<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to
--------- --------
Commission File Number 0-18438
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VITAFORT INTERNATIONAL CORPORATION
----------------------------------
Exact name of Registrant as specified in its charter)
DELAWARE 68-011059
-------- ---------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 AVENUE OF THE STARS, SUITE 480, LOS ANGELES, CA 90067
----------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(310) 552-6393
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(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 of during the preceding twelve
months ended December 31, 1995 (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 ninety days.
Yes: X No:
----- -----
The number of shares of the Registrant's Common Stock, par value $.0001
per shares outstanding on November 18, 1996 is 4,758,666.
1
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VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART 1 - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 Financial Statements:
Condensed Consolidated Balance Sheets - September 30, 1996 and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 3-4
Condensed Consolidated Statements of Operations - Three Month
Periods Ended September 30, 1996 and 1995 and Nine-Month
Periods Ended September 30, 1996 and 1995 . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows - Nine-Month
Periods Ended September 30, 1996 and 1995 . . . . . . . . . . 6
Notes to the Condensed Consolidated Financial Statements. . . 7-10
ITEM 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . 11-14
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 15
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $1,184,321 $1,316,406
Short-term Investments 41,000 0
Accounts receivable-trade, net of allowance for doubtful
accounts of $156,775 at September 30, 1996 and
$45,650 at December 31, 1995 1,189,751 39,423
Notes receivables 16,250 19,778
Other receivables 7,566 147,974
Inventory, net of valuation reserve of $249,724 at
September 30, 1996 and $0 at December 31, 1995 2,197,715 680,876
Prepaid expenses and other assets 986,666 365,117
------------ ------------
TOTAL CURRENT ASSETS 5,623,269 2,569,574
FIXED ASSETS:
Manufacturing equipment 292,521 165,931
Furniture and office equipment 119,759 82,465
Computer equipment 164,931 148,074
------------ ------------
TOTAL FIXED ASSETS 577,211 396,470
Less accumulated depreciation and amortization (223,562) (139,991)
------------ ------------
NET FIXED ASSETS 353,649 256,479
OTHER ASSETS:
Intangible and other assets 609,401 425,494
Less accumulated amortization (79,130) (67,703)
------------ ------------
NET OTHER ASSETS 530,271 357,791
------------ ------------
------------ ------------
TOTAL ASSETS $6,507,189 $3,183,844
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
------------ -----------
(UNAUDITED)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $1,374,105 $ 236,927
Accrued expenses 346,309 636,514
Notes payable 0 75,000
Notes payable - bank 896,587 0
Current maturities of long-term debt 40,460 174,364
Other current liabilities 0 150,000
------------ -----------
TOTAL CURRENT LIABILITIES 2,657,461 1,272,805
Long-term debt, exclusive of current maturities 3,947 34,548
------------ -----------
TOTAL LIABILITIES 2,661,408 1,307,353
STOCKHOLDERS'' EQUITY:
Series B, 10% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 110,000 shares authorized,
1,000 shares issued and outstanding at September 30,
1996 and 1,500 shares issued and outstanding at
December 31, 1995; aggregate liquidation preference of
$50,000 at September 30, 1996 and $75,000 at
December 31, 1995. 10 15
Series C, Convertible Preferred stock, $0.01 par value,
450 shares authorized, 50 shares issued and outstanding
as of September 30, 1996 and December 31, 1996;
aggregate liquidation preference of $1 at September 30,
1996 and December 31, 1995. 1 1
Subscribed stock, 4,106,967 shares at September 30,
1996 and 24,589,484 shares at December 31, 1995. 666,362 3,418,201
Common stock, $.0001 par value. Authorized
180,000,000 shares at September 30, 1996 and
December 31, 1995, issued and outstanding 87,334,116
and 38,223,704 shares at September 30, 1996 and
December 31, 1995, respectively. 8,834 3,823
Additional paid-in capital 19,669,948 11,382,120
Accumulated deficit (16,499,374) (12,927,664)
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TOTAL STOCKHOLDERS' EQUITY 3,845,781 1,876,491
------------ -----------
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,507,189 $ 3,183,844
------------ -----------
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</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------------- ---------------------------
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales $ 2,104,314 $ 460,152 $ 4,408,665 $ 2,056,867
Cost of sales 1,978,979 293,985 4,133,637 1,130,659
------------ ------------ ------------ ------------
