares of its common stock to Sov in connection
with the prior conversion of 40 shares of Series A Preferred Stock.
40
<PAGE>
In December 1998, the Company sold 1,000,000 shares to Terra Healthy
Living, Ltd., a principal stockholder, for $250,000 (or $.25 per share) which
was paid by delivery to the Company of marketable securities. The Company
believes that the price paid for such shares was no less favorable to the
Company than that which would have been paid by an unaffiliated purchaser.
The Company has used the services of Alto Palato Restaurant in Los Angeles,
California for business entertainment. Mr. Beychok is a partner in the
restaurant. The services were provided to the Company by Alto Palato Restaurant
at a 20% discount from its usual and customary rates.
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 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
41
<PAGE>
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 with the holder also receiving warrants ("Conversion Warrants") for
each share converted so that the holder's potential profit n 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
42
<PAGE>
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 resales 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 1,626 shares of 1997 Series A
Preferred Stock remain outstanding.
These securities were redeemed as of December 31, 1998. See "Certain
Relationships and Related Transactions."
Redeemable Warrants
The Company issued Redeemable Common Stock Purchase Warrants in its initial
public offering which, as extended, expired on October 31, 1998. There were
1,680,000 Redeemable Common Stock Purchase Warrants outstanding which each
entitles 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
were exercised.
Transfer Agent
Continental Stock Transfer & Trust Company, Two Broadway, New York, NY
10004 is Transfer agent for the Common Stock.
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.
43
<PAGE>
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."
These securities were redeemed as of December 31, 1998. See "Certain
Relationships and Related Transactions."
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; and (ii) 30,000 options with an
exercise price of $.10.
EXPERTS
The consolidated financial statements of Vitafort International Corporation
for the years ended December 31, 1998 and 1997, 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.
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.
44
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheets - December 31, 1998 and 1997 F-3
Consolidated Statements of Operations -
Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit) -
Years Ended December 31, 1998 and 1997 F-6
Consolidated Statements of Cash Flows -
Years Ended December 31, 1998 and 1997 F-7
Summary of Accounting Policies F-9
Notes to Consolidated Financial Statements F-13
F-1
<PAGE>
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
Los Angeles, California
We have audited the accompanying consolidated balance sheets of Vitafort
International Corporation and Subsidiaries as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998 and 1997,
and the consolidated results of their operations and their 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 $3,970,712 for the year
ended December 31, 1998. The Company also has a negative working capital of
$615,028 and a stockholders' deficit of $1,704,265 as of December 31, 1998.
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
April 15, 1999 /s/ BDO SEIDMAN, LLP
F-2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
1998 1997
---- ----
Assets (Note 6)
Current assets:
Cash and cash equivalents $ 903,649 $ 2,199,036
Marketable securities (Note 17) 250,000 -
Accounts receivable, net of allowance for
doubtful accounts of $41,775 and $25,743 as of
December 31, 1998 and 1997, respectively 929,006 412,289
Inventory (Notes 3 and 6) 196,603 247,611
Notes receivable - related party (Note 15) - 10,000
Prepaid expenses and other current assets 132,509 269,268
---------- ------------
Total current assets 2,411,767 3,138,204
---------- ------------
Equipment (Note 7):
Manufacturing equipment 19,881 290,912
Furniture and office equipment 105,160 105,160
Computer equipment 209,574 193,571
---------- ------------
334,615 589,643
Less accumulated depreciation (271,411) (347,493)
---------- ------------
Net equipment 63,204 242,150
---------- ------------
Other Assets:
Advances to Global International Sourcing (Note 8) - 193,818
Intangible assets, net (Note 4) 911,684 338,091
Other assets 875 -
---------- ------------
912,559 531,909
---------- ------------
Total other assets $3,387,530 $ 3,912,263
========== ============
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,
1998 1997
---- ----
<S> <C> <C>
Current liabilities:
Note payable - bank (Note 6) $ 283,689 $ 60,757
Notes payable - other (Note 6) 958,724 283,898
Convertible notes payable (Note 6) 600,000 -
Accounts payable 1,054,079 909,315
Accrued expenses (Note 5) 130,303 342,437
Current maturities of long-term debt - 37,859
------------ ------------
Total current liabilities 3,026,795 1,634,266
------------ ------------
Long-term debt due to stockholder (Note 7) 2,065,000 -
------------ ------------
Commitments and contingencies (Notes 11 and 13)
Stockholders' equity (deficit) (Notes 10, 11 and 16):
Series A, 6% Cumulative Convertible Preferred Stock,
$0.01 par value; 750 shares authorized;
0 shares issued and outstanding at December 31,
1998 and 750 at December 31, 1997; 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 shares; 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 12,056,428 and 6,683,853 shares 1,206 668
Additional paid-in capital 24,064,868 23,160,507
Accumulated deficit (25,770,350) (20,883,197)
------------ ------------
Total stockholders' equity (deficit) (1,704,265) 2,277,997
------------ ------------
$ 3,387,530 $ 3,912,263
============ ============
</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,
1998 1997
---- ----
<S> <C> <C>
Net sales $ 2,861,392 $ 1,995,317
Cost of sales 1,876,319 1,896,410
------------ -----------
Gross profit 985,073 98,907
------------ -----------
Operating expenses:
Research and development 362,770 337,806
Sales and marketing 2,035,125 1,239,460
General and administrative 2,557,890 2,672,946
------------ -----------
Total operating expenses 4,955,785 4,250,212
------------ -----------
Loss from operations (3,970,712) (4,151,305)
Other income (expense):
Interest income 39,591 78,070
Interest expense (221,547) (214,690)
Other income (expense) (59,684) 15,210
Loss on disposal of assets (42,246) -
Litigation recovery, net of costs (Note 18) - 4,748,946
------------ -----------
Total other income (expense) (283,886) 4,627,536
(Loss) income before income taxes (4,254,598) 476,231
State income taxes (Note 8) 3,407 3,200
------------ -----------
Net (loss) income (4,258,005) 473,031
Deemed dividends to preferred shareholders (629,148) (305,749)
------------ -----------
Net (loss) income allocable to common shareholders $ (4,887,153) $ 167,282
============ ===========
Basic net (loss) income per common share $ (0.66) $ 0.03
============ ===========
Diluted net (loss) income per common share $ (0.66) $ 0.03
============ ===========
Basic weighted average shares of common stock 7,348,093 5,831,404
============ ===========
Diluted weighted average shares of common stock 7,348,093 6,343,397
============ ===========
</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
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
Series A Series B
Cumulative Cumulative Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
--------------- --------------- --------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 - $ - 1,000 $ 10 50 $ 1 4,908,664 $ 491
Common stock issued in private placement 500,000 50
Common stock issued as settlement of disputes 70,000 7
Series A Preferred issued in private placement 750 8
Payment of accounts payable obligations with stock 662,589 66
Exercise of warrants 200,000 20
Exercise of stock options 342,600 34
Preferred stock dividends
Net income
------ ------ ------ ------ ------ ------ ---------- ------
Balance, December 31, 1997 750 8 1,000 10 50 1 6,683,853 668
Series A Preferred issued in connection with
a private placement, net of expenses 500 5
Stock issued as settlement of contract disputes 115,000 12
Exercise of stock options 239,500 24
Stock issued for acquisition of marketing contract 60,000 6
