<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                        
                                 FORM 10-KSB/A
                                        


(Mark One)

 X   Annual Report under Section 13 or 15(d) of the Securities Exchange Act of
---
     1934 (Fee Required)

     The fiscal year ended December 31, 1996.

     Transition report under Section 13 or 15(d) of the Securities Exchange Act
---
     of 1934 (No Fee Required)

     For the transition period from _____ to _____

                          Commission File No.  0-18438
                                               -------

                      VITAFORT INTERNATIONAL CORPORATION
                      ----------------------------------
                (Name of Small Business Issuer in its Charter)

        Delaware                                         68-0110509
        --------                                         ----------
(State or Other Jurisdiction of                        (I.R.S. Employer
 Incorporation or Organization)                       Identification No.)
     

        1800 Avenue of the Stars, Los Angeles, California     90067
        --------------------------------------------------------------
           (Address of Principal Executive Offices)         (Zip Code)

                                (310) 552-6393
                                --------------
               (Issuer's Telephone Number, Including Area Code)

Securities registered under Section 12(b) of the Exchange Act:
<TABLE> 
<CAPTION> 
                                             Name of Each Exchange
Title of Each Class                          on Which Registered
<S>                                          <C>
None                                   
---------------------------                  ---------------------------

---------------------------                  ---------------------------
</TABLE> 

                                       1
<PAGE>
 
Securities registered under Section 12(g) of the Exchange Act:


                         COMMON STOCK, PAR VALUE $.0001
                         ------------------------------
                                (TITLE OF CLASS)


Check whether the issuer:  (1) Filed all reports required to be filed by Section
13 or 14(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

                           Yes  X          No 
                               ---            ---


Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this form 10-KSB.  [_]

State issuer's revenues for its most recent fiscal year:  $5,560,367.

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock on March 31, 1997
was $6,305,432.

The number of shares outstanding of the issuer's common stock as of March 31,
1997 was 5,640,765.

Transitional Small Business Disclosure Format (check one):

                         Yes               No  X
                             ---              ---
                                        

                                       2
<PAGE>
 
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act, the 
Registrant has caused this report to be signed on its behalf by the undersigned,
thereby, duly authorized.

VITAFORT INTERNATIONAL COMPANY


By: /s/ Mark Beychok
   -----------------
    Mark Beychok

Los Angeles, California
DATE: July 16, 1998


Pursuant to the requirements of the Exchange Act, this report has been duly 
signed below by the following persons on behalf of the Registrant and in the 
capacities and on the dates indicated.

<TABLE> 
<CAPTION> 
Name                            Title(s)                      Date
--------------------------------------------------------------------------------
<S>                             <C>                           <C> 

  /s/ Mark Beychok
--------------------------
Mark Beychok                    Director, President and       July 16, 1998
                                Chief Executive Officer
                                (Principal Executive)


  /s/ Jack B. Spencer
--------------------------
Jack B. Spencer                 Chief Operating Officer/      July 16, 1998
                                Chief Financial Officer
                                (Principal Accounting
                                and Financial Officer)


  /s/ Donald Wohl
--------------------------
Donald Wohl                     Director                      July 16, 1998


  /s/ Paul G. Cowen
--------------------------
Paul G. Cowen                   Director                      July 16, 1998


  /s/ Benjamin Tabatchnick
--------------------------
Benjamin Tabatchnick            Director                      July 16, 1998

</TABLE> 
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE> 
<S>                                                                     <C>
Report of Independent Certified Public Accountants-BDO Seidman, LLP      F-2


Independent Auditors' Report-KPMG Peat Marwick, LLP                      F-3


Consolidated Balance Sheets - December 31, 1996 and 1995                 F-4


Consolidated Statement of Operations -
     Years Ended December 31, 1996 and 1995                              F-6


Consolidated Statement of Stockholders' Equity (Deficit) -
     Years Ended December 31, 1996 and 1995                              F-7


Consolidated Statement of Cash Flows -
     Years Ended December 31, 1996 and 1995                              F-8


Summary of Accounting Policies                                          F-10


Notes to Consolidated Financial Statements                              F-13
</TABLE> 

                                      F-1
<PAGE>
 
              REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES
Los Angeles, California

We have audited the accompanying consolidated balance sheet of Vitafort
International Corporation and Subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for the year then ended.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based
on our audit.

We conducted our audit in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.  We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Vitafort
International Corporation and Subsidiaries at December 31, 1996, and the
consolidated results of their operations and cash flows for the year then
ended, in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.  As discussed in Note 2 to the
financial statements, the Company has suffered from recurring losses from
operations, including a net loss of $8,122,815 for the year ended December
31, 1996, and has negative working capital of $875,965 as of December 31,
1996, and a net capital deficiency of $152,498.  The Company has also been
slow and is delinquent in paying its accounts payable and other
obligations.  These factors raise substantial doubt about its ability to
continue as a going concern.  There is no assurance that the Company will
be able to realize its recorded assets and liquidate its liabilities in the
normal course of business.  Management's plans in regard to these matters
are also described in Note 2.  The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
Los Angeles, California
April 14, 1997                                             BDO SEIDMAN, LLP

                                      F-2
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT

                                        

The Board of Directors and Stockholders
VITAFORT INTERNATIONAL CORPORATION
AND SUBSIDIARIES:

We have audited the accompanying consolidated balance sheet of Vitafort
International Corporation and subsidiaries as of December 31, 1995 and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for the year then ended.  These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vitafort
International Corporation and subsidiaries as of December 31, 1995 and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.