Gross profit 125,335 166,167 275,028 926,208
Operating expenses:
Product development 247,061 122,729 693,389 213,530
Marketing 514,553 296,829 1,544,515 1,083,136
General and administrative 573,929 427,113 1,603,775 1,156,813
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 1,335,543 846,671 3,841,679 2,453,479
------------ ------------ ------------ ------------
Operating loss (1,210,208) (680,504) (3,566,651) (1,527,271)
Other income 2,647 14,096 11,793 19,007
Interest expenses (4,423) (46,532) (13,693) (104,039)
------------ ------------ ------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,211,984) (712,940) (3,568,551) (1,612,303)
Provision for income taxes 994 0 3,159 (558)
------------ ------------ ------------ ------------
NET LOSS $ (1,212,978) $ (712,940) $ (3,571,710) $ (1,612,861)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET LOSS PER SHARE $ (0.01) $ (0.03) $ (0.04) $ (0.06)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1995
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $(3,571,710) $(1,612,861)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 94,998 265,227
(Increase) decrease in:
Inventory (1,516,839) 63,878
Accounts receivable (1,150,328) (9,572)
Prepaids and other assets (477,613) (57,530)
Increase (decrease) in:
Accounts payable 1,325,140 (172,301)
Accrued expenses (205,668) (134,237)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (5,502,020) (1,388,992)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investment (41,000) 0
Purchase of property and equipment (180,741) (5,897)
Cash paid for acquisition (183,907) 0
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (405,648) (5,897)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,118,501 550,000
Proceeds from (Repayment of) notes payable, short-term 75,000 935,000
Proceeds from note payable - bank 896,587 0
Prepayment of long-term debt (164,505) (103,607)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,775,583 1,381,393
----------- -----------
NET INCREASE (DECREASE) IN CASH (132,085) (13,426)
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CASH AT BEGINNING OF PERIOD 1,316,406 330,977
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CASH AT END OF PERIOD $ 1,184,321 $ 317,551
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 5,632 $ 61,937
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES OF NON-CASHING INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for:
Payment for services and equipment $ 973,207 $ 976,590
----------- -----------
----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
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VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(1) GENERAL:
The unaudited condensed consolidated financial statements have been
prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring adjustments) necessary for a fair presentation for each of
the periods presented. The results of operations for interim periods are
not necessarily indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and related footnotes have been condensed and do not contain
certain information that will be included in the Company's annual
consolidated financial statements and footnotes thereto. For further
information, refer to the consolidated financial statements and related
footnotes for the year ended December 31, 1995 included in the Company's
Annual Report on Form 10-KSB.
The Company is presently engaged in formulating and marketing fat-free and
low fat foods.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) The accompanying condensed consolidated financial statements include
the accounts of the Company and its subsidiaries. All material
inter-company accounts and transactions have been eliminated. The
subsidiaries have had no operations since 1994 and will remain
inactive in the near future.
(b) Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
(c) Fixed assets are composed of manufacturing equipment, furniture,
office equipment, and computer equipment and are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated
useful life, generally five or less years.
(d) Intangible assets are composed of debt issuance costs, customer lists,
and trademarks recorded at cost. The acquisition costs associated
with trademarks are being amortized on a straight-line basis over ten
years. All other intangible assets are being amortized on a
straight-line basis over periods not exceeding five years.
(e) Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
(3) NET INCOME LOSS PER SHARE:
Net income loss per share of common stock is computed based on the weighted
average number of shares of common stock outstanding of 86,797,551 and
24,585,133 for the three-month period ended September 30, 1996 and 1995,
respectively, and 84,313,353 and 24,299,044 for the nine-month period ended
September 30, 1996 and 1995, respectively. See Note (10) for additional
information concerning a reverse stock split.