Stock issued for services 436,500 44
Issuance of common stock in private placement 1,000,000 100
Conversion of Series A Preferred Stock (350) (4) 3,521,575 352
Redemption of Series A Preferred Stock (1,351) (13)
Issuance of warrants
Preferred stock dividends 451 4
Net loss
------ ------ ------ ------ ------ ------ ---------- ------
Balance, December 31, 1998 0 $ - 1,000 $ 10 50 $ 1 12,056,428 $1,206
====== ====== ====== ====== ====== ====== ========== ======
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
----------- ------------- -----------
<S> <C> <C> <C>
Balance, January 1, 1997 $20,556,148 ($21,050,479) ($493,829)
Common stock issued in private placement 449,950 450,000
Common stock issued as settlement of disputes 78,743 78,750
Series A Preferred issued in private placement 672,992 673,000
Payment of accounts payable obligations with stock 638,297 638,363
Exercise of warrants 139,980 140,000
Exercise of stock options 318,648 318,682
Preferred stock dividends 305,749 (305,749) -
Net income 473,031 473,031
----------- ------------- -----------
Balance, December 31, 1997 23,160,507 (20,883,197) 2,277,997
Series A Preferred issued in connection with
a private placement, net of expenses 498,995 499,000
Stock issued as settlement of contract disputes 94,176 94,188
Exercise of stock options 213,634 213,658
Stock issued for acquisition of marketing contract 43,118 43,124
Stock issued for services 402,149 402,193
Issuance of common stock in private placement 249,900 250,000
Conversion of Series A Preferred Stock (348) -
Redemption of Series A Preferred Stock (1,505,007) (1,505,020)
Issuance of warrants 278,600 278,600
Preferred stock dividends 629,144 (629,148) -
Net loss (4,258,005) (4,258,005)
----------- ------------- -----------
Balance, December 31, 1998 $24,064,868 $ (25,770,350) $(1,704,265)
=========== ============= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
December 31,
Increase (Decrease) in Cash and Cash Equivalents 1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (4,258,005) $ 473,031
Adjustments to reconcile net (loss) income to net cash
and cash equivalents provided by (used in) operating activities:
Depreciation and amortization 237,410 163,503
Allowance for doubtful accounts 16,032 (54,251)
Write-off of related party receivables 104,290 -
Loss on disposal of assets 42,559 -
Warrants issued for services (Note 10) - 138,000
Stock issued for services (Note 16) 261,706 -
Other (37,859) -
Change in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (210,204) (127,249)
Inventories 56,008 113,585
Prepaid expenses and other current assets 152,618 2,463
Notes receivable - 46,000
Other receivables - 4,464
Other assets (875) -
Increase (decrease) in:
Accounts payable and accrued expenses 66,358 1,031,347
------------- -----------
Cash and cash equivalents used in operating activities (3,569,962) 1,790,893
------------- -----------
Cash flows from investing activities:
Proceeds from disposal of equipment 73,516 -
Purchase of equipment (35,884) (20,277)
Advances to Global International Sourcing (285,386) (193,818)
Customer acquisition costs (109,872) -
Cash acquired through acquisition of Global International Sourcing 75,462 -
------------- -----------
Cash and cash equivalents provided by (used in) investing activities (282,164) (214,095)
------------- -----------
Cash flows from financing activities:
Proceeds from convertible notes payable 600,000 -
Proceeds from notes payable, other 1,047,262 307,871
Repayment of notes payable, other (372,435) (625,695)
Proceeds from issuance of stock 499,000 1,123,000
Exercise of stock options and warrants - 7,460
Redemption of Preferred Series A stock (1,505,020) -
Proceeds from long-term debt 2,065,000 -
Proceeds from notes payable - bank 2,025,818 838,426
Repayments of notes payable - bank (1,802,886) (1,217,691)
------------- -----------
Cash and cash equivalents provided by financing activities 2,556,739 433,371
------------- -----------
Increase (decrease) in cash and cash equivalents (1,295,387) 2,010,169
Cash and cash equivalents at beginning of year 2,199,036 188,867
------------- -----------
Cash and cash equivalents at end of year $ 903,649 $ 2,199,036
============= ===========
</TABLE>
F-7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ----------
<S> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $175,079 $ 215,126
Income taxes 3,407 3,200
Supplemental disclosure of non-cash operating, investing and
financing activities
Conversion of accounts payable to equity $ - 1,030,335
Conversion of accounts payable to notes payable - 601,723
Stock issued for accounts and notes payable 132,988 -
Stock issued for prepaid consulting services 7,500 -
Stock issued upon cashless exercise of options 213,658 -
Stock issued as settlement of contract dispute 94,188 -
Conversion of Series A Preferred Stock to common stock
(350 shares of preferred stock for 3,521,575 shares of
common stock - -
Stock issued in exchange for marketable securities
(1,000,000 shares of common stock issued) 250,000 -
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 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: Hollywood Partners, Inc. (formerly Vitafort Distributors,
Inc.); Global International Sourcing, Inc. (Global); Nutrifish Corporation
(90.5% owned; and Crystal Clear Farms. Nutrifish Corporation and Crystal Clear
Farms are inactive subsidiaries. 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 1997 amounts have been reclassified to conform to the 1998
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.
MARKETABLE SECURITIES
The Company has classified its entire investment portfolio as available-
for-sale in accordance with the provisions of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities". Available-for-sale
securities are stated at fair value with unrealized gains and losses included in
shareholders' equity. The amortized cost of debt securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses are
included in other income (expense). The cost of securities sold is based on the
specific identification method.
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.
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, debt issuance costs and customer acquisition 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 Financial Accounting Standards Board ("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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has cash and cash equivalents, receivables and accounts payable
for which the carrying value approximates the fair value due to the short-term
nature of these instruments.
The fair value of long-term debt due to shareholder cannot be estimated due
to its related party nature.
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.
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 beginning 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 and it did not 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 adopted SFAS 131 on
January 1, 1998, and it did not have any effect on its financial position or
results of operations as the Company operates in one business segment. The
Company is providing the other footnote disclosures required by SFAS 131.
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 sourcing, developing and formulating
products that it sells and markets under brands for healthy products, for
licensed products and for low-priced sourced products.
NOTE 2 - LIQUIDITY AND GOING CONCERN
For the past several years, the Company has suffered recurring losses from
operations, including $3,970,712 for the year ended December 31, 1998 and has a
negative working capital of $615,028 and a stockholders deficit of $1,704,265 at
December 31, 1998. The Company's long-term credit facility expires April 30,
1999. Furthermore, the Company has been delinquent or slow in payments to
noteholders and suppliers. Although the Company raised additional capital in
1998 (see Note 10), 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 financial statements do not include
any adjustments that may be necessary if the Company is unable to continue as a
going concern.
The Company has reduced its cost of sales by sourcing a significant amount
of its products from Mexico at lower rates than with existing manufacturers. The
Company has also introduced both new and reformulated products in 1998 and plans
to introduce new products in 1999. 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.