                             KPMG PEAT MARWICK LLP

Los Angeles, California

FEBRUARY 16, 1996

                                      F-3
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                           1996          1995
                                                        -----------   -----------
<S>                                                     <C>           <C>
ASSETS (Notes 1 and 4)
 
Current assets:
 Cash and cash equivalents                              $  188,867    $1,316,406
 Accounts receivable - trade, net of allowance for
  doubtful accounts of $79,994 and $45,650
  in 1996 and 1995, respectively                           230,789        39,423
 Notes receivable                                           56,000        19,778
 Other receivables                                           4,464       147,974
 Inventory                                                 361,196       680,876
 Prepaid and other current assets                          271,731       365,117
                                                        ----------    ----------
 
     Total current assets                                1,113,047     2,569,574
                                                        ----------    ----------
 
Fixed assets (Note 5):
 Manufacturing equipment                                   290,912       165,931
 Furniture and office equipment                            105,160        82,465
 Computer equipment                                        173,294       148,074
                                                        ----------    ----------
 
                                                           569,366       396,470
 
 Less accumulated depreciation                            (231,592)     (139,991)
                                                        ----------    ----------
 
     Net fixed assets                                      337,774       256,479
                                                        ----------    ----------
 
 Intangible assets                                         481,254        70,000
 Other assets                                                    -       355,494
 Less accumulated amortization                            ( 95,561)      (67,703)
                                                        ----------    ----------
 
     Net intangible and other assets                       385,693       357,791
                                                        ----------    ----------
 
                                                        $1,836,514    $3,183,844
                                                        ==========    ==========
</TABLE>
See accompanying summary of accounting policies and notes to consolidate and
financial statements.

                                      F-4
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES


                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                                         1996             1995
                                                                    ---------------   -------------
<S>                                                                 <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 
Current liabilities:
 Notes payable (Note 4)                                               $    440,022    $     75,000
 Accounts payable - trade                                                1,510,982         236,927
 Accrued expenses (Note 3)                                                 341,480         636,514
 Current maturities of long-term debt (Note 5)                              37,859         174,364
 Other current liabilities                                                       -         150,000
                                                                      ------------    ------------
 
     Total current liabilities                                           2,330,343       1,272,805
 
Long-term debt, exclusive of current maturities (Note 5)                         -          34,548
                                                                      ------------    ------------
 
     Total liabilities                                                   2,330,343       1,307,353
                                                                      ============    ============
 
Commitments and contingencies (Notes 10 and 12)
 
Stockholders' equity (deficit) (Notes 7, 8 and 13):
 Series B, 10% Cumulative Convertible Preferred Stock,
  $.01 par value; authorized 110,000 shares; issued
  and outstanding 1,000 and 1,500 shares at December 31,
  1996 and 1995, respectively; aggregate liquidation
  preference of $50,000 and $75,000 at December 31,
  1996 and 1995, respectively                                                   10              15
 Series C, Convertible Preferred Stock, $.01 par value;
  authorized 450 shares; issued and outstanding 50 shares
  at December 31, 1996 and 1995; aggregate liquidation
  preference of $1 at December 31, 1996 and 1995                                 1               1
 Subscribed stock, 1,229,474 shares at December 31, 1995                         -       3,418,196
 Notes receivable on subscribed common stock
 Common stock, $.0001 par value, authorized 9,000,000
  and 9,000,000 shares at December 31, 1996 and 1995,
  respectively; issued and outstanding 5,133,665 and 1,911,185
  shares at December 31, 1996 and 1995, respectively                         8,686           3,823
 Additional paid-in capital                                             20,547,953      11,382,120
 Accumulated deficit                                                   (21,050,479)    (12,927,664)
                                                                      ------------    ------------
 
     Total stockholders' equity (deficit)                                 (493,829)      1,876,491
                                                                      ------------    ------------
 
                                                                      $  1,836,514    $  3,183,844
                                                                      ============    ============
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.

                                      F-5
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                     DECEMBER 31,
                                                1996             1995
                                            -------------    -----------
<S>                                         <C>              <C>
Revenues:
 Product sales                              $   5,560,367    $ 2,434,811
 Sales discounts and allowances                  (275,218)      (119,660)
                                            -------------    -----------
 
     Net revenues                               5,285,149      2,315,151
 
Cost of sales                                   6,870,120      1,482,326
                                            -------------    -----------
     Gross profit (loss)                       (1,584,971)       832,825
                                            -------------    -----------
 
Operating expenses:
 Research and development                         737,044        378,602
 Marketing                                      3,029,480      1,417,645
 Selling, general and administrative            2,721,321      1,714,424
                                            -------------    -----------
 
     Total operating expenses                   6,487,845      3,537,671
                                            -------------    -----------
 
     Loss from operations                      (8,072,816)    (2,704,846)
 
Interest income                                    49,319         19,778
Interest expense                                  (50,509)      (126,290)
Other income expense                              (45,650)           677
                                            -------------    -----------
 
   Loss before income taxes                    (8,119,656)    (2,810,681)
 
State income taxes (Note 6)                         3,159          1,600
                                            -------------    -----------
 
     Net loss                               $  (8,122,815)   $(2,812,281)
                                            =============    ===========

Net loss per common share                   $       (1.59)   $      (.10)
                                            =============    ===========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

                                      F-6
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                    YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
                                            Series B                     Series C
                                           Cumulative                   Cumulative
                                           Convertible                  Convertible                          Notes
                                         Preferred Stock              Preferred Stock                     Receivable on
                                    ---------------------------   ------------------------   Subscribed    Subscribed
                                       Shares         Amount        Shares       Amount        Stock      Common Stock
                                    ------------   ------------   ----------   -----------   ----------   ------------
                                    <C>            <C>            <C>          <C>           <C>          <C>
Balance at January 1, 1995              100            $20             3          $  1       74,925       ($74,925)