7
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VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(4) INVENTORY VALUATION/RESERVE:
Inventories are stated at the lower cost (first-in, first-out basis) or
market. Market-based valuations are based upon estimates and assumptions,
and are generally limited to slow moving product offerings. The current
valuation includes a reserve of $249,724 as an estimate of the potential
additional disposal costs to distribute such slow moving products.
(5) PREPAID EXPENSES AND OTHER ASSETS:
Prepaid expenses and other current assets as of September 30, 1996 and
December 31, 1995 consist of the following:
September 30, December 31,
1996 1996
------------- ------------
Deposits $ 124,704 $ 1,000
Advertising and promotional artwork 31,083 9,452
Legal fees 26,224 -0-
Trade promotion expenses 501,576 -0-
Insurance 30,101 90,303
Consulting (Current Portion) 250,695 264,362
Other prepaids 22,283 -0-
--------- ---------
Total Prepaid and Other Current Assets $ 986,666 $ 365,117
--------- ---------
--------- ---------
Prepaid expenses are retired when consumed (e.g., deposits) or are
amortized over the remainder of the year or their estimated economic life,
as appropriate.
(6) NOTES PAYABLE - BANK:
On August 15, 1996 the Company entered into an agreement with a lending
institution which provided for the institution to make advances to the
Company of a certain percentage of eligible trade accounts receivable, as
defined, and a certain percentage of eligible inventory, as defined,
located in the Company's warehouse in Ontario, California. The Company
issued a security interest on substantially all of its assets, including,
but not limited to, accounts receivables, inventory, and machinery and
equipment. The provisions of the agreement represent a maximum credit
facility of $4 million over a two (2) year term, with an interest rate of
the Bank of American Reference Rate ("Prime Rate") of 8.25% at September
30, 1996, plus three percent (3%). Minimum interest charges, after the
first three months of the term, are $10,000 per month. The agreement
includes certain financial covenants with respect to tangible net market
and working capital minimums. As of September 30, 1996 and November 18,
1996, the Company was in compliance with the financial covenants.
For financial statement purposes, the entire amount is classified as a
current liability.
8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(7) NOTES PAYABLE AND LONG-TERM DEBT:
Current Long-Term Total
------- --------- -----
14% note payable to shareholders, due in
monthly installments of $4,033, including
interest, through October 1997 Secured by
certain of the Company's fixed assets. $40,460 $ 3,947 $ 44,407
------- ------- --------
------- ------- --------
(8) STOCKHOLDERS' EQUITY:
During the nine-month period ended September 30, 1996, the following common
stock transactions occurred:
a. The Company completed the Private Placement transactions representing
the sales of 23,000,000 shares of common stock at prices from $.15 to
$.30 per share, with proceeds of approximately $3.9 million, net of
expenses of approximately $490,000.
b. At the time of the Private Placement transactions, the Company
converted Consultant Fees Payable and Employees' deferred wages of
approximately $43,000 at $.15 per share.
c. The Company issued 250,000 shares of common stock at prices from $.15
to $.30 per share of a total 2,000,000 shares in exchange for services
as part of the Company's public relations agreement.
d. Various investors exercised options to purchase approximately
3,465,000 shares at prices from $.15 to $.30 per share, with total
proceeds of approximately $591,000.
e. The Company sold 1,000,000 stock purchase options, with an exercise
price of $.15 per share for $120,000, for total proceeds to the
Company upon exercise of $270,000, or $.27 per share ($0.12 purchase
cost plus $.15 exercise price). The purchase proceeds were used to
purchase production assets.
f. The Company converted consulting fees payable and other accrued
expenses of approximately $422,000 at the July 28, 1996 S-8 filing
rate of $.25 per share.
g. Simultaneous with the S-8 filing, certain warrants and options were
exercised at prices from $.15 to $.30 per share, with proceeds of
about $24,000.
(9) GOING CONCERN:
The Company's condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. At
September 30, 1996, current assets exceed current liabilities by
$2,965,808; however, the Company's accumulated deficit aggregates
$16,499,374. The Company's ability to continue operations is dependent
upon its ability to reach a satisfactory level of profitability. The
accompanying condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(10) SUBSEQUENT EVENT:
Pursuant to the Board of Directors' resolution, the Company effected a 20
to 1 reverse common stock split for common shareholders of record. The
effect is to reverse the number of shares outstanding from 87,334,116 to
approximately 4,366,706.
