<PAGE>
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission File Number: 0-28912
INNOPET BRANDS CORP.
- --------------------------------------------------------------------------------
(Name of small business issuer as specified in its charter)
Delaware 65-0639984
------------------------------- ----------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1 East Broward Blvd., Suite 1100
Fort Lauderdale, Florida 33301
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(954) 453-2400
- --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
-----------------
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(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
As of May 13, 1998, 5,795,225 shares of common stock of the issuer were
outstanding.
Transitional small business disclosure format (check one): Yes ____ No __X__
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INNOPET BRANDS CORP.
Index To Financial Statements and Financial Schedules
March 31, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets as of March 31, 1998 and December 31, 1997................................ 3.
Condensed Statements of Operations for the three months ended March 31, 1998 and March 31, 1997,
and cumulative from inception ..................................................................... 4.
Condensed Statements of Cash Flows for the three months ended March 31, 1998 and March 31, 1997,
and cumulative from inception ..................................................................... 5.
Notes to Condensed Financial Statements............................................................ 7.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation................... 9.
Part II. OTHER INFORMATION
Other Information...................................................................................... 13.
Signature.............................................................................................. 16.
</TABLE>
2
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
BALANCE SHEET
<TABLE>
<CAPTION>
Assets March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
Current Assets:
Cash $ 367,778 $ 378,528
Accounts receivable 1,125,854 1,160,610
Inventories 1,905,240 1,921,199
Prepaid expenses and other current assets 661,261 843,444
------------ ------------
Total current assets 4,060,133 4,303,781
------------ ------------
Property and Equipment, net 405,122 426,611
------------ ------------
Intangible Assets:
Deferred slotting fees, net of accumulated
amortization 58,625 110,933
Product formulae acquisition costs, net
of accumulated amortization 216,921 223,871
Non-compete agreement, net of accumulated
amortization 84,941 110,423
------------ ------------
Total intangible assets 360,487 445,227
------------ ------------
Other assets 10,000 10,000
------------ ------------
Total Assets $ 4,835,742 $ 5,185,619
============ ============
Liabilities and Stockholders' Deficiency
Current Liabilities:
Accounts Payable:
Trade $ 2,839,895 $ 2,729,400
Slotting fees 380,127 536,675
Accrued expenses and other payables 915,539 583,461
Parent (38,353) --
Notes payable, net 825,393 1,716,397
------------ ------------
Total current liabilities 4,922,601 5,565,933
Long term debt 171,303 175,500
------------ ------------
Total liabilities 5,093,904 5,741,433
Stockholders' Equity:
Series A 4% convertible preferred stock, $.01 par
value; issued and outstanding 625,000 shares
at liquidation value 2,500,000 2,500,000
Series B 8% convertible preferred stock, $100 par
value; issued and outstanding 10,000 shares
(historical) and 20,000 shares (pro forma)
at liquidation value 2,000,000 1,000,000
Common stock, $.01 par value; authorized
25,000,000 shares; issued and outstanding
5,553,169 shares 55,531 49,287
Additional paid-in capital 16,613,170 14,702,788
Retained earnings (19,119,134) (16,530,047)
Notes and interest receivable on sale of common
stock (2,304,493) (2,274,606)
Treasury stock at cost (3,236) (3,236)
------------ ------------
Total stockholders' equity (258,162) (555,814)
------------ ------------
Total Liabilities and Stockholders' Equity $ 4,835,742 $ 5,185,619
============ ============
</TABLE>
3
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Three Months Cumulative
Ended Ended from
March 31, 1998 March 31, 1997 Inception
-------------- -------------- ---------
<S> <C> <C> <C>
Net Sales $ 673,689 $ 575,028 $ 5,600,114
------------ ------------ ------------
Cost of Goods Sold 424,394 383,574 4,106,155
------------ ------------ ------------
Gross Profit 249,295 191,454 1,493,959
------------ ------------ ------------
Operating Expenses:
Sales expenses 201,757 160,900 1,390,117
Slotting allowances 143,321 439,435 2,482,258
Marketing expenses 421,645 708,334 5,451,728
Distribution 26,638 89,287 686,930
Product development 463,433 111,241 1,482,743
General and administrative 1,274,164 896,287 6,808,874