Common stock issued for cash
 in bridge offering, net of
 commissions and offering costs           -              -             -             -            -              -
Common stock subscribed in                                                                                       
 private placement, net of                                                                                       
 commissions and offering costs           -              -             -             -    1,530,249              -
Conversion of debt to equity              -              -             -             -    1,416,447         74,925
Conversion of preferred                                                                                          
 stock to common stock                  (25)            (5)            -             -      372,500              -
Exercise of stock options                 -              -             -             -       24,075              

Net loss                                  -              -             -             -            -              -
                                       ----            ---          ----          ----    ---------       --------
Balance, December 31, 1995               75            $15             3          $  1    3,418,196             $0

Common stock issued from 
 subscriptions                                                                           (3,418,196)
Common stock issued in private
 placement, net of commissions
 and offering costs
Common stock issued in private
 placement
Coversion of preferred stock to
 common stock                           (25)            (5)
Common stock-consulting
Exercise of stock options

Net loss
                                       ----            ---          ----          ----    ---------       --------
Balance, December 31, 1996               50            $10             3          $  1            -             $0
                                       ====            ===          ====          ====    =========       ========
<CAPTION> 
                                                                        Additional
                                                Common Stock             Paid-In       Accumulated
                                            Shares        Amount         Capital         Deficit           Total
                                         ------------   ------------  --------------   ------------     -----------
<S>                                      <C>            <C>           <C>              <C>              <C>
Balance at January 1, 1995                1,201,305       $2,403       $ 9,722,557     ($10,115,383)       (390,395)

Common stock issued for cash
 in bridge offering, net of
 commissions and offering costs             260,417          521           563,439                -         563,960
Common stock subscribed in
 private placement, net of
 commissions and offering costs                   -            -                 -                -       1,530,249
Conversion of debt to equity                381,014          762         1,418,399                -       2,910,533
Conversion of preferred
 stock to common stock                       48,014           96          (372,584)               -               -
Exercise of stock options                    20,435           41            50,309                -          74,425
Net loss                                          -            -                 -       (2,812,281)     (2,812,281)
                                          ---------       ------       -----------     ------------     -----------
Balance, December 31, 1995                1,911,185       $3,823       $11,382,120     ($12,927,664)    $ 1,876,491

Common stock issued from 
 subsciptions                             1,129,474        1,992         3,116,204                         (300,000)
Common stock issued in private
 placement, net of commissions
 and offering costs                       1,020,000        2,040         3,497,801                        3,499,841
Common stock issued in private
 placement                                   80,000            8           399,992                          400,000
Conversion of preferred stock to
 common stock                                 2,500            5            59,694                           59,694
Common stock-consulting                     579,957          447         1,377,197                        1,377,644
Exercise of stock options                   185,548          371           714,945                          715,316

Net loss                                                                                 (8,122,815)     (8,122,815)
                                          ---------       ------       -----------     ------------     -----------
Balance, December 31, 1996                4,908,664       $8,686       $20,547,953     ($21,050,479)      ($493,829)
                                          =========       ======       ===========     ============     ===========
</TABLE> 

See accompanying summary of accounting policies and notes to financial
statements.

                                      F-7
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                DECEMBER 31,
                                                                            1996             1995
                                                                        -----------      -----------
<S>                                                                     <C>              <C>
Cash flows from operating activities:
 Net loss                                                               ($8,122,815)     ($2,812,281)
 Adjustments to reconcile net loss to net cash
 and cash equivalents used in operating activities:
  Depreciation and amortization                                             119,459           75,385
  Operating expenses paid with common stock                               1,377,644                -
  Change in assets and liabilities:
   (Increase) decrease in:
    Accounts receivable - trade, net                                       (191,366)         111,514
    Inventory                                                               319,680         (490,126)
    Intangible assets                                                       (55,760)
    Prepaid and other assets                                                 93,386           52,125
    Notes receivable                                                        (36,222)         (19,778)
    Other receivables                                                       143,510         (147,974)
   Increase (decrease) in:
    Accounts payable - trade                                                979,022          (42,937)
    Accrued expenses                                                              -          859,632
    Other current liabilities                                              (150,000)         150,000
                                                                        -----------      -----------
 
     Cash and cash equivalents used in operating activities              (5,523,462)      (2,264,440)
                                                                        -----------      -----------
 
Cash flows from investing activities:
 Purchase of fixed assets                                                  (172,896)         (92,767)
 
     Cash and cash equivalents used in investing activities                (172,896)         (92,767)
                                                                        -----------      -----------
 
Cash flows from financing activities:
 Proceeds from notes payable                                                599,715        1,818,911
 Repayment of notes payable                                                 (75,000)               -
 Repayment of long-term debt                                               (171,053)        (644,909)
 Proceeds from stock subscription                                                 -        1,530,249
 Proceeds from issuance of common stock                                   3,499,841          563,960
 Exercise of stock options                                                  715,316           74,425
                                                                        -----------      -----------
 
     Cash and cash equivalents provided by financing activities           4,568,819        3,342,636
                                                                        -----------      -----------
 
     Increase (decrease) in cash and cash equivalents                    (1,127,539)         985,429
 
Cash and cash equivalents at beginning of year                            1,316,406          330,977
                                                                        -----------      -----------
 
Cash and cash equivalents at end of year                                $   188,867      $ 1,316,406
                                                                        ===========      ===========
</TABLE>

                                      F-8
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE> 
<CAPTION> 
                                                             DECEMBER 31,
                                                          1996         1995
                                                       ----------   ----------
<S>                                                    <C>          <C> 
Supplemental disclosures of cash flow information:
Cash paid during the year for:
  Interest                                             $   50,509   $  128,978
  Income taxes                                              2,854        1,600
                                                       ==========   ==========
 
Supplemental disclosure of non-cash investing and
 financing activities:
 Issuance of common stock for:
  Conversion of debt to equity                         $        -   $1,790,476
  Conversion of accrued interest                           59,694       29,427
  Conversion of preferred stock to common stock            14,999      372,488
  Payment of expenses                                           -      490,630
  Payment of consulting contract                         (300,000)     600,000
 Prepayment of insurance with note payable                      -       90,303
                                                       ==========   ==========
</TABLE>

See accompanying summary of accounting policies and notes to financial
statements.