(11) STOCK-BASED COMPENSATION:
Effective January 1, 1996, the Company adopted Statement of Financial
Standards No. 123, "Accounting for Stock-based Compensation" (FAS 123),
which was issued in October 1995. This statement encourages, but does not
require, a fair value based method of accounting for employee stock options
or similar equity instruments. FAS 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" (APBO No. 25),
but requires pro forma disclosures of net earnings and earnings per share
as if the fair value based method of accounting had been applied. The
Company has elected to continue to measure compensation cost under APBO No.
25, "Accounting for Stock Issued to Employees," and will comply with the
pro forma disclosure requirements in its December 31, 1996 Annual Report on
Form 10-KSB. The adoption of FAS 123 had no impact on the Company's
financial position or results of operations.
(12) IMPAIRMENT OF LONG-LIVED ASSETS:
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 (FAS 121), "Accounting for the Impairment of
Long-lived Assets and for Long-lived Assets to Be Disposed Of," which was
issued in March 1995. This statement establishes accounting standards for
the recognition and measurement of impairment of long-lived assets, certain
identifiable intangibles and goodwill either to be held or disposed of.
The adoption of FAS 121 did not have a material impact on the Company's
financial position or results of operations.
10
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VITAFORT INTERNATIONAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AS RESULTS OF OPERATIONS
(UNAUDITED)
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995:
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS REPORT WHICH ARE
FORWARD LOOKING INVOLVE A HIGH DEGREE OF RISKS AND UNCERTAINTIES. POTENTIAL
RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES
FROM OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, ECONOMIC CONDITIONS
IN THE COMPANY'S PRIMARY MARKETS AND OTHER UNCERTAINTIES DETAILED FROM TIME TO
TOM IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
Results of Operations:
The Company has completed the acquisition of the Auburn Farms-Registered
Trademark-/Natures Warehouse-Registered Trademark- trademarks and other
assets, sourced the products to long-term co-packers, and began
introduction of new products. The challenges remaining for the Company
include the reintroduction of Auburn Farms-Registered Trademark-/Natures
Warehouse-Registered Trademark- brands into distribution, the expansion of
other Vitafort products into the broker/distributor network, completing
long-term agreements with co-packers to insure a consistent source of
quality product to meet changes in demand by the Company's customers, and
bringing costs and margins in line with industry standards.
There are significant differences between the products sold, method of
manufacture, and operating expenses between the third quarter of 1996 and
1995. Any analysis and conclusions drawn based on comparisons of the two
periods involved in developing trends or anticipating future events would
be highly subjective and risky.
Subject to the information contained in the proceeding paragraph, net sales
for the quarter ended September 30, 1996 were $2,104,314, generating a
gross profit margin of $125,335 or 6.0% of net sales. This represents an
increase in net sales of $640,958 or 43.8% from the second quarter of 1996,
an increase of $1,644,162 or 357.3% compared to the third quarter of 1995.
The net (loss) for the three months ended September 30, 1995 was $1,212,978
compared to $1,471,070 for the second quarter of 1996, and a $712,940 loss
for the comparable three-month period ended September 30, 1995. The loss
continues to reflect the ongoing commitment to increase the market and the
consumer awareness of our products, coupled with the increase in legal fees
and related costs associated with the arbitration action resulting from the
contract termination with the major co-packer, the Keebler Company.
Net Sales:
For the three months ended September 30, 1996, net sales were $2,104,314
compared to $1,463,356 for the three-month period ended June 30, and
$840,995 for the three-month period ended March 31 both of the current
year. Auburn Farms-Registered Trademark-/Natures Warehouse-Registered
Trademark- sales were $0.00, $268,864, and $661,436 for the respective
quarters of 1996 ending March 31, June 30, and September 30, representing
0%, 18.4%, and 31.4% of total net sales, respectively. For the three
months ended September 30, 1995, there were no Auburn Farms-Registered
Trademark-/Natures Warehouse-Registered Trademark- net sales. The meatless
cold cuts represented
11
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VITAFORT INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AS RESULTS OF OPERATIONS
(UNAUDITED)
approximately 3.3% of sales for the third quarter of 1995 compared to 1.1%
for the first quarter of 1996 and less than 1% of total net sales for both
the second or third quarters of this year.