Inventory consists of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Finished goods $ 118,524 $ 30,188
Packaging and raw material 78,079 217,423
--------- ---------
$ 196,603 $ 247,611
========= =========
</TABLE>
F-13
<PAGE>
NOTE 4 -- INTANGIBLE ASSETS, NET
Intangible assets, net, consists of the following:
December 31,
1998 1997
---- ----
Auburn Farms trademarks $311,254 $311,254
Customer acquisition costs 76,167 -
Deferred financing costs 278,600 100,000
Distribution rights 93,686 -
Goodwill 218,213 -
-------- --------
977,920 411,254
Less accumulated amortization
66,236 73,163
-------- --------
-
Total intangible assets $911,684 $338,091
======== ========
NOTE 5 -- ACCRUED EXPENSES
Accrued expenses consist of the following:
December 31,
1998 1997
----- ----
Accrued compensation $ 32,709 $156,764
Accrued interest payable 46,468 -
Accrued legal fees - 40,112
Accrued consulting fees - 4,919
Accrued royalties 51,126 -
Other accrued expenses - 140,642
-------- --------
Total accrued expenses $130,303 $342,437
======== ========
NOTE 6 -- NOTES PAYABLE
Bank
----
In August 1996, the Company entered into a revolving credit facility with
Coast Business Credit ("Bank") that provided a credit line of up to $4,000,000
subject to certain covenants. Advances made to the Company under the facility
were 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. Advances under the
facility bear interest at the Bank of America NT prime (7.75% at December 31,
1998) plus 3%, and are secured by a first priority lien on all of the Company's
assets. Minimum interest charges were $15,000 per month through August, 1998.
On June 26, 1998, the Bank notified the Company that the credit line was
expiring on August 31, 1998. As of December 31, 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 April 30, 1999. As of December 31, 1998, the amount due under this credit
facility was $283,690. The Bank agreed to eliminate from its collateral the
inventory to be used for the Purchase Order Financing discussed below. The
Company is in negotiations with the Bank and
F-14
<PAGE>
other potential lenders to receive more favorable terms than under the previous
agreement. Should the Company be unable to secure a replacement lender, it could
severely jeopardize the future ability of the Company to fund operations.
Other
-----
In June 1998 and throughout the rest of the year, the Company entered into
purchase order financing agreements with accredited investors which provided the
Company with $995,000 to purchase inventory. These advances bear interest at 3%
per month and are due as the related receivables are collected. In addition,
several lenders received options to purchase 410,000 shares of the Company's
common stock at $1.00 per share, which was fair market value at the time. The
exercise price was later reduced to $0.10 and $0.085 reflecting a subsequent
decline in the fair market value of the Company's common stock. The Company has
pledged its inventory as collateral for these advances. At December 31, 1998,
$795,000 of these advances were outstanding.
Notes payable -- other, at December 31, 1997 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 (including interest at
various rates). The notes have various maturity dates through December 1998. At
December 31, 1998, $111,462 was still outstanding under these notes. The Company
is delinquent on payment of these notes.
Also included in notes payable at December 31, 1998 is an insurance
contract payable for $52,262.
Convertible Notes Payable
-------------------------
The convertible notes payable consists of two notes in the amount of
$300,000 each to previous holders of the Company's Series A Preferred Stock. The
notes are due October 20, 1999 and bear interest at 8%. The Company may repay
these notes and accrued interest through the issuance of common stock, based
upon the market price of the shares at that time.
Under the terms of these notes, the Company issued five-year warrants to
the holders of these notes to purchase 60,000 shares of common stock at $0.40
per share and 60,000 shares of common stock at $0.25 per share. If the notes and
accrued interest are repaid in cash, the warrants for 60,000 shares at $0.25
will be cancelled. Otherwise, to the extent any portion of the notes and accrued
interest is paid with stock, the exercise price of a proportionate number of the
60,000 shares will be adjusted to $0.01 per share. The warrants were valued at
the fair value as of the date issued, which resulted in non-cash financing cost
of $58,262. This non-cash financing cost is being amortized as interest expense
over the term of the debt.
On August 24, 1998, the Company issued a convertible debenture due August
24, 2000 and received proceeds in the amount of $548,352. Interest was payable
at 6% per annum. Repayments could be made in cash or stock at the option of the
Company. On December 30, 1998, this note and accrued interest of $11,629 were
repaid in full from the proceeds of a long-term promissory note (Note 7).
NOTE 7 -- LONG-TERM DEBT
The Company's long term debt consists of a $2,065,000 five year promissory
note payable issued to a principal shareholder on December 30, 1998. The note is
due January 22, 2004 and bears interest at 6%. Interest is payable annually. The
note provides for the first year's interest on the note to be applied to the
partial exercise of the warrants. Under the terms of the note, the Company
issued warrants to the note holder to purchase 500,000 shares of common stock at
$0.25 per share. These warrants were valued at the fair value as at that date,
which resulted in non-cash financing cost of $220,267. This non-cash financing
cost is being amortized as interest expense over the term of the debt.
F-15
<PAGE>
The proceeds from this note were used to retire 1,351 shares of Series A
Preferred Stock and repay a $548,352 note payable to a shareholder along with
accrued interest thereon of $11,628 (Notes 7,10 and 19).
NOTE 8 -- 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. Had the Company consolidated
its operating performance with Global for the entire year ended December 31,
1998, the unaudited proforma results would have been as follows:
Net Sales $ 3,332,369
Gross Profit 1,037,128
Net Loss (4,364,431)
Net Loss Allocable to Common Shareholders (4,993,579)
Net Loss Per Share (.67)
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 9 -- INCOME TAXES
As the Company has incurred significant operating losses since inception,
its current tax provision has been limited to minimum California tax payments.
As of December 31, 1998, the Company had unused Federal and California net
operating loss carryforwards of approximately $24,300,000 and $11,100,000,
respectively, available to offset against future Federal taxable income and
future California taxable income. The unused net operating loss and credit
carryforwards expire in various amounts through the year 2013. 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 2003.
Net deferred tax assets of approximately $8,600,000 resulting from net
operating losses 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.
F-16
<PAGE>
NOTE 10 -- STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The Company entered into two subscription agreements totaling $750,000 in
1997 with two unrelated investors for 750 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
$305,749 is being treated as a deemed dividend. The facilitators received a 10%
fee from the proceeds, as well as warrants to purchase 52,500 shares of common
stock at an exercise price of $1.00 per share. Cumulative unpaid dividends
amounted to $32,500 at December 31, 1998.
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 the above 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 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 resulted in a deemed dividend of $147,381.
The modified terms of the 1,701 total shares of 1997 Series A Preferred
Stock outstanding resulted 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.
During the last quarter of 1998, the holders of 350 shares of the 1997
Series A Preferred Stock elected to convert said shares into 3,251,575 shares of
common stock under the terms of the subscription agreement.
The Company repurchased the remaining 1,351 shares of the 1997 Series A
Preferred Stock for $1,505,020 from the proceeds of a promissory note (Note 7).
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 $39,000 and $25,000 at
December 31, 1998 and 1997, respectively.
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
F-17
<PAGE>
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 B and Series C Preferred stock are not currently
registered under the Securities Exchange Act of 1934.
Common Stock
In January 1998, 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.
In February 1998, the Company issued 30,000 shares of common stock at a
value of $.30625 per share as settlement of a contract dispute related to
consulting services previously recorded as a liability.
In February 1998, the Company issued 60,000 shares of common stock at a
value of $.71875 per share and forgave a $25,000 note receivable from an
unrelated company in exchange for its distribution rights with respect to
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.
In February 1998, 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.
In March 1998, 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.
In April and July 1998, the Company issued a total of 87,000 shares of
common stock at a value of $1.00 per share upon the exercise of options granted
to a consultant in exchange for consulting services.
In May 1998, 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.
In June 1998, the Company issued 174,500 shares of common stock at a value
of $1.00 per share under an S-8 filing as payment for services rendered and to
be rendered.
In July 1998, the Company issued an additional 60,500 shares at values
averaging $.80 per share under the S-8 filing as payment for services rendered
and to be rendered.
During 1998, the Company issued 29,500 shares of common stock at a value of
$1.00 per share to various consultants and professional firms for previous
services rendered.
In July 1998, the Company issued 20,000 shares of common stock at a value
of $.94 per share to a consultant in payment of services rendered.