                                      F-9
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                        SUMMARY OF ACCOUNTING POLICIES


BASIS OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the
Company, Nutrifish Corporation (90.5% owned as of December 31, 1996 and 1995)
and Crystal Clear Farms.  All material inter-company accounts and transactions
have been eliminated.

Vitafort Latin America, a 50%-owned subsidiary, has had no operations since its
incorporation.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

INVENTORIES

Inventories consist of merchandise available for sale and packaging supplies,
and are stated at the lower cost (first-in, first-out) or market.

FIXED ASSETS

Fixed assets are comprised of manufacturing equipment, furniture, office
equipment and computer equipment and are recorded at cost.  Depreciation is
computed on a straight-line basis over the estimated useful life of five years.

INTANGIBLE AND OTHER ASSETS

The Company capitalizes certain marketing and promotional costs incurred to
develop a market for new as well as existing products throughout the United
States.  These costs are normally amortized over a 12-month period.
Amortization of product introduction costs was $1,080,032 and $ -0- for the
years ended December 31, 1996 and 1995, respectively.

Also included in intangible assets are debt issuance costs and customer lists
which are recorded at cost.  These intangible assets are being amortized on a
straight-line basis over periods not exceeding five years, or the life of the
loan, if debt.

Other assets consist of long-term consulting contracts with individuals for
which the Company has advanced cash, or has issued common stock.

These costs are reviewed by management periodically and written down to the
value of the future benefit expected to be derived.

                                      F-10
<PAGE>
 
REVENUE

Product sales and related costs are recognized when the Company's products are
shipped from the contract manufacturer to the customer.

Royalty revenue is recognized as earned upon the sale of the end product to
which the royalty relates.

IMPAIRMENT OF LONG-LIVED ASSETS

Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
(SFAS No. 121) establishes guidelines regarding when impairment losses on long-
lived assets, which include plant and equipment and certain identifiable
intangible assets, should be recognized and how impairment losses should be
measured.  The adoption of this standard did not have a material effect on the
Company's financial position or results of operations.

LOSS PER SHARE

Loss per share of common stock is computed based on the weighted average number
of shares of common stock outstanding of 5,133,665 and 1,467,648 in 1996 and
1995, respectively.  Common stock equivalents, consisting of stock options and
warrants, are anti-dilutive for 1996 and 1995.  Dividends on Cumulative
Preferred Stock are not material.

During the years ended December 31, 1996 and 1995, the Company satisfied certain
obligations by issuing 507,500 and 894,189 shares of common and subscribed
stock, respectively.  In addition, during 1996 and 1995, 500 shares of Series B
Preferred stock were converted to 49,998 and 64,284 shares of common stock,
respectively.  In 1995 the 673 shares of Series D Preferred stock that were
previously outstanding  were converted to 896,000 shares of common stock in
negotiated conversions.

INCOME TAXES

Income taxes are accounted for under the asset and liability method.  Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.  A valuation allowance is provided when management
cannot determine whether or not it is more likely that the net deferred tax
asset will be realized.  The effect on deferred tax assets and liabilities of a
change in the rates is recognized in income in the period that includes the
enactment date.

STATEMENT OF CASH FLOWS

For purposes of the statements of cash flows, the Company considers cash and
cash equivalents to include cash on hand and cash equivalents with original
maturities of three months or less.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of the Company's debt instruments is based on the quoted market
prices for the same or similar issues or on the current rates offered to the
Company for debt of the same remaining maturities.

                                      F-11
<PAGE>
 
STOCK COMPENSATION

As of January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (FASB 123).  FASB
123 allows an entity to elect to continue to measure compensation cost under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), but requires pro forma disclosures of net earnings and
earnings per share as if the fair-valued-based method of accounting had been
applied.  In accordance with FASB 123, the Company elected to continue to
measure compensation cost under APB No. 25, "Accounting for Stock Issued to
Employees," and comply with the pro forma disclosure requirements.  Adoption of
FASB 123 had no material impact on the Company's financial position or results
of operations.  Accordingly, pro forma disclosures of net loss and net loss per
share are not presented.

                                      F-12
<PAGE>
 
              VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - THE COMPANY

Vitafort International Corporation (the Company) was incorporated on September
28, 1990 in the State of Delaware to succeed to the business of a California
corporation of the same name which was organized on February 7, 1986.  The
Company is presently engaged in formulating and marketing fat-free foods.

NOTE 2 - LIQUIDITY AND GOING CONCERN

The Company has suffered recurring losses from operations and has a negative
working capital and net capital deficit as of December 31, 1996.  While the
Company has raised additional capital after year-end 1996, (see Note 13), it has
not generated sufficient revenue-producing activity to sustain its operations.
Accordingly, there is substantial doubt regarding the Company's ability to
continue as a going concern.  The Company is attempting to raise additional
capital to meet the working capital deficiency, but may not be able to do so.
Should the Company not be able to raise additional capital, it may have to
severely curtail operations.