------------ ------------ ------------
Total operating expenses 2,530,958 2,405,484 18,302,650
------------ ------------ ------------
Income (Loss) from Operations (2,281,663) (2,214,030) (16,808,691)
------------ ------------ ------------
Other Income (Expenses):
Interest income 231 36,930 86,341
Interest expense and financing costs (307,655) (22,808) (2,341,546)
Other income (expense) -- -- (55,238)
------------ ------------ ------------
Total other income (expense) (307,424) 14,122 (2,310,443)
------------ ------------ ------------
Net Income (Loss) $ (2,589,087) $ (2,199,908) $(19,119,134)
============ ============ ============
Net Loss Per Common Share $ (0.49) $ (0.49)
============ ============
Shares Used in Per Share Calculations 5,335,916 4,465,878
============ ============
</TABLE>
4
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Three Months Cumulative
Ended Ended from
March 31, 1998 March 31, 1997 Inception
-------------- -------------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (2,589,087) $ (2,199,908) $(19,119,134)
Adjustments to reconcile net loss to net
cash used in operating activities:
Costs and expenses paid on behalf of
the Company by InnoPet Inc. -- -- 1,580,327
Depreciation 33,508 24,378 175,795
Amortization:
Slotting fees 119,808 439,435 2,458,744
Financing costs -- -- 872,759
Original issue discount 254,036 -- 726,408
Other 32,432 32,432 281,911
Provision for doubtful accounts 340,046 -- 914,227
Offsets against accounts receivable
for slotting fees (40,000) (181,273) (1,316,519)
Interest paid from proceeds of public
offering -- -- 61,944
Loss on disposal of equipment 3,143 -- 3,484
Non-cash expense related to issuance
of shares in settlement 199,699 -- 238,699
Changes in Operating Assets and
Liabilities:
(Increase) Decrease in:
Accounts receivable (265,290) (199,196) (1,604,678)
Inventory 15,959 (925,626) (1,401,209)
Prepaid expenses and other
current assets 114,683 89,466 (2,091,475)
Deposits and other assets -- (54,298) --
Increase (Decrease) in:
Accounts payable, trade 110,512 305,623 2,839,912
Accounts payable slotting fees (156,548) 2,235 380,127
Accounts payable, InnoPet Inc. (38,353) (89,953) 527,668
Accrued expenses and other
current liabilities 332,078 -- 770,939
------------ ------------ ------------
Net cash used in operating activities (1,533,374) (2,756,685) (13,700,071)
------------ ------------ ------------
Cash Flows from Investing Activities:
Acquisition of property and equipment (15,162) (250,308) (479,609)
------------ ------------ ------------
Cash Flows from Financing Activities:
Payments on capital lease obligation (4,214) -- (29,114)
Proceeds from initial public offering -- -- 6,851,487
Proceeds from issuance of preferred stock 942,000 -- 3,928,900
Proceeds of long-term financing from
InnoPet Inc., net -- -- 202,014
Proceeds from private placement financing -- -- 1,672,236
Proceeds from notes payable 600,000 -- 2,462,500
Offering costs -- -- (472,641)
Deferred financing costs -- -- (67,924)
------------ ------------ ------------
Net cash provided by financing activities 1,537,786 -- 14,547,458
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents (10,750) (3,006,993) 367,778
Cash and Cash Equivalents, Beginning 378,528 4,614,312 --
------------ ------------ ------------
Cash, Ending $ 367,778 $ 1,607,319 $ 367,778
============ ============ ============
</TABLE>
5
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
STATEMENT OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Three Months Three Months Cumulative
Ended Ended from
March 31, 1998 March 31, 1997 Inception
-------------- -------------- ---------
<S> <C> <C> <C>
Supplemental Disclosure of Cash Flow
Information:
Non-Cash Investing and Financing Activities:
Common stock issued to InnoPet Inc.
in satisfaction of debt $ -- $ -- $1,317,530
======= ========= ==========
Common stock issued on behalf of
InnoPet Inc. as settlement of dispute $ -- $ -- $ 91,000
======= ========= ==========
Capital lease obligation incurred
for acquisition of equipment $ -- $ -- $ 44,000
======= ========= ==========
Expenditures for various assets paid on
behalf of the Company by InnoPet Inc.:
======= ========= ==========
Product formulae, non-compete
agreement and inventory $ -- $ -- $1,072,772
======= ========= ==========
Deferred financing costs $ -- $ -- $ 227,071
======= ========= ==========
Deferred slotting fees $ -- $ -- $ 291,957
======= ========= ==========
Property and equipment and other assets $ -- $ -- $ 195,732
======= ========= ==========
Deferred financing costs paid from
proceeds of private placement financing $ -- $ -- $ 327,764
======= ========= ==========
Offering costs paid from proceeds of
initial public offering $ -- $ -- $1,436,611
======= ========= ==========
Notes payable paid from proceeds of
initial public offering $ -- $ -- $2,000,000
======= ========= ==========
</TABLE>
6
<PAGE>
INNOPET BRANDS CORP.