In August 1998, the Company issued 125,000 shares of common stock to
officers at a value of $1.00 per share in payment of accrued bonuses.
In August 1998, the Company issued 7,000 shares of common stock at a value
of $.86 per share to a consultant in payment of services rendered.
F-18
<PAGE>
In December 1998, the Company issued 352,575 shares of common stock upon
the conversion of 350 shares of 1997 Series A Preferred Stock.
In December 1998, the Company sold 1,000,000 shares of common stock to
Terra Healthy Living, a principal shareholder, for $250,000 (or $.25 per share)
which was paid by delivery to the Company of marketable Swiss securities. The
Company believes that the price paid for such shares was no less favorable to
the Company than that which would have been paid by an unaffiliated purchaser.
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.
NOTE 11 -- 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
F-19
<PAGE>
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, 1998, 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, 1998 and 1997:
<TABLE>
<CAPTION>
Number of Common Stock Options Weighted
1995 Stock Other Stock Average
Option Plan Options Price
----------- ------- -----
<S> <C> <C> <C>
Outstanding as of
January 1, 1997 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
Granted and repriced - 6,755,528 .48
Exercised - (239,500) .89
Canceled - (2,328,970) 2.01
---------- ---------- -------
Outstanding as of
December 31, 1998 1,231,708 8,073,040 $ .66
========== ========== =======
Exercisable as of
December 31, 1998 1,231,708 6,839,320 $ .60
========== ========== =======
</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 1998 and 1997 dividend yield of zero percent; expected volatility of 28
percent and 36 percent; risk-free interest rate of eight percent; and expected
lives of 5. 0 and 5.0 years, respectively.
The weighted average fair value of options granted during 1998 and 1997 was
$.41 and $.39, respectively.
Under the accounting provisions of FASB Statement 123, the Company's net
income (loss) and income (loss) per share for 1998 and 1997 would have been
reduced to the pro forma amounts indicated below:
F-20
<PAGE>
<TABLE>
<CAPTION>
Net Income (Loss) 1998 1997
------------------------------------------------------------
<S> <C> <C>
As reported $(4,887,153) $167,282
Pro forma $(4,904,346) $(68,466)
Basic income (loss) per share
-----------------------------
As reported $ (.66) $ 0.03
Pro forma $ (.66) $ (0.01)
Diluted income (loss) per share
-------------------------------
As reported $ (.66) $ 0.03
Pro forma $ (.66) $ (0.01)
</TABLE>
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, 1998:
<TABLE>
<CAPTION>
Options Options Exercisable
Outstanding -------------------
Number Weighted-Average Number Weighted
Range of Outstanding Remaining Weighted-Average Exercisable Average
Exercisable Prices At 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- -------------------- ----------- ---------------- ---------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
$ 0.875 - $.75 4,932,250 1.8 $ 0.11 4,518,750 $ 0.11
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
$ 0.875 - $2.80 4,044,373 2.1 1.05 3,324,153 1.05
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
$3.00 - $7.50 295,375 1.9 2.76 195,375 2.50
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
$10.00 - $20.00 32,750 8.93 12.14 32,750 12.14
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Totals 9,304,748 2.0 $ 0.66 8,071,028 $ 0.60
==============================================================================================
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12 -- 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 $7,250 per month.
Rent expense for the years ended December 31, 1998 and 1997 including
parking, included in selling, general and administrative expenses, was $138,627
and $98,538, respectively.
F-21
<PAGE>
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 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.
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.
In 1996, Auburn Farms entered Chapter 7 bankruptcy. In connection with the
Auburn Farms bankruptcy, the Company entered into an agreement with Sacramento
Bank the priority secured creditor in the Auburn Farms bankruptcy, by which the
Company assumed the bank's position as the priority secured
F-22
<PAGE>
creditor in the bankruptcy. Under independent counsel's advice, the Company
believes, as a consequence of the agreement with the bank, that it is no longer
liable for royalty payments subsequent to 1997.
NOTE 13 -- 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,
1998 and 1997:
1998 1997
----------- ---------
Wal-Mart $ 585,813 -
A-1 International, Inc. 532,422 320,235
---------- --------
Total $1,118,235 $320,235
========== ========
NOTE 14 -- LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, 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, Steve Westlund. 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 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. 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
F-23
<PAGE>
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.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI")
in 1996, the Company acquired the intellectual property and certain claims of
AFI. 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 misappropriation of Auburn Farms'
principal products by Auburn Farms co-packer, New Life Bakery ("New Life") and a
principal competitor, Barbara's Bakery ("Barbara's"). The lawsuit was filed in
the United States District Court for the Eastern District of California which is
scheduled for trial in May 2000. Vitafort is seeking in excess of $10 million in
damages based on claims of unfair competition, breach of contract, fraud among
other claims. These claims arise from New Life's abrupt termination of
production for Auburn Farms and its alleged conspiracy with Barbara's Bakery to
make and distribute to natural food stores and other retailers products to which
Auburn Farms (and Vitafort as successor) had contractual rights to distribute
exclusively. It is also based on Barbara's Bakery's representations to brokers,
distributors and consumers that it had the right to distribute these same food
products. The Company has been advised by outside litigation counsel that
evidence produced in discovery may support a request for punitive damages. The
defendants have filed counterclaims against Vitafort and its Chief Executive
Officer seeking $5 million in damages.
Vitafort has secured up to $800,000 in off balance sheet financing for the
litigation against New Life and Barbara's Bakery, including $600,000 from a
newly formed investment partnership, Auburn Farms Vindication Partners, LLC, for
the purpose of paying the legal fees and expenses of the pending litigation. The
fee arrangement includes a limited, partial contingency arrangement with Jenner
& Block, one of the nation's leading trial firms. Jenner & Block also
represented Vitafort in the 1997 arbitration against The Keebler Company that
resulted in Vitafort receiving $6.75 million in damages and attorneys' fees.
Under the fee arrangements, the first proceeds received from the litigation, if
any, will go to repay the advancements of legal fees and expenses, including
those made by the Company. Between 25% to 35% of any additional amounts may be
paid to the investment partnership. Additionally, the investment group may
collectively receive as much as $180,000 as additional compensation from a
successful resolution in the litigation. These fee arrangements may materially
decrease the value of any recovery to the Company.
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. In a subsequent transaction, Vitafort acquired Sacramento Commercial
Bank's interest in the litigation proceeds. 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, as well as a portion of any recovery against any
defendant to the Auburn Farms Vindication Limited Partners, LLP which is
committed to funding a significant part of the litigation expense. The Company
intends to pursue this litigation vigorously. There is no assurance given that
the Company will receive any recovery. The Company believes that the
distribution of the Auburn Farms products was substantially injured by unfair
competition from Barbara's Bakery and New Life.
On September 29, 1998, a complaint was filed in Superior Court, the County
of Los Angeles, in an action entitled "Kirtland & Packard LLP, a California
Limited Liability Partnership vs. Vitafort, Inc., a Delaware Corporation; and
Does 1-25 inclusive." The complaint alleges Breach of Contract, Fraud,
Negligent Misrepresentation, Common Counts, Breach of Implied Covenant of Good
Faith and Fair Dealing, Negligent Performance of Contract, and Declaratory
Relief, arising out of a contract for legal services. The Complaint seeks
damages in the amount of $85,000 plus interest and attorneys fees, and for such
other and further relief as the Court deems just and proper. The Company is
vigorously defending the suit.