NOTE 3 - ACCRUED EXPENSES

Accrued expenses as of December 31, 1996 and 1995 consist of the following:

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                             1996       1995
                                           --------   --------
<S>                                        <C>        <C>
   Accrued compensation                    $ 90,753   $ 36,120
   Accrued interest payable                     436      7,654
   Accrued financing fees                         -    209,893
   Accrued legal fees                       120,811     67,671
   Accrued public relations fees                  -      8,916
   Accrued freight and warehousing                -     26,592
   Accrued rent                                   -      6,000
   Accrued consulting fees                   13,500     18,053
   Other accrued expenses                   115,890    255,615
   Accrued advertising and promotion        447,732          -
                                           --------   --------
 
   Total accrued expenses                  $789,212   $636,514
                                           ========   ========
</TABLE>

                                      F-13
<PAGE>
 
NOTE 4 - NOTES PAYABLE

In August 1994, the Company issued a $500,000, 5% convertible note due in
February 1995.  On November 12, 1995, the note and accrued interest on the note
was converted into 216,000 shares of the Company's common stock using a $2.50
stock price.  During 1995, the Company issued three $25,000 notes payable
bearing interest at 10%, due January 1996.  As of December 31, 1995, the
aggregate balance of $75,000 is included within current liabilities in the
accompanying consolidated balance sheets.

During 1995, the Company issued, as interim financing, and subsequently
converted into subscribed stock, approximately $1,200,000 of notes payable.  The
notes were converted into common stock at $.15 per share, plus options, on
December 29, 1995.

In August 1996, the Company entered into a revolving credit facility with a
financing institution, that provides a credit line of up to $4,000,000 subject
to certain covenants.  Advances made to the Company under the facility are based
on a certain percentage of eligible accounts receivable, as defined, and a
certain percentage of eligible inventory, as defined, located in Ontario,
California.  The amount of inventory advances under the facility cannot exceed
$500,000.  The initial term of the facility ends August 1997, with automatic
renews thereafter.  Advances under the facility bear an interest rate at the
Bank of America NT plus 3%, and are secured by a first priority lien on all of
the Company's assets.  Minimum interest charges after the first three months of
the term are $10,000 per month for the next three months, and $15,000 per month
thereafter.  The Company paid $40,000 to the institution upon execution of the
agreement, and $40,000 to a facilitator in connection with the placement of the
loan. The Company is in violation of certain covenants with respect to working
capital and tangible net worth requirements, and is under negotiation with the
lender to modify the covenants. The Company classified the entire loan as a
current liability.

NOTE 5 - LONG-TERM DEBT

The Company's long-term debt as of December 31, 1996 and 1995 consist of the
following:

<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                                       1996      1995
                                                                     -------   --------
<S>                                                                  <C>       <C>
10% note payable, due in monthly installments of $3,125
   plus interest through July 1996.                                  $     -   $ 23,876
14% note payable, due in monthly installments of $4,033,
   including interest, through October 1997, secured by certain
   of the Company's fixed assets                                      37,859     74,733
14% note payable, due in monthly installments of $5,000 plus
   interest, through April 1996                                            -     20,000
8% note payable, due in monthly installments of $5,091 plus
   interest, commencing January 1, 1995                                    -     90,303
                                                                     -------   --------
 
                                                                      37,859    208,912
Less current maturities                                               37,859    174,364
                                                                     -------   --------
                                                                     $     -   $ 34,548
                                                                     =======   ========
</TABLE>
 

                                      F-14
<PAGE>
 
NOTE 6 - INCOME TAXES

As the Company has incurred significant operating losses since inception, its
current tax provision has been limited to minimum California and Delaware tax
payments.

The difference between the Federal income tax rate and the effective income tax
rate on net loss from continuing operations is as follows:

<TABLE>
<CAPTION>
                                                   1996                       1995
                                                   ----                       ----
<S>                                      <C>        <C>               <C>       <C>  
 
Expected Federal income tax rate         (35.0%)    ($2,843,000)      (35.0)%   $(983,738)
State income taxes, net of Federal
 income tax benefit                       (6.1)        (495,000)       (6.1)     (171,451)
Change in valuation allowance to
 income tax expense                       40.1        3,249,000        32.0       899,000
Expiration of state NOL's                    -                -         1.8        50,000
Adjustment of deferred tax assets            -                -         5.3       150,000
Other, net                                 1.0           86,000         2.0        54,590
                                         -----      -----------       -----     ---------
 
                                             -%         ($3,000)          -%    $  (1,600)
                                         =====      ===========       =====     ========= 
</TABLE>

The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1996 and 1995 are as follows:

<TABLE>
<CAPTION>
                                                     1996          1995
                                                     ----          ----
<S>                                              <C>            <C>
Deferred income tax assets:
 Net operating loss carry-forwards                $6,700,000    $4,850,000
 Tax credit carry-forwards                            36,000        36,000
                                                  ----------    ----------
 
     Total gross deferred income tax assets        6,736,000     4,886,000
 
 Less valuation allowance                          6,685,000     4,835,000
                                                  ----------    ----------
 
     Deferred income tax assets, net of
      valuation allowance                             51,000        51,000
 
Deferred income tax liabilities                      (51,000)      (51,000)
                                                  ----------    ----------
 
     Net deferred income taxes                    $        -    $        -
                                                  ==========    ==========
</TABLE>

                                      F-15
<PAGE>
 
NOTE 6 - INCOME TAXES (Continued)

As of December 31, 1996, the Company had unused net operating loss carry-
forwards of approximately $19,600,000 and $6,400,000 available to offset future
Federal taxable income and future California taxable income.  In addition, the
Company had unused research and experimental credits of $44,000 and $26,000 for
Federal and California state purposes.  The unused net operating loss and credit
carry-forwards expire in various amounts through the year 2011.  In contrast to
Federal net operating losses, only 50% of the California net operating losses
incurred subsequent to December 31, 1986 may be carried forward.  The California
net operating losses will expire in various amounts through the year 2000.

Due to restrictions imposed by the Internal Revenue Code regarding substantial
changes in ownership of companies with loss carry-forwards, the utilization of
the above-mentioned net operating losses may be limited as a result of changes
in stock ownership.  The annual utilization of these losses is limited to an
amount equal to the estimated fair value (for income tax purposes) of the
Company at the point of stock ownership change, multiplied  by the long-term
tax-exempt rate then in effect.  The annual limitation has not been quantified
at this time.