(A Development Stage Enterprise)
Notes to Financial Statements
(Unaudited)
1. These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions to Form 10-QSB. The financial statements should be read in
conjunction with the audited financial statements of the Company from
inception (January 11, 1996) to December 31, 1997 for a description of the
significant accounting policies, which have continued without change, and
other footnote information.
2. All adjustments which are, in the opinion of management, necessary for a
fair presentation of financial position, results of operation and cash flow
have been included. For purposes of interim financial reporting, the
Company uses the standard cost method in determining the estimate of the
lower of cost or market for inventory valuation. The results of the interim
period are not necessarily indicative of the results for the full year.
3. The Company was incorporated on January 11, 1996, and, since that time, has
been primarily involved in organizational activities, developing a
strategic plan for the marketing and distribution of its pet food products,
and raising capital. Planned operations, as described above, have
commenced, but revenue therefrom generated to date is not considered
significant in relation to the Company's strategic plan. Accordingly, the
Company is considered to be in the development stage, and the accompanying
interim financial statements represent those of a development stage
enterprise.
The accompanying interim financial statements have been presented in
accordance with generally accepted accounting principles, which assume the
continuity of the Company as a going concern. However, as discussed above,
the Company is in the development stage and, therefore has generated little
revenue to date. As reflected in the accompanying interim financial
statements, the Company has incurred a net loss and reflects a deficit
accumulated during the development stage of $19,119,134 for the period from
inception (January 11, 1996) through March 31, 1998. This condition raises
substantial doubt as to the ability of the Company to continue as a going
concern.
Management's plans with regard to this matter encompass the following
actions:
Business Plan
Product shipments began in Fall 1996 after wholesale marketing programs
were begun in July 1996; consumer marketing programs were implemented once
the Company's products appeared on supermarket shelves. The Company
developed an integrated marketing communications program based on sampling
as the method most likely to produce trial and conversion of consumers.
Using highly articulated mailing lists that define target consumers by pet
ownership and proximity to outlets for the Company's products, the Company
began an aggressive direct mail program in core areas such as New York and
Philadelphia. In addition, in-store demonstrations at stores, pet fairs and
shows add names to the Company's base of sampling targets. Couponing
through advertising (generally store-sponsored), free standing inserts in
Sunday newspapers and in-store programs are used to disseminate samples and
literature about the product.
Slotting, a system whereby the vendor pays the supermarket chain to
integrate their products into the stores and warehouse systems, presented a
high-cost factor during the product's introduction. The Company determined
that it would pay such slotting fees only with product (as opposed to
cash), and at no more than forty percent of the chain's listed slotting
rate. Of the 31 chains that have purchased the product, this has been
adhered to in all but two cases where a concession was made to certain
market-leading chains which the Company deemed were vital to penetrating
specific geographic areas.
7
<PAGE>
As an additional marketing tool, in June 1997, the Company entered into
long-term agreements with North Shore Animal League of Long Island ("NSAL")
and the international Pet Savers Foundation, which NSAL administers. This
program, which had featured Iams products for several years, targets
approximately 6,000 animal shelters, accounting for approximately 2.5
million pet adoptions annually, where the Company's products are
exclusively fed to sheltered animals, given away as a free sample when a
dog is adopted and sold in over 400 animal shelter stores participating in
the Pet Savers program. The Company views this program, which is structured
under a multi-year contract (due to expire in 2002) as a vital way to
introduce pet owners to the Company's products at the earliest possible
point in pet ownership and in addition, as a valuable sales channel.
In November 1997, the Company successfully presented to and acquired its
first customer for premium private label pet food, the Kroger Company, the
nation's largest supermarket chain. The Company believes that it was able
to beat its competition for this business as a result of its superior
product quality and its marketing expertise in the premium pet foods
segment. The Company has established a separate private label sales effort
to support this area. The Company plans to commence its first shipment in
Spring 1998.
As of March 31, 1998, the Company had placed its products in more than
6,000 stores in twenty states. Market penetration to date varies from 15%
to 70%, depending on the market and geographic spread of its customer
chains.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, including in this quarterly report on Form 10-QSB, InnoPet
Brands Corp. (the "Company") may publish forward-looking statements relating to
such matters as anticipated financial performance, business prospects, future
operations, new products, research and development activities, and similar
matters. The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for such forward-looking statements. In order to comply with the terms of
the safe harbor, the Company notes that a variety of factors could cause the
Company's actual results to differ materially from the anticipated results or
other expectations expressed in the Company's forward-looking statements. The
risks and uncertainties that may affect the operations, performance, development
and results of the Company's business include the following: the ability to
obtain additional financing; changes in the pet food industry; the Company's
ability to manage growth effectively; the Company's ability to sell premium pet
foods through supermarkets and grocery stores; the entrance into the supermarket
distribution channel of an existing or new premium pet food; the ability of the
Company's manufacturers and other suppliers to meet the Company's performance
and quality specifications; and the ability of the Company to control the cost
of raw materials, manufacturing, packaging, warehousing and distribution.