F-24
<PAGE>
In addition to the items discussed in this note, the Company is a party to
legal proceedings (which generally relate to disputes between the Company and
its suppliers or customers regarding payment for products sold or supplied) are
typical for a company of its size and scope and financial condition, and that
none of these proceedings are believed to be material to its financial condition
or results of operations.
NOTE 15 - RELATED PARTY TRANSACTIONS
The Company has entered into related party transactions during 1997 and
1998. See Notes 10, 11, 12, 18 and 19 for further detailed information.
NOTE 16 - EARNINGS PER SHARE
The following table reconciles the numerators and denominators of the basic
and diluted (loss) earnings per share computation:
<TABLE>
<CAPTION>
December 31,
1998 1997
---- ----
<S> <C> <C>
Basic (loss) earnings per share
Net (loss) income $(4,258,005) $ 473,031
Deemed dividends (629,148) (305,749)
----------- -----------
(Loss) income available to common stockholders (numerator) $(4,887,153) $ 167,282
=========== ===========
Weighted average common shares outstanding (denominator) 7,348,093 5,831,404
=========== ===========
Basic (loss) earnings per share $ (.66) $ 0.03
=========== ===========
Diluted (loss) earnings per share
(Loss) income available to common shareholders (numerator) $ 167,282
===========
Weighted average common shares outstanding 5,831,404
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
===========
Diluted earnings (loss) per share $ 0.03
===========
</TABLE>
Options and warrants to purchase 8,751,028 shares of common stock and
958,565 shares of common stock at various prices per share, at December 31, 1998
and 1997, respectively, as well as 1,463,415 shares reflecting conversion of the
convertible note payable assuming it was converted at December 31, 1998, were
not included in the computation of diluted earnings (loss) per share because the
effect would be antidilutive.
F-25
<PAGE>
The diluted earnings (loss) per share has not been calculated for 1998
because the Company incurred a loss and all potentially dilutive securities are
antidilutive. The diluted loss per share for 1998 is the same as the basic loss
per share.
NOTE 17 - MARKETABLE SECURITIES
The marketable securities carrying amount and fair value (based on quoted
market prices) of securities available for sale at December 31, 1998, is
$250,000.
NOTE 18 - 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.
NOTE 19 - RECENT FINANCING AGREEMENTS
Effective December 30, 1998, the Company completed the Closing under a
series of agreements including a Common Stock Purchase Agreement (the "CSPA"),
dated as of December 30, 1998, by and among the Company; Terra Healthy Living,
Ltd., a B.V.I. corporation ("Terra"); Sovereign Partners Limited Partnership, a
Connecticut limited partnership ("Sov"); and Dominion Capital Fund, Ltd., a
Bahamian corporation ("Dom"). Pursuant to the CSPA and the related documents:
Terra acquired 2,712,843 shares of the Company's common stock from Sov and
Dom for $235,000. Such shares were issued by the Company upon the conversion by
Sov and Dom of an aggregate of 235 shares of the Company's 1997 Series A
Convertible Preferred Stock ("Series A Preferred").
The Company borrowed $2,065,000 from Terra pursuant to a Promissory Note
With Warrant and Registration Rights (the "Terra Note"). The Terra Note is a
five year note bearing interest at 6% per annum. Interest on the Terra Note is
payable annually. The Terra Note provides for the issuance to Terra of a five
year warrant (the "Terra Warrant") for the purchase of 500,000 shares of the
Company's common stock at $.25 per share. The Terra Note further provides that
the first year's interest on the Terra Note shall be applied to the partial
exercise of the Terra Warrant.
F-26
<PAGE>
The Company applied the $2,065,000 proceeds of the Terra Note to redeem all
1,351 remaining shares of Series A Preferred held by Sov and Dom, as well as a
convertible debenture in the amount of $548,352 held by Dom.
The aggregate of $2,300,00 paid by Terra in connection with its purchase of
the 2,712,843 shares of the Company's common stock from Sov and Dom and in
connection with the Terra Note was satisfied through the delivery to Sov and Dom
of marketable securities having a value of $2,300,000. Under the CSPA, Terra
made certain assurances to Sov and Dom and assumed certain obligations to assure
that Sov and Dom would realize $2,300,000 on the sale of the marketable
securities.
The Company borrowed $300,000 from each of Sov and Dom pursuant to a non-
negotiable nine month promissory note bearing interest at 8% per annum (the "Sov
Note" and the "Dom Note"). These notes provide for their repayment, at the
option of the Company, in registered common stock of the Company which shall be
valued at the then market for such stock. The Sov Note and the Dom Note provide
for the issuance to each of Sov and Dom of 60,000 warrants which expire on
December 31, 2003, half of which are exercisable at $.40 and half of which are
exercisable at $.25. If the Company repays the Sov Note or the Dom Note with
common stock, as provided in such notes, then the exercise price of the $.25
warrant is reduced to $.01.
The CSPA granted the Company the right to redeem up to 2,000,000 of the
shares of its common stock acquired by Terra through June 30, 2000, based upon a
formula related to the market price of the common stock at the time of the
redemption.
In addition, the Company issued 571,232 shares of its common stock to Sov
in connection with Sov's prior conversion of 40 shares of Series A Preferred
Stock.
F-27
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
TABLE OF CONTENTS
-----------------
PART 1 - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Consolidated Financial Statements:
Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998.....F-29-F-30
Statements of Operations -
Nine Month Period Ended September 30, 1999 and 1998 (unaudited)...........F-31
Statements of Cash Flows -
Nine Month Periods Ended September 30, 1999 and 1998 (unaudited)..........F-32
Statement of Stockholders' Equity --
Nine Month Period Ended September 30, 1999 (unaudited)....................F-33
Notes to the Financial Statements (unaudited).............................F-34
</TABLE>
F-28
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
ASSETS
------
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 1,327,033 $ 903,649
Marketable securities 55,000 $ 250,000
Accounts receivable, less allowance
for doubtful accounts of $82,106 and $41,775 538,441 929,006
Other Receivables 96,659 -
Inventories 519,749 196,603
Prepaid expenses and other current assets 544,084 132,509
------------- ------------
Total Current Assets 3,080,966 2,411,767
------------- ------------
Equipment
Manufacturing equipment 110,824 19,881
Furniture and equipment 105,160 105,160
Computer equipment 209,574 209,574
------------- ------------
425,558 334,615
Less accumulated depreciation (323,039) (271,411)
------------- ------------
Net Equipment 102,519 63,204
------------- ------------
Other Assets
Intangible assets, net of accumulated amortization
of $121,224 and $66,236 781,148 911,684
Other assets 875 875
------------- ------------
Total Other Assets 782,023 912,559
------------- ------------
$ 3,965,508 $ 3,387,530
============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-29
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30,
1999 December 31,
(Unaudited) 1998
------------- ------------
<S> <C> <C>
Current liabilities
Notes payable - bank $ - $ 283,689
Notes payable - other 1,790,493 958,724
Convertible notes payable 375,000 600,000
Accounts payable 825,868 1,054,079
Accrued expenses 385,756 130,303
------------ ------------
Total Current Liabilities 3,377,117 3,026,795
------------ ------------
Long-term debt - 2,065,000
------------ ------------
Minority Interest 183,666 -
------------ ------------
Stockholders' equity (deficit)
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued and
outstanding 1,000 shares, aggregate liquidation preference
of $50,000 10 10
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50 shares, 1 1
aggregate liquidation preference of $50,000
Common stock, $.0001 par value; authorized 30,000,000