Deferred tax assets of approximately $6,736,000 for the net operating losses and
other credits have been substantially offset by a valuation allowance since
management cannot determine whether it is more likely than not such assets will
be recovered.

NOTE 7 - STOCKHOLDERS' EQUITY

CONVERTIBLE PREFERRED STOCK

Each share of Series B 10% Cumulative Convertible Preferred stock is convertible
into 33.33 shares of common stock, and cumulative convertible dividends of 10%
per annum are payable annually commencing October 1992.  The Series B 10%
Cumulative Preferred stock has a liquidation preference of $50 per share plus
all accrued and unpaid dividends.  It is subject to optional redemption by the
Company at any time at $50 per share plus accrued and unpaid dividends.
Cumulative unpaid dividends amounted to $25,000 and $40,000 at December 31, 1996
and 1995, respectively.

In December 1995, the holder of 500 shares of Series B Cumulative Convertible
Preferred Stock exchanged his shares and accumulated unpaid dividends for 64,284
shares of common stock pursuant to an agreement with the holder.  In August
1996, the holder of 500 shares of Series B Cumulative Convertible Preferred
Stock exchanged his shares and accumulated accrued and unpaid dividends for
49,998 shares of common stock.

Each share of Series C Convertible Preferred Stock is convertible into 2,000
shares of common stock and 2,000 warrants.  Series C Convertible Preferred Stock
does not carry any dividend rights.  The warrants expired in June 1994.
Additionally, the Series C Convertible Stock has a dilutive conversion factor.
The Series C Convertible Preferred Stock has a liquidation preference of $1 per
share after Series B Cumulative Convertible Preferred Stock but before Series D
Cumulative Preferred Stock, and to holders of common stock.

Each share of Series D Convertible Preferred Stock is convertible into 1,367
shares of common stock.  Noncumulative dividends of $80 per share per annum are
payable semiannually.  The Series D Convertible Preferred Stock has a
liquidation preference of $1,000 per share plus all accrued dividends after
payment of preferences on the Series B 10% Cumulative Convertible Preferred
Stock.

In December 1995, the holders of the Series D Convertible Preferred stock
exchanged their shares for common stock pursuant to an agreement.  During
December 1995, 44,800 shares of common stock were

                                      F-16
<PAGE>
 
issued and 55,626 shares were included in subscribed stock and were issued
subsequent to December 31, 1995.

The shares of Series B and Series C Preferred stock are not currently registered
under the Securities Exchange Act of 1934.

COMMON STOCK

In January 1996, the Company completed its private placement offerings of common
stock. Total shares issued in these offerings were 1,121,667 at prices of $3.00
to $6.00.  Total proceeds to the Company were $3,028,500, net of expenses of
$336,500.  At December 31, 1995, $1,530,249 was received representing 
subscriptions for 635,000 common shares under this private placement offering.

During August 1993, three officers of the Company subscribed to purchase 37,500
shares of common stock at $2.00 per share.  Notes aggregating $74,925 were
received from three officers in consideration for this subscription.  During
1995, these notes were paid.

In August 1995, the Board of Directors unanimously agreed to authorize 7,000,000
more shares of common stock, bringing the total to 9,000,000, and stockholder
approval was obtained.

During September 1995, pursuant to a contractual agreement, the Company issued
100,000 shares of its common stock to a public relations/financial consulting
firm and authorized an additional 100,000 shares to be issued to the consulting
firm upon performance under the contract for $600,000 or prepaid consulting
fees.

Additionally, during 1995, the Company issued in a private placement 281,014
shares of common stock a per share prices ranging from $2.50 to $8.00 as payment
for services and satisfaction of certain of its liabilities.  During the same
period, the Company issued 260,417 shares of its common stock at per share
prices ranging from $1.40 to $5.00 with net proceeds to the Company of
approximately $563,960.

During 1995, options to purchase 20,435 shares of the Company's common stock
were exercised at per share prices ranging from $1.40 to $5.00 with net proceeds
to the Company of $74,425.

In December 1995, the Company commenced a private placement offering of common
stock at a per share price of $3.00.  Prior to December 31, 1995, the Company
had received subscriptions for the purchase of  635,000 shares of common stock.
Net subscription proceeds were $1,680,249.

In December 1995, the Company committed to issuing 43,175 shares of common stock
at per share prices ranging from $2.40 to $3.00 to certain of its employees and
consultants.  As of December 31, 1995, the shares had not been issued and,
accordingly, are accounted for as subscribed stock.

In March 1996, the Company completed a private placement of 250,000 common 
shares receiving $1,350,000, net of expenses of $150,000.

In April 1996, the Company completed a private placement of 283,333 common 
shares receiving $651,590, net of expenses of $118,410.

During 1996 the Company issued 579,957 shares of common stock valued at 
$1,377,644 to attorneys, consultants and employees as payment for services.

NOTE 8 - STOCK OPTIONS

The 1989 Stock Option Plan, as amended (the Plan) reserved 1,000,000 shares of
common stock to grant either nonqualified or incentive stock options.  All
directors, officers, key employees and consultants to the Company or its
subsidiaries are eligible under the terms of the Plan.  Such options may not be
granted at less than 100% of the fair market value at the date of grant (110%
for an owner of 10% or more of the outstanding stock).  Upon termination of
service, the options which an individual was entitled to exercise at the date of
termination may be exercised at any time within six months of such termination.
If an employee 

                                      F-17
<PAGE>
 
is terminated with cause, the options are canceled upon termination. As of
December 31, 1995, no options are outstanding under this plan.

The 1995 Stock Option Plan is intended to award stock options to directors,
management and employees of the Company based on performance.  The options vest
over periods of three to four years.