General
The Company produces, markets and sells premium dog food primarily through
supermarkets and grocery stores under the name InnoPet Veterinarian Formula(TM)
Dog Food. The Company was created on January 11, 1996 to acquire the KenVet
Nutritional Care Line of dog and cat foods from a subsidiary of ConAgra.
The Company's objective is to become a national provider of premium pet foods
primarily through supermarket and grocery store outlets. The Company intends to
achieve its objective by: (i) providing supermarkets a brand of
competitively-priced premium pet food to enable supermarkets to recapture a
share of the premium pet food market they have lost to specialty pet stores;
(ii) expanding distribution to supermarkets and grocery stores throughout the
United States; (iii) increasing consumer awareness and market penetration
throughout the Company's market areas; and (iv) packaging its products in unique
single serving-sized inner-bags which are designed to increase convenience of
feeding, regulate portions, reduce product deterioration and prevent
contamination. The Company's strategy is to provide premium pet food products
that are good for the pet and easy to use for the owner.
Since 1988, supermarkets' share of pet food sales in the United States has
fallen from 95% to 58%, mainly due to increased sales of premium pet foods
through specialty pet stores. Until the introduction of Veterinarian Formula,
premium pet foods, which represent approximately 20% of the total pet food
market, were not available in supermarkets. The Company believes that the
availability of a full line of premium pet foods at supermarkets will allow
supermarkets to stop the erosion of their market share and perhaps allow them to
recapture market share.
In June 1996, the Company commenced sales of its beef formula dog food to
supermarkets in the Greater Metropolitan New York area. As of March 6, 1998, the
Company's products have been sold in the following markets: the Greater
Metropolitan New York area; the New England area; Philadelphia, Pennsylvania and
other areas of Pennsylvania; the Baltimore, Maryland and Washington, D.C. area;
Virginia; North Carolina; South Carolina; Georgia; Alabama; Tennessee; Florida;
and Texas.
During the next twelve months the Company anticipates that it will increase its
penetration into supermarkets throughout the central and western United States.
The Company also plans to increase its lamb & rice flavor dog food offering to 9
stock keeping units ("SKUs"), and to introduce 4 SKUs each of liver flavor and
chicken flavor cat food.
Additionally, the Company plans to commence its first shipment of private label
product, in Spring 1998. The Company was selected by The Kroger Co. ("Kroger"),
one of the nation's largest supermarket chains, to provide a full line of
private label premium pet food to the chain's approximately 1,300 retail
9
<PAGE>
outlets. This product line will initially target dog owners; it is anticipated
that cat food will be introduced at a later date. The first products which the
Company expects to introduce will be beef, lamb and rice, and chicken flavor dry
dog foods. The Company anticipates that more than 10 SKUs will be brought to
Kroger shelves in the first round of product offerings.
Results of Operations
The three months ended March 31, 1998 compared to the three months ended March
31, 1997.
Revenues. Revenues increased $98,661 or 17% to $673,689 during the first quarter
of 1998 from $575,028 for the comparable period in 1997.
Cost and Expenses. Cost of goods sold increased $40,820 or 11% to $424,394
during the first quarter of 1998 from $383,574 for the comparable period in
1997. Cost of goods sold for the first quarter of 1998 were 63% of sales,
providing a gross margin of 37% for the period, an improvement of 4 percentage
points over the first quarter of 1997. The improved margin was the result of
increased volume and improved manufacturing efficiencies during the first
quarter of 1998 over the comparable period of 1997.
Sales expenses increased $40,857 or 25% to $201,757 during the first quarter of
1998 from $160,900 for the comparable period in 1997. The increase reflected an
expanded sales force and increased commission expenses for brokers. Sales
expenses for the first quarter of 1998 totaled 30% of sales compared to 28% for
the first quarter of 1997.
Slotting expenses decreased $296,114 or 67% to $143,321 during the first quarter
of 1998 from $439,435 for the comparable period in 1997. The decrease reflected
slower geographic expansion and reduced slotting fees during the first quarter
of 1998, compared to the rapid pace of geographic expansion and associated
slotting fees for the comparable period in 1997, Slotting fees are fees charged
manufacturers by retailers in order to facilitate the introduction of new
products. The fees represent charges for warehouse space (slots) to be used to
store a manufacturer's products, charges for retail shelf space and related
shelf sets to make room for the products and reimbursement of retailer expenses
(entering new items into their computer systems and in some cases marketing
support provided by the retailer). The practice by retailers of charging
slotting fees is a standard industry practice. The Company expects to continue
to incur slotting fees as it expands its geographic territory and as new
products are introduced.