shares; issued and outstanding 17,517,288 and 12,056,428 1,752 1,206
shares
Additional paid-in-capital 26,877,859 24,064,868
Accumulated deficit (26,474,897) (25,770,350)
------------ ------------
Total Stockholders' Equity (Deficit) 404,725 (1,704,265)
------------ ------------
$ 3,965,508 $ 3,387,530
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-30
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Net revenues $ 1,851,685 $ 1,555,505
Cost of sales 1,161,653 951,407
----------- -----------
Gross profit 690,032 604,098
----------- -----------
Operating expenses
Research and development 56,315 280,251
Sales and marketing 1,279,950 1,368,052
General and administrative 1,394,384 2,121,027
----------- -----------
Total operating expenses 2,730,649 3,769,330
----------- -----------
Loss from operations (2,040,617) (3,165,232)
Other income (expense)
Interest income 6,498 38,851
Litigation recovery, net of costs 1,260,632 (60,000)
Minority interest in net loss of consolidated subsidiary 6,835 -
Interest expense (253,723) (149,202)
----------- -----------
Total other income (expense) 1,020,242 (170,351)
----------- -----------
Income (loss) before income tax expense (1,020,375) (3,335,583)
State income tax expense - 3,407
----------- -----------
Net loss after tax, before extraordinary item (1,020,375) (3,338,990)
Extraordinary item 315,828 -
----------- -----------
Net income (loss) (704,547) (3,338,990)
Deemed dividend to preferred shareholders - (629,148)
----------- -----------
Net income (loss) allocable to common shareholders (704,547) (3,968,138)
=========== ===========
Basic and diluted net income (loss) per common share:
Loss before extraordinary item (0.07) (0.55)
Extraordinary gain on extinguishment of debt 0.02 -
----------- -----------
Basic and diluted net income (loss) per common share $ (0.05) $ (0.55)
=========== ===========
Basic and diluted weighted average shares of common stock 14,785,893 7,178,791
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-31
<PAGE>
VITAFORT INTERATIONAL CORPORTION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
-------------- -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net income(loss) $ (704,547) $ (3,338,990)
Adjustments to reconcile net income to cash and cash equivalents
provided by (used in) operating activities
Extraordidnary item (315,828) -
Depreciation and amortization 119,798 136,207
Minority interest in net loss of consolidated subsidiary (6,835) -
Stock issued for services 206,878 214,706
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 390,566 105,500
Inventories (323,147) (332,522)
Prepaid expenses and other current assets (237,024) 57,983
Other assets (96,659) (875)
Increase (decrease) in:
Accounts payable 54,344 503,584
Accrued expenses 240,453 (284,188)
----------- ------------
Cash and cash equivalents used in operating activities (672,001) (2,938,595)
----------- ------------
Cash flows from investing activities:
Purchase of equipment (90,942) (42,392)
Advances to related parties - (468)
Advances to Global International - (285,385)
Cash acquired through sale of marketable securities 195,000 -
Cash acquired through acquisition of Global International Sourcing - 75,462
----------- ------------
Cash and cash equivalents provided by (used in) investing activities 104,058 (252,783)
----------- ------------
Cash flows from financing activities:
Proceeds from issuance of stock 125,000 499,000
Proceeds from notes payable 607,517 720,726
Contribution to equity of subsidiary by shareholders 500,000 -
Repayments of notes payable (241,190) -
----------- ------------
Cash and cash equivalents provided by financing activities 991,327 1,219,726
----------- ------------
Increase (decrease) in cash and cash equivalents 423,384 (1,971,652)
Cash and cash equivalents, beginning of period 903,649 2,199,036
----------- ------------
Cash and cash equivalents, end of period $ 1,327,033 $ 227,384
=========== ============
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 253,723 $ 149,202
Income taxes $ - $ 3,407
Supplemental disclosure of non-cash operating, investing, and
financing activities
Stock issued for accounts payable $ 150,962 $ 519,692
Stock issued for prepaid consulting services $ 72,447 $ 102,602
Stock issued for repayment of debt $ 543,775 $ -
Stock issued for acquisition of marketing contract $ - $ 43,125
Debt transferred to capital $ 1,521,225 $ -
Acquisition of Global International Sourcing:
Assets acquired, net of cash $ - $ 535,786
Liabilities assumed, including $522,328 due to Vitafort $ - $ 829,461
Contribution to equity of subsidiary by shareholders allocated
to minority interest $ 182,500 $ -
</TABLE>
See accompanying notes to consolidated financial statements
F-32
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1999
(Unaudited)
<TABLE>
<CAPTION>
Series B Series C
Convertible Convertible
Preferred Stock Preferred Stock Common Stock Additional
--------------- ----------------- ------------------ Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital Deficit Total
------ ------ ------- -------- ---------- ------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,000 $ 10 50 $ 1 12,056,428 $1,206 $24,064,868 $(25,770,350) $(1,704,265)
Exercise of stock options 5,460,860 546 $ 974,266 974,812
Contribution to equity of Hollywood
Partners.com by shareholders 317,500 317,500
Contribution to paid in capital
by shareholders 1,521,225 1,521,225
Net Income (704,547) 704,547
------ ------ ------- -------- ---------- ------- ----------- ------------ -----------
Balance, September 30, 1999 1,000 $ 10 50 $ 1 17,517,288 $1,752 $25,356,634 $(24,953,672) $ 404,725
====== ====== ======= ======== ========== ======= =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-33
<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 included in the fiscal 1998 filing.
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 nine months ended September 30, 1999, basic loss per share has
been computed using the weighted average number of common shares
outstanding during the period. Dividends on cumulative preferred stock
are not material.
F-34
<PAGE>
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market. Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
Finished goods $ 320,457 $ 118,524
Packaging and raw material 199,292 78,079
---------- ---------
$ 519,749 $ 196,603
========== =========
</TABLE>
NOTE 4 - EXTRAORDINARY ITEM
Extraordinary item reflects the forgiveness by vendors and consultants of
$315,827. As of September 29, 1999, Terra forgave debt in the amount of
$1,521,225 due to it by the Company. Although forgiveness of debt is normally
presented as extraordinary item, since Terra is a related party, generally
accepted accounting principles require the Forgiveness to be recorded as a
contribution to capital.
NOTE 5- STOCKHOLDERS' EQUITY
During the nine month period ended September 30, 1999, the holders of stock
options which were granted in 1998 at a fair market value to purchase 5,460,860
shares of stock exercised these options as follows:
(a) 1,550,316 shares at prices ranging from $0.085 to $1.00 in settlement
of $150,962 of debts previously recorded as a liability.
(b) 765,500 shares at prices ranging from $0.085 to $0.40 in exchange for
$91,273 of services rendered.
(c) 396,187 shares at prices ranging from $0.10 to $0.25 as prepayment for
$72,447 of future services to be rendered to the Company.
(d) 1,235,857 shares at $0.44 to convert the remaining convertible debt of
$ 543,775 owed to Terra Healthy Living, Ltd.
(e) The Company issued 1,013,000 shares at prices ranging from $0.085 to
$0.667 as additional compensation of $ 115,605 to various employees.
(f) A shareholder exercised 500,00 options at a price of $0.25.
NOTE 6 - LINE OF CREDIT
In June 1999, the Company paid off its line of credit, but the assets are
still collateralized.
NOTE 7 - GOING CONCERN
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. Although the
Company raised additional capital in 1999, it has not generated sufficient
revenue-producing activity to sustain its operations. Accordingly, the Company
must
F-35
<PAGE>
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, 1998 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.