The Company has also granted stock options outside the stock plans to other
individuals in consideration for services performed.  The following summarizes
all option activity for the years ended December 31, 1996 and 1995:

<TABLE>
<CAPTION>
                                             Number of Common Stock Options                 Weighted
                                            1995 Stock            Other Stock                Average
                                            Option Plan             Options                Price Range
                                            -----------           -----------              -----------
<S>                                          <C>                   <C>                    <C>
Outstanding as of
 January 1, 1995                                     -               555,189              1.40 to 47.50
Granted                                      2,000,000             1,731,063              2.80 to 13.00
Exercised                                            -               (47,440)             1.40 to  5.00
Canceled                                             -                     -                          -

Outstanding as of
 December 31, 1995                           2,000,000             2,238,812              1.40 to 65.00

<CAPTION>
                                                                                            Weighted
                                                                                             Average
                                                                                              Price
                                                                                            --------
<S>                                          <C>                   <C>                    <C>
Granted                                        368,382                                        3.825
Exercised                                                           (164,216)                 3.825
Canceled                                       432,562                     -
                                             ---------             ---------

Outstanding as of
 December 31, 1996                           1,567,438             2,442,978              1.40 to 47.50
                                             =========             =========

Exercisable as of
 December 31, 1996                             534,104             2,442,978              1.40 to 47.50
                                             =========             =========
</TABLE>

The weighted average prices for options outstanding and exercisable at December
31, 1996 are primarily at the lower end of the range.

During 1994, the Company entered into various Option Agreements with executive
officers and consultants which granted options to purchase 17,000 shares of
common stock from between $15.00 to $25.00  per share for a period of two to
five years from the date of grant.  Due to the lack of significant trading
volume in the Company's shares, the options were granted at fair market value
determined by the Board of Directors based on private placement stock
transactions with independent third parties.

During 1995, the Company entered into various Option Agreements with executive
officers and consultants which granted options to purchase 7,583 shares of
common stock at $10.00 per share for a period of two to five years from the date
of grant.  The options were granted at prices determined to approximate fair
market value.

                                      F-18
<PAGE>
 
During 1995, the Company granted options to purchase 36,750 shares of common
stock at prices of $.15 to $13.00 per share as part of various settlement
agreements and conversions of notes payable.

In November 1995, the Company granted options to purchase 279,356 shares of
common stock at prices of $3.30 to $6.00 in conjunction with the bridge
financing.

During 1995, the Company granted options to purchase 22,500 shares of common
stock at prices of $.14 to $.65 to two of its consultants for services to be
rendered.

As of December 31, 1995 and 1994, options to purchase 841, 411 and 344,925
shares were exercisable at prices ranging from $1.40 to $65.00 per share.

NOTE 9 - LICENSING AGREEMENTS

In 1990, the Company entered into an agreement with Vitafort Latin America
(VLA), whose president was a director and stockholder of the Company.  The
agreement grants VLA an exclusive ten-year license to use the "Vitafort"
trademark and to manufacture and sell the Company's products in certain Latin
American countries, royalty free.  In consideration for this license, the
Company received a 50% ownership interest in VLA.  VLA had not commenced
operations as of December 31, 1996.

NOTE 10 - COMMITMENTS

LEASE AGREEMENT

The Company is obligated under a lease agreement for its executive offices
through August 1997.  Amounts due under the lease for the period ending August
5, 1997 is $46,875.

Rent expense for the years ended December 31, 1996 and 1995, included in
selling, general and administrative expenses, was $75,743 and $72,562,
respectively.

EMPLOYMENT AGREEMENTS

As of December 31, 1995, the Company held an employment agreement with one
senior executive of the Company.  The agreement calls for annual aggregate
compensation of $150,000 plus bonuses of 25% of pretax profits, but not more
than 20% of the base salary for the executive.  The agreement expired on
November 30, 1996.  Certain payments amounting to $110,000 during 1995 were
deferred.  A portion of this amount was converted into the Company's common
stock at $.15 per share on October 30, 1995.  The balance was converted into
common stock on January 31, 1996.  The agreement was extended by the Company on
the same terms for three additional years.  Certain payments of $12,500 during
1996 were deferred.  As of December 31, 1996, the Company held an employment
with another senior executive of the Company.  The agreement commenced on
January 1, 1996 and is for one year, with two annual renewals.  The agreement
calls for annual aggregate compensation of $102,000 plus the higher of 5% or
cost of living (COLA) increase each subsequent year.  In addition, the senior
executive received options to purchase 225,000 shares of common stock at $3.00
per share.  25% of these options vested during 1996, 25% lapsed in early 1997
and the remainder vest in 1998 and 1999 based on performance criteria.

AUBURN FARMS TRADEMARK ACQUISITION

The Company entered into a purchase agreement in 1996 whereby it acquired the
Auburn Farms trademarks and other related trademarks.  Deferred payments, which
will be accounted for as royalties, under the agreement include 3-1/2% of gross
sales of products sold using these trademarks during the 30 months beginning May
1, 1996 with gradually reducing percentages over the next successive three
thirty-month 

                                      F-19
<PAGE>
 
periods. Deferred payments under the agreement made in 1996 were $45,612 and
were expensed as royalties during the year.

NOTE 11 - MAJOR CUSTOMERS

The Company derived the following revenue from major customers, each of which
provided 10% or more of total revenues during the year ended December 31, 1996
and 1995:
<TABLE>
<CAPTION>
                     1996       1995
                     ----       ----
  <S>              <C>        <C>
 
  K-Mart           $606,199   $      -
 
  Price Club              -    579,144
                   --------   --------
 
  Total            $606,199   $579,144
                   ========   ========
</TABLE>

NOTE 12 - LITIGATION

The Company is subject to pending claims and litigation, the most significant of
which are discussed below.
 