Marketing expenses decreased $286,689 or 40% to $421,645 during the first
quarter of 1998 from $708,334 for the comparable period in 1997. The decrease
reflected maintenance of our established marketing plans compared to costly new
start-up programs during the first quarter of 1997. During the first quarter the
Company's marketing programs included radio and newspaper advertising, in-store
coupons, floorminder displays, direct sampling programs, in-store demonstrations
and cause-related programs.
Distribution expenses decreased $62,649 or 70% to $26,638 during the first
quarter of 1998 from $89,287 for the comparable period in 1997. The decrease
reflected more productive use of personnel, reduced freight expense and greater
efficiencies in distribution facilities used by the Company.
Product development costs increased $352,192 or 317% to $463,433 during the
first quarter of 1998 from $111,241 for the comparable period in 1997. The first
quarter of 1998 expense level reflected expenses associated with the ongoing
management of manufacturers and co-packers, and ongoing research and
development.
General and Administrative expenses increased $377,877 or 42% to $1,274,164
during the first quarter of 1998 from $896,287 for the comparable period in
1997. The increase resulted from increased reserve for bad debts against
chargebacks to customers (approximately $340,000), and other general office
expenses.
10
<PAGE>
Total Other Income decreased $321,546 or 2,177% to a net expense of $307,424
during the first quarter of 1998 from a net income of $14,122 during the
comparable period in 1997. The first quarter includes interest expense of
$297,628 on various financings and amortization of original issue discount.
Net Loss. Net loss increased $389,179 or 18% to $2,589,087 during the first
quarter of 1998 from $2,199,908 for the comparable period in 1997. The increase
was due primarily to increased reserve for bad debts. The Company expects to
continue to incur losses at least through the fourth quarter of 1998. The
Company's ability to achieve a profitable level of operations will depend in
large part on the market acceptance of its products, and the Company's ability
to obtain additional financing. There can be no assurance that the Company will
achieve profitable operations.
Liquidity and Capital Resources
Working Capital. At March 31, 1998 the Company had a working capital deficit of
$862,468, compared to a working capital deficit of $380,314 at December 31,
1997. The change in working capital was primarily due to the loss incurred in
the current period, partially offset by the sale of Series B 8% Cumulative
Convertible Preferred Stock and the conversion of current debt to equity.
Cash Flow. During the three month period ended March 31, 1998, the Company had
net cash used by operating activities of $1,533,374. The primary use of cash was
the net loss incurred for the period.
The Company had net cash used in investing activities of $15,162 for the
three-month period ended March 31, 1998. The primary use of cash during this
period was for office-related property and equipment.
During the three month period ended March 31, 1998, the Company had net cash
provided by financing activities of $1,537,786, reflecting the net proceeds of a
$1 million Private Placement of 8% Series B Cumulative Preferred Stock of the
Company at par value $100 per share and short term notes.
In order to achieve its financial plan, the Company is seeking additional
funding, which may consist of debt, equity or a combination thereof. If the
Company is unable to obtain additional funding, the Company will be required to
modify its current business plan. There can be no assurance that the Company
will be able to obtain such additional funding. The Company has discussed
working capital financing with banks and factors. There can be no assurance that
any credit facility will be available to the Company, or if available, that it
will be available on acceptable terms.
On March 31, 1998, stockholders' equity approximated ($258,162), and working
capital deficit approximated $862,468.
Legal Proceedings
On March 16, 1998, Entrepreneurial Investors, Ltd., a Bahamas company ("EIL"),
commenced an action against the Company in the Court of Chancery of the State of
Delaware, and for New Castle County, seeking specific performance of the
Company's obligations under a registration rights agreement dated April 28, 1997
(the "Registration Rights Agreement"), and a bridge loan agreement dated July 9,
1997 (the "Loan Agreement"). The Complaint alleges that the Company had an
obligation to register shares of Common Stock underlying 625,000 shares of the
Company's Series A Convertible Preferred Stock purchased by EIL pursuant to a
subscription agreement dated as of April 28, 1997, in exchange for $2.5 million.
The Complaint further alleges that the Company is obligated to register certain
securities, including shares of Common Stock relating to Warrants acquired by
EIL.
11
<PAGE>
As a consequence of the Registration Statement filed by the Company with the
Securities and Exchange Commission having gone effective on April 6, 1998, the
EIL action was rendered moot and has been voluntarily withdrawn.