NOTE 8 - LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
In December 1994, Lloyd Gauntt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in Superior
Court, Orange County, California against his stockbroker, two national brokerage
firms, several companies in which he had invested; and, certain of those
company's officers. Included among the defendants were the Company and its then
Chief Executive Officer, Steve Westlund. 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 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 appealed
that ruling and the appellate court affirmed the lower court ruling. The Company
denies any liability to the plaintiff and intends to vigorously defend this
action in the event the plaintiff seeks to pursue the arbitration. 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 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. 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.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI")
in 1996, the Company acquired the intellectual property and certain claims of
AFI. 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 misappropriation of Auburn Farms'
principal products by Auburn Farms co-packer, New Life Bakery ("New Life") and a
principal competitor, Barbara's Bakery ("Barbara's").
F-36
<PAGE>
On August 3, 1999, the Company entered into litigation settlement
agreements with Barbara's Bakery, Inc. ("Barbara's Bakery"), New Life Bakery,
Inc. ("New Life"), Gil Pritchard, David Marson, James Marson, and Kim Walters
(collectively the "Defendants") and resolved the Company's disputes with its
insurers over coverage for Defendants' counterclaims against the Company and
Mark Beychok. The lawsuit alleged that Barbara's Bakery had violated the Federal
Lanham Act, and the California Unfair Competition Act, by improperly marketing
toaster pastries, fruit juice sweetened cookies, and fig bars, and that New Life
Bakery had breached an agreement with Auburn Farms, Inc., whose claims Vitafort
purchased in 1996. Barbara's Bakery further agreed to withdraw from the toaster
pastry business by discontinuing its Nature's Choice Toaster Pastry line by no
later than November 30, 1999. Vitafort had secured up to $800,000 in off balance
sheet financing for the litigation against New Life and Barbara's Bakery,
including $600,000 from an investment partnership, Auburn Farms Vindication
Partners, LLC, for the purpose of paying the legal fees and expenses of the
pending litigation. The fee arrangement included a limited, partial contingency
arrangement with the Chicago-based law firm of Jenner & Block. After paying
attorneys' fees and making payments to outside investors who funded the
litigation, the Company has received approximately $1,260,000. Each party to the
litigation denies all liability and wrongdoing in connection with the claims
asserted in the pending litigation. The Company intends to use the proceeds of
the settlement towards its working capital requirements.
In addition to the items discussed in this note, the Company is a party to
legal proceedings (which generally relate to disputes between the Company and
its suppliers or customers regarding payment for products sold or supplied) are
typical for a company of its size and scope and financial condition, and that
none of these proceedings are believed to be material to its financial condition
or results of operations.
NOTE 9 - SHARE EXCHANGE AND REORGANIZATION
Effective September 13, 1999, pursuant to a Share Exchange and
Reorganization Agreement, Vitafort exchanged all of the issued and outstanding
shares of Hollywood Partners, Inc., a California corporation that previously
operated as a wholly-owned subsidiary of the Company. In consideration, Vitafort
received an aggregate of 5,000,000 shares of the common stock of Hollywood
Partners and is now the majority stockholder of the new company with 62.5% of
the company's issued and outstanding common stock. In connection with the
transaction, Hollywood Partners, Inc. changed its name to Hollywood
Partners.com, Inc.
NOTE 10 - SUBSEQUENT EVENTS
On October 12, 1999, the Company retired a convertible note in the amount
of $375,000 plus accrued interest of $6,512.50.
During the months of October and November 1999, the Company received
$1,500,000 from Terra Health Living, Ltd. One million-dollars was invested in
Swiss securities.
F-37
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Article Seventh of the Company's Certificate of Incorporation provides for
indemnification of the Company's officers and directors to the fullest extent
permitted under the General Corporation Law of the State of Delaware ("DGCL").
SECTION 145 of the DGCL, as amended, applies to the Company and the
relevant portion of the DGCL provides as follows:
145. Indemnification of Officers, Directors, Employees and Agents;
Insurance.
(a) A corporation may indemnify any person who
was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right
of the corporation) by reason of the fact that he is or
was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he
acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal
action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself,
create a presumption that the person did not act in
good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his
conduct was unlawful.
(b) A corporation may indemnify any person who
was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit
by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture,
trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a
manner he reasonably believed to be in or not opposed
to the best interests of the corporation and except
that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation
unless and only to the extent that the Court of
Chancery or the court in which such action or suit was
brought shall determine upon application that, despite
the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall
deem proper.
(c) To the extent that a director, officer,
employee or agent of a corporation has been successful
on the merits or otherwise in defense of any action,
suit or proceeding referred to in subsections (a) and
II-1
<PAGE>
(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.
II-2
<PAGE>
(i) For purpose of this section, references to
"other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise
taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request
of the corporation" shall include any service as a
director, officer, employee or agent of the corporation
which imposes duties on, or involves services by, such
director, officer, employee, or agent with respect to
an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and
in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an
employee benefit plan shall be deemed to have acted in
a manner "not opposed to the best interests of the
corporation" as referred to in this section.
(j) The indemnification and advancement of
expenses provided by, or granted pursuant to, this
section shall, unless otherwise provided when
authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs, executors and
administrators of such a person.
The Company maintains insurance for the benefit of its directors and
officers and the directors and officers of its subsidiaries, insuring such
persons against certain liabilities, including liabilities arising under the
securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933 and is therefore unenforceable. Furthermore, the Company has given certain
undertakings with respect to indemnification in connection with this
Registration Statement.
Item 25. Other Expenses of Issuance and Distribution.
Securities and Exchange Commission filing fee $313.13
National Association of Securities Dealers, Inc. filing fee $618.61
Transfer Agent's and Registrar's Fees $ *
Legal fees and expenses $ *
Accounting fees and expenses $ *
Miscellaneous $ *
-------
Total $931.74
* 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.
II-3
<PAGE>
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.
In December 1998, the Registrant sold 1,000,000 shares of its common stock
to an investor for $250,000, or $.25 per share, which was paid by delivery to
the Registrant of marketable securities. The transaction was exempt from
registration under the Securities Act by reason of Regulation D promulgated
thereunder.
In February 2000, the Registrant sold 1,250,000 shares of its common stock
to an accredited investor for $500,000, or $.40 per share. 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.l Certificate of Incorporation of Registrant(i)
3.2 By-laws of Registrant(i)
3.3 Agreement and Plan of Merger between the Registrant and Vitafort
International Corporation, a California corporation(i)
3.4 Certificate of Designation - Series A Preferred Stock(v)
3.5 Certificate of Designation - Series B Preferred Stock(v)
3.6 Certificate of Amendment to the Certificate of Incorporation,
November 1991(v)
3.7 Certificate of Designation - Series C Preferred Stock(v)
3.8 Certificate of Amendment to the Certificate of Incorporation,
filed February 8, 1994 (vi)
3.9 Certificate of Designation - Series D Preferred Stock(vi)
3.10 Certificate of Amendment to the Registrant's Certificate of
Incorporation, filed November, 1995. Incorporated by reference to
Exhibit 4.10 filed with the Registrant's Registration Statement
on Form S-8 filed January 25, 1996 File Number 33-300435 (the "
January 1996 S-8").
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 (xiii)
3.17 Convertible Debenture dated August 1998 (xiii)
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.
</TABLE>
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<TABLE>
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4.14 Warrant Extension Agreement, December 31, 1995. Incorporated by
reference to Exhibit 4.21 to the January 1996 S-8.
4.15 Warrant Extension Agreement, April 30, 1996. Incorporated by
reference to Exhibit 4.23 to the May 1996 S-8.
4.16 Warrant Extension Agreement, July 31, 1996. Incorporated by
reference to Exhibit 4.26 to the December 1996 S-8.