On November 1, 1995, Keebler Company (Keebler) and the Company entered into a
co-packer agreement (the Agreement) to manufacture Caketts.  In 1996, the
Company suffered losses and terminations of business relationships by a number
of the Company's distributors, retailers and brokers due to mold in the Cakett
products.  In August 1996, Keebler gave the Company thirty (30) days notice of
termination of the Agreement between the parties, and indicated that it had
discontinued further production of the Company's product.  The Agreement between
Keebler and the Company provides for the binding arbitration of disputes.  On
August 15, 1996, the Company filed a demand for arbitration seeking compensatory
damages, which is scheduled to be heard during May 1997.  The Company is seeking
damages in excess of $5,000,000.  Keebler has filed a counterclaim against the
Company for breach of contract which alleges damages in excess of $300,000.  The
Company believes that Keebler breached the agreement by failing to meet its
warranties to Vitafort to manufacture the products in an acceptable process
manner, improperly terminating the agreement; and, made intentional
misrepresentations regarding the cause of the mold problems.

In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in certain
of the Company's private placements, initiated an action in Superior Court,
Orange County, California against his stockbroker, two national brokerage firms,
several companies in which he had invested; and, certain of those company's
officers.  Included among the defendants was the Company and its then Chief
Executive Officer.  The complaint seeks damages in an unspecified amount in
excess of $500,000 and punitive damages in an unspecified amount in excess of
$5,000,000. The Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration.    The Plaintiff has appealed that
ruling.  The Company denies any liability to the plaintiff and intends to
vigorously defend this action.  The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment and realize a profit on
his $75,000 investment.

In February 1996, Cottage Bakery, Inc., a former co-packer of Fudgets, initiated
a lawsuit against the Company in Superior Court, San Joaquin County, California.
The Complaint alleges breach of contract and fraud against the Company and seeks
damages in an unspecified amount in excess of $150,000.  The Company disputes
this liability and filed a cross complaint against Cottage Bakery.  The parties
have reached an agreement in principle with respect to the settlement of this
action but the settlement 

                                      F-20
<PAGE>
 
agreement has not been executed; and, if such settlement is consummated, the
Company will not be subjected to any material liability. If the action is not
settled, the Company will vigorously defend the action.

In connection with the acquisition of assets of Auburn Farms, Inc., (AFI) under
the FPA, the Company acquired certain rights of AFI against its co-packer and
against Barbara's Bakery.  The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims.  The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims.  The litigation is in the early stages and the Company intends
to vigorously pursue the same.

In October 1996, Michel's Bakery, Inc., a former co-packer of Fudgets, initialed
an action in the Federal District Court for the Eastern District of Pennsylvania
seeking damages in excess of $140,000 under various contract ant tort theories.
The Company has filed a counterclaim alleging breach of contract and other
claims relating to the product manufactured by Michel's.  The parties have
agreed to a mediation session, scheduled to be held in April 1997.  If, however,
the matter is not resolved through mediation, the Company intends to vigorously
prosecute this lawsuit.

On October 9, 1996,  a complaint was filed in Superior Court, the County of Los
Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a Delaware
Corporation; Mark Beychok and Does 1-50 inclusive."  The complaint alleges
Breach of Oral Contract, Breach of Written Contract, and other similar claims
arising out of the consulting relationship that previously existed between the
Company and Mr. Ellis.  The Complaint seeks damages in an unspecified amount.
The court has sustained, without leave to amend, a demurrer to the claims
against Mark Beychok.  Mr. Ellis recently filed an amended complaint against the
Company.  Litigation is in its early stages and the Company will vigorously
defend the action.

NOTE 13 - SUBSEQUENT EVENTS

The Company entered into a subscription agreement in February 1997, with an
investor who purchased 500,000 shares of common stock at $1.00 per share.  At
funding, a 10% fee was paid to a facilitator and warrants were given to that
same facilitator to purchase 125,000 shares of common stock at a price of $1.375
per share.

The Company entered into a second subscription agreement in April 1997, with
another investor for $500,000 of Preferred 1997 Series "A" stock.  The preferred
stock has a cumulative dividend rate of 6% percent with no voting rights.  The
conversion price is either the lower of $1.25 per share or percent 30% discount
to the market price at the time of conversion.  The preferred stock is
convertible at any time.  The facilitator received a 10% fee from proceeds, as
well as warrants to purchase 35,000 shares of common stock at an exercise price
of $1.00 per share.

In April 1997, the Company agreed in principle with ATCOLP INVESTMENT PARTNERS,
a California Limited Partnership (the "Lender), in which Donald Wohl, a Director
of the Company, is the general partner, for a loan in the amount of $300,000
(the "Loan"), to fund the payment of legal fees in connection with the Company's
arbitration against the Keebler Company.  See Note 12.  The loan will be
evidenced by a note which bears interest at the lesser of 15% per annum or the
highest rate allowed by law with recourse solely to the net proceeds of the
arbitration, if any.  If the Company does not realize any net proceeds from the
arbitration, the Loan will be canceled and the Lender will receive a warrant for
the purchase of 400,000 shares of the Company's Common Stock at $.01 per share.
If the Loan is repaid through the application of the net proceeds of the
arbitration, the Lender will receive warrants for the purchase of 200,000 shares
of common stock at $.01 per share and a percentage of net proceeds of the
arbitration equal to 15% of the first $1,000,000 of net proceeds; 20% of the net
proceeds greater than 

                                      F-21
<PAGE>
 
$1,000,000 and less than $3,000,000; and, 25% of net proceeds above $3,000,000.
The Loan was approved by the disinterested members of the Company's Board of
Directors, and was on terms no less favorable to the Company than were available
from non-affiliated lenders.

                                      F-22