On December 22, 1997, Ryt-Way Industries, Inc. d/b/a Ryt-Way Packaging Company,
commenced an action against the Company in the District Court, State of
Minnesota, for alleged non-payment for packaging services. Plaintiff seeks money
damages of $119,084.33, plus interest. Plaintiff filed a motion for summary
judgment on the ground of account stated. The Company filed a cross-motion for
lack of personal jurisdiction and opposed the motion by plaintiff for summary
judgment. The Company previously answered the complaint, denying all liability
and asserted counter-claims.
On April 27, 1998, Interbank Special Purpose Corporation II ("IBF") commenced an
action against the Company in the Circuit Court of the 17th Judicial Circuit of
the State of Florida, and for Broward County, in connection with the non-payment
by the Company of principal and interest on a promissory note in the principal
amount of $762,500 (the "IBF Note"). The IBF Note has a stated interest rate of
1.5% per month (18% per annum) and matured on April 28, 1998. As of the date
hereof, the Company has failed to make any principal or interest payments to
IBF. The IBF Note is secured by, among other things, all inventory, equipment,
vehicles, accounts receivables, trade names and trademarks of the Company (the
"Collateral"). IBF is seeking among other things (i) full payment of principal
and interest on the IBF Note, (ii) an accounting of all the Collateral, (iii) a
judgment foreclosing the Collateral and a deficiency judgment if the proceeds
from the sale of the Collateral are insufficient to pay any judgment in the
action, and (iv) appointment of a receiver for the Company. The Company is
currently in settlement negotiations with IBF and believes that it will reach an
amicable agreement with IBF. If the action is not settled, the Company intends
to vigorously defend this action and file a counterclaim against IBF.
Subsequent Events
On May 13, 1998, the Company issued to InnoPet Inc. ("IPI") an additional
130,166 shares of the Common Stock in accordance with the exchange agreement
dated December 23, 1997 between the Company and IPI (the "Exchange Agreement"),
whereby (i) principal and accrued interest in the aggregate amount of
$773,702.97, payable pursuant to a note dated June 5, 1996, issued by the
Company to IPI in the amount of $1.0 million, bearing interest at one percent
above the prime rate and having a stated term of five years, and (ii) accounts
payable in the amount of $543,828.42, pursuant to a facilities agreement between
the Company and IPI dated June 1, 1996, whereby the Company has agreed to lease
its offices, furnishings and equipment from IPI until April 30, 2001
(collectively, the "Debt"), was satisfied in exchange for 396,847 shares of the
Common Stock of the Company, which represented a number equal to the Debt
divided by a number equal to eighty percent of the average closing bid price for
a share of Common Stock as then reported by NASDAQ for the five trading days
immediately preceding the December 31, 1997 closing date (the "Exchange Rate").
The Exchange Agreement required an adjustment to the Exchange Rate if, at any
time during the one year period following the closing date of the Exchange
Agreement, the average closing bid price for a share of the Company's Common
Stock was less than or equal to $2.50 per share of Common Stock for forty-five
(45) consecutive days, such that the Company was required to issue to IPI
additional shares of Common Stock equal to the difference between (a) the number
of shares of Common Stock which would have resulted if the Debt had been
exchanged at an Exchange Rate of $2.50 and (b) the number of shares previously
issued.
In December 1997, the Company completed a private placement of 4 units (the
"Units") to Curi Oil Co., L.L.C., each Unit consisting of a promissory note of
the Company in the principal amount of $25,000, bearing interest at the rate of
10% per annum and maturing 90 days after the date of issuance, and Redeemable
Warrants to purchase 30,000 shares of Common Stock expiring on December 5, 1002,
at an exercise price of $6.00 per share. The Company has extended the maturity
date of the promissory notes to May 30, 1998. Curtis Granet, a director of the
Company, holds a 40% membership interest in Curi Oil Co., L.L.C., and was issued
10,000 Redeemable Warrants in connection with this transaction.
12
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
On March 16, 1998, Entrepreneurial Investors, Ltd., a Bahamas company
("EIL"), commenced an action against the Company in the Court of
Chancery of the State of Delaware, and for New Castle County,
seeking specific performance of the Company's obligations under a
registration rights agreement dated April 28, 1997 (the "Registration
Rights Agreement"), and a bridge loan agreement, dated July 9, 1997
(the "Loan Agreement"). The Complaint alleges that the Company had an
obligation to register shares of Common Stock underlying 625,000
shares of the Company's Series A Convertible Preferred Stock
purchased by EIL pursuant to a subscription agreement dated as of
April 28, 1997, in exchange for $2.5 million. The Complaint further
alleges that the Company is obligated to register certain securities,
including shares of Common Stock relating to Warrants acquired by
EIL. As a consequence of the Registration Statement filed by the
Company with the Securities and Exchange Commission having gone
effective on April 6, 1998, the EIL action was rendered moot and has
been voluntarily withdrawn.