4.17 Warrant Extension Agreement, September 30, 1996. Incorporated by
reference to Exhibit 4.27 to the December 1996 S-8.
4.18 Warrant Extension Agreement, November 11, 1996. Incorporated by
reference to Exhibit 4.28 to the December 1996 S-8.
4.19 Warrant Extension Agreement, April 15, 1997. Incorporated by
reference to Exhibit 4.19 to the 1996 10K-SB.
4.20 Warrant Extension Agreement, October 31, 1997.(x)
5.1 Opinion of Frank J. Hariton, Esq. (to file by amendment)
10.1 Loan Agreement, dated August 19, 1988, between the Registrant and
Bishop Capital, L.P. and promissory note in the principal amount
of $150,000(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 between the Registrant, Gilford
Securities Corp., and certain stockholders of Registrant(i)
</TABLE>
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10.24 Promissory Note, made November 21, 1989, by Nutrifish Corporation
and payable to Joseph R. Daly(i)
10.25 Right of First Refusal Agreement, dated November 21, 1989,
between Nutrifish Corporation and Joseph R. Daly(i)
10.26 Production License Agreement for Nutrifish Norwegian Salmon,
dated February 2, 1990, between Nutrifish Corporation and
Norwegian Seafoods, Inc.(ii)
10.27 Test Market Agreement, dated December 19, 1989, between
International Multifoods Corporation and the Registrant.(ii)
10.28 Amendment, dated as of December 19, 1989, to the Product
Development Agreement between International Multifoods
Corporation and the Registrant.(ii)
10.29 Consulting Agreement, dated February 21, 1990, between the
Registrant and Joseph R. Daly.(ii)
10.30 License Agreement between the Registrant and Nulaid Foods, Inc.,
dated April 30, 1990.(ii)
10.31 License Agreement between the Registrant and Vitafort Latin
America, dated July 30, 1990.(ii)
10.32 Termination Agreement between the Registrant and Jeffrey D.
Lewenthal, dated September 12, 1990.(ii)
10.33 Settlement Agreement and Full Release between Nicholas J. Caputo
and Registrant, dated October 4, 1990.(ii)
10.34 Employment Agreement between the Registrant and Stephen D. Clow,
dated December 1, 1990.(ii)
10.35 Employment Agreement between the Registrant and Frank A. Corsini,
dated January 2, 1991.(ii)
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)
</TABLE>
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10.51 Employment Agreement dated as of November 29, 1993, between the
Registrant and Steven Westlund. Incorporated by reference to
exhibit 99.01 to Form S-8 filed by the Registrant on March 4,
1994 (the "1994 S-8").
10.52 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to
exhibit 99.02 to the 1994 S-8.
10.53 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Steven Westlund. Incorporated by reference to
exhibit 99.03 to 1994 S-8.
10.54 Employment Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit
99.04 to 1994 S-8.
10.55 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Peter Benz. Incorporated by reference to exhibit
99.05 to 1994 S-8.
10.56 Employment Agreement dated as of November 29, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.06 to the 1994 S-8.
10.57 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.07 to the 1994 S-8.
10.58 Stock Option Agreement dated as of September 15, 1993 between the
Registrant and Mark Beychok. Incorporated by reference to exhibit
99.08 to the 1994 S-8.
10.59 Consulting Agreement dated as of November 29, 1993 between the
Registrant and Herman Jacobs. Incorporated by reference to
exhibit 99.09 to the 1994 S-8.
10.60 Stock Option Agreement dated as of November 29, 1993 between the
Registrant and Herman Jacobs. Incorporated by reference to
exhibit 99.10 to the 1994 S-8.
10.61 Vitafort International Corporation 90-Day Operating Plan.
Incorporated by reference to exhibit 99.21 to the 1994 S-8.
10.62 Stock Option Agreement, dated September 15, 1993, between the
Registrant and Stanley J. Pasarell. Incorporated by reference to
exhibit 99.22 to the 1994 S-8.
10.63 Separation and Release Agreement, dated as of December 1, 1994,
between the Registrant and Peter Benz.(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.
</TABLE>
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<TABLE>
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10.75 Conversion Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.18 to the May 1996 S-8.
10.76 Class A Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.19 to the May 1996 S-8.
10.77 Class B Option Agreement, dated as of March 26, 1996, between the
Registrant and John Coppolino. Incorporated by reference to
Exhibit 9.20 to the May 1996 S-8.
10.78 Employment Agreement, between the Registrant and John Coppolino.
Incorporated by reference to Exhibit 10.78 to the 1996 Form 10-
KSB.
10.79 Foreclosure Purchase Agreement related to the Acquisition of
assets of Auburn Farms, Inc. Incorporated by reference to Exhibit
1 to the Registrant's Form 8-K, dated May 2, 1996.
10.80 Loan and Security Agreement, dated August 15, 1996, between the
Registrant and Coast Business Credit, a division of Southern
Pacific Thrift & Loan Association. Incorporated by reference to
Exhibit 1 to the Registrant's Form 8-K, dated August 15, 1996.
10.81 Agreement, dated as of July 10, 1996, between the Registrant and
Second Nature Technologies, Inc. Incorporated by reference to
Exhibit 10.81 to the 1996 Form 10-KSB.
10.82 Employment Agreement dated June 16, 1997 between Jack Spencer and
the Registrant. Incorporated by reference to Exhibit 10.12 of the
Registrant's Form SB-2 filed July 23,1997
10.83 Agreement, dated April 1997, between the Registrant and ATCOLP
Investment Partners, a California Limited Partnership.
Incorporated by reference to the Registrant's Form SB-2 filed
July 23, 1997
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 (xi)
10.87 1st Amendment and Lease Extension Agreement between Duesenberg
Investment Company, successor in interest to Topa Equities
(V.I.), Ltd. and the Registrant (filed herewith)
10.88 Assignment and Assumption of Lease between the Registrant and
Hollywood Partners, Inc. (to file by amendment)
22. Subsidiaries of the Registrant:
Global International Sourcing, Inc. (xi)
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.
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(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 August 14, 1998 Form SB-2/A.
(xii) Incorporated by reference to the same numbered exhibit to the
Registrant's November 12, 1998 Form SB-2/A.
(xiii) Incorporated by reference to the same numbered exhibit to the
Registrant's December 20, 1999 Form SB-2.
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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.
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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 February 10, 2000.
VITAFORT INTERNATIONAL CORPORATION
By: /s/ John Coppolino
-------------------------------------
John Coppolino
President
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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:
/s/ Mark Beychok Chairman of the Board February 10, 2000
- ----------------------------
Mark Beychok
/s/ Fred Rigaud (Principal Accounting and February 10, 2000
- ---------------------------- Acting Financial Officer)
Fred Rigaud
/s/ Benjamin Tabatchnick Director February 10, 2000
- ----------------------------
Benjamin Tabatchnick
/s/ John Coppolino Director and President February 10, 2000
- ---------------------------- (Principal Executive Officer)
John Coppolino
II-15
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF FRANK J. HARITON . ATTORNEY-AT-LAW]
February 10, 2000
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 333-93137 relating to
an aggregate of 7,073,257 shares (the "Shares") of the Company's
Common Stock, par value $.0001 per share
Gentlemen:
I have been requested by the Company, a Delaware corporation, to furnish
you with my opinion as to the matters hereinafter set forth in connection with
the above captioned Registration Statement (the "Registration Statement")
covering the 7,073,257 Shares. All of the 7,073,257 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 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 7,073,257 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