On December 22, 1997, Ryt-Way Industries, Inc. d/b/a Ryt-Way
Packaging Company commenced an action against the Company in the
District Court, State of Minnesota, for alleged non-payment for
packaging services. Plaintiff seeks money damages of $119,084.33,
plus interest. Plaintiff filed a motion for summary judgment on the
ground of account stated. The Company filed a cross-motion for lack
of personal jurisdiction and opposed the motion by plaintiff for
summary judgment. The Company previously answered the complaint,
denying all liability, and asserted counter-claims.
On April 27, 1998, Interbank Special Purpose Corporation II ("IBF")
commenced an action against the Company in the Circuit Court of the
17th Judicial Circuit of the State of Florida, and for Broward
County in connection with the non-payment by the Company of principal
and interest on a promissory note in the principal amount of $762,500
(the "IBF Note"). The IBF Note has a stated interest rate of 1.5% per
month (18% per annum) and matured on April 28, 1998. As of the date
hereof, the Company has failed to make any principal or interest
payments to IBF. The IBF Note is secured by, among other things, all
inventory, equipment, vehicles, accounts receivables, trade names and
trademarks of the Company (the "Collateral"). IBF is seeking among
other things (i) full payment of principal and interest on the IBF
Note, (ii) an accounting of all the Collateral, (iii) a judgment
foreclosing the Collateral and a deficiency judgment if the proceeds
from the sale of the Collateral are insufficient to pay any judgment
in the action, and (iv) appointment of a receiver for the Company.
The Company is currently in settlement negotiations with IBF and
believes that it will reach an amicable agreement with IBF. If the
action is not settled, the Company intends to vigorously defend this
action and file a counterclaim against IBF.
Item 2. Changes in Securities and Use of Proceeds.
On February 20, 1998 and March 18, 1998, respectively, the Company
sold 2,000 and 8,000 shares of the Series B Preferred Stock of the
Company, at $100 per share, to Explorer Partners, LLC ("Explorer"),
pursuant to a private placement of up to $4.0 million entered into
with Explorer on December 18, 1997. Net proceeds to the Company to
date from such private placement are approximately $2.0 million. Each
share of Series B Preferred Stock is convertible at any time at the
option of the holder thereof, into that number of shares of Common
Stock which is equal to $100 divided by 80% of the average closing
bid price for a share of Common Stock as quoted on the OTC Electronic
Bulletin Board for the five trading days preceding the conversion
date, provided that such conversion price shall not exceed $6.00 per
share of Common Stock. The Series B Preferred Stock pays a quarterly
dividend of 8% per annum, and is payable, at the Company's option, in
cash or by the issuance of shares
13
<PAGE>
of Common Stock. The number of shares of Common Stock to be issued as
a dividend, if applicable, shall be determined based on the average
closing bid price for a share of Common Stock as quoted on the OTC
Electronic Bulletin Board for the five trading days preceding the
last day of the calendar quarter for the applicable dividend period.
In connection with the private placement, the Company issued 8,000
and 32,000 Redeemable Warrants to Explorer Fund Management, L.L.C. on
February 20, 1998 and March 18, 1998, respectively. In addition, the
Company issued 100,000 Redeemable Warrants to Coleman and Company
Securities, Inc.
On January 28, 1998, the Company increased the principal amount of
the secured promissory note issued on December 3, 1997, by the
Company to Interbank Special Purpose Corporation II ("IBF"), a
wholly-owned special purpose subsidiary of Coleman and Company
Securities, Inc. (the "IBF Note"), from $262,500 to $762,500. The IBF
Note has a stated interest rate of 1.5% per month (18% per annum),
payable on a monthly basis, and matured on April 28, 1998. The IBF
Note is secured by, among other things, all inventory, equipment,
vehicles, accounts receivable, trade names and trademarks of the
Company.
In February 1998, the Company completed a private placement of units,
each unit consisting of a promissory note in the principal amount of
$25,000 bearing interest at the rate of 10% per annum and maturing 90
days from the issuance thereof, and Redeemable Warrants to purchase
25,000 shares of Common Stock, expiring on December 5, 2001, at an
exercise price of $6.00 per share. The Company has exercised its
right under the promissory notes to extend the maturity date thereof
an additional 90 days to August 24, 1998. The following persons
purchased from the Company the number of Redeemable Warrants set
forth next to each of their names:
NAME WARRANTS
---- --------
Manuel M. Arvesu, Esq., P.A. 50,000
SFG Financial Services, Inc. 50,000
Rafael Pratts, Jr. 50,000
Southlake Trading Corp. 25,000
Lynn M. Esco 25,000
On February 20, 1998, the Company issued 4,444 shares to M. W.
Houck as payment in full for broker fees outstanding.
Pursuant to a Settlement Agreement dated March 9, 1998 among the
Company, the predecessor to IPI, Beverage Canners International
Corporation ("BCIC"), and others, the Company issued 10,877 shares of
Common Stock to BCIC on March 25, 1998.
The sales of the aforementioned securities were made in reliance upon
the exemption from the registration provision of the Act afforded by
section 4(2) thereof and/or Regulation D promulgated thereunder, as
transaction by an issuer not involving a public offering. To the best
of Registrant's' knowledge, the purchasers of the securities
described above acquired them for their own account, and not with the
view to any distribution thereof to the public.
14
<PAGE>
Item 3. Defaults upon Senior Securities.
On July 9, 1997, the Company issued a senior convertible note to
Entrepreneurial Investors, Ltd., ("EIL") a Bahamas corporation and
principal stockholder of the Company, in the principal amount of $1.5
million (the "Senior Note"). The Senior Note has a stated interest
rate of 14% per annum and matured on January 15, 1998. To date, the
Company has not made any payment of principal or interest under the
Senior Note and is in default on the Senior Note. On March 16, 1998,
EIL commenced an action against the Company in the Court of Chancery
of the State of Delaware, and for New Castle County, seeking
specific performance of the Company's obligation to register shares
of Common Stock which were issued as collateral for such Note. As a
consequence of the Registration Statement filed by the Company with
the Securities and Exchange Commission having gone effective on April
6, 1998, the EIL action was rendered moot and has been voluntarily
withdrawn.
On January 28, 1998, the Company issued to Interbank Special Purpose
Corporation II ("IBF") a secured promissory note in the principal
amount of $762,500 (the "IBF Note"). The IBF Note has a stated
interest rate of 1.5% per month (18% per annum) and matured on April
28, 1998. The IBF Note is secured by, among other things, all
inventory, equipment, vehicles, accounts receivables, trade names and
trademarks of the Company (the "Collateral"). As of the date hereof,
the Company has failed to make any principal or interest payments to
IBF. On March 17, 1998, IBF declared the IBF Note to be in default
and accelerated the payments due thereunder. IBF also made a written
demand requesting that the Company immediately deliver to IBF the
Collateral. On April 27, 1998, IBF commenced an action against the
Company in the Circuit Court of the 17th Judicial Circuit of the
State of Florida, and for Broward County, seeking among other
things (i) full payment of principal and interest on the IBF Note,
(ii) an accounting of all the Collateral, (iii) a judgment
foreclosing the Collateral and a deficiency judgment if the proceeds
from the sale of the Collateral are insufficient to pay any judgment
obtained in the action and (iv) appointment of a receiver for the
Company. The Company is currently in settlement negotiations with IBF
and believes that it will reach an amicable agreement with IBF. If
the action is not settled the Company intends to vigorously defend
this suit and to file a counter-claim against IBF.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. See Exhibit 27.
(b) Reports filed on Form 8-K: None.
15
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
InnoPet Brands Corp.
Date: May 15, 1998 By: /s/ Marc Duke
-------------------------------------------
Marc Duke, Chairman of the Board and CEO
Date: May 15, 1998 By: /s/ Michael L. Winer
-------------------------------------------
Michael L. Winer, Vice President and CFO
(Chief Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET, CONSOLIDATED STATEMENT OF OPERATIONS AND
CONSOLIDATED STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE
PERIOD ENDING MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 368
<SECURITIES> 0
<RECEIVABLES> 1,126
<ALLOWANCES> 0
<INVENTORY> 1,905
<CURRENT-ASSETS> 4,060
<PP&E> 579
<DEPRECIATION> 34
<TOTAL-ASSETS> 4,836
<CURRENT-LIABILITIES> 4,923
<BONDS> 0
4,500
0
<COMMON> 56
<OTHER-SE> (4,814)
<TOTAL-LIABILITY-AND-EQUITY> 4,836
<SALES> 674
<TOTAL-REVENUES> 674
<CGS> 424
<TOTAL-COSTS> 424
<OTHER-EXPENSES> 2,531
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308
<INCOME-PRETAX> (2,589)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,589)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,589)
<EPS-PRIMARY> (.49)
<EPS-DILUTED> (.49)
</TABLE>