Gross Profit:
During the third quarter gross profit was $125,335 or 6.0% of net sales
compared to 6.5% for the previous six months ended June 30, 1996. The
gross profit margin is below Management's expectations and is due
primarily to the additional cost incurred in connection with the
co-packer contract termination. The loss of the co-packer for the
major products delayed the introduction of the newly packaged
products, the new costs for which had already been committed,
and further delayed the full introduction and production of the
Auburn Farms-Registered Trademark-/Natures Warehouse-Registered Trademark-
product-line. In addition, certain additional costs, such as repackaging,
returned freight, storage, and certain marketing and sales costs, were
incurred as a direct result, in management's opinion, of the
cancellation by the major co-packer and the product that was returned
from customers due, in Management's opinion, to improper manufacturing by
the co-packer. Management believes that this condition has caused
significant costs to be incurred by the Company beyond those of normal
business practice. Although the cancellation agreement contains a
provision for arbitration of termination costs, and management believes it
will recover some amount of the costs incurred, these additional costs are
being expensed as they are incurred.
Operating Expenses:
Total operating expenses were $3,841,679 and $2,453,479 for the nine-month
periods ended September 30, 1996 and 1995, respectively, an increase of
$1,388,200 or 56.6%. Sales for the comparable periods increased by
$2,351,798 or 114.3%. The overall increases in product development and
marketing reflects both the increase in sales activity and the additional
incurred costs due to the production issue mentioned previously. For the
three months ended September 30, total expenses were $1,335,543 for 1996
and $846,671 for 1995, an increase of $488,872 or 57.7%, due primarily to
the increase in new product development for Auburn Farms, increases in
sales staff and commissions on sales, and increase in professional fees and
other expenses related to the manufacturing problems.
PRODUCT DEVELOPMENT: The Company continues to expend funds to insure
quality supplies of product by locating alternative sources of
manufacturing capability. In addition, there continues to be expenditures
related to new products and improvements to existing products. The problem
related to the contract termination and returned products of the co-packer
significantly exacerbated expenditures. The increase of $124,332 in
product development for the three months ended September 30, 1996 over the
previous year is the result of approximately $67,000 in additional
expenditures for new and enhanced product development and $76,000 in
travel, professional services, and other expenses directly related to the
effort invested by the Company in determining the reason for the
manufacturing process problems with the major co-packers and the
qualification of new co-packers. For the nine-month period, the $479,859
increase in 1996 over 1995 is represented by about $200,000 in new and
enhanced product development and test markets, plus another $225,000 or so
in additional expenses incurred in the resolution of the production issues
related to one of the Company's co-packers, plus locating acceptable other
co-packers.
12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AS RESULTS OF OPERATIONS
(UNAUDITED)
SALES AND MARKETING: As a percent of sales, sales and marketing expenses
declined from 64.5% for the three months ended September 30, 1995 to 24.4%
for the same period in 1996. For the nine-month periods ended September
30, sales and marketing expense as a percent of sales declined from 52.7%
in 1995 to 35.0% in 1996. The increase of $217,724 for the three months
of 1996 over the three months ended September 30, 1995 is due to
approximately $200,000 in costs associated with sales staff and commission
increases attributable to the increase in sales. For the year-to-date
periods, the increase of $461,379 in 1996 over 1995 is primarily due to the
extended scope of sales activity in trade shows of about $60,000, plus an
estimated $450,000 in costs related to staffing and commission increase due
to both the increase in net sales and the sales effort involved in dealing
with the product problem discussed previously and its negative impact on
our distributors and customers.
GENERAL AND ADMINISTRATIVE: General and administrative expense decreased
as a percent of sales for the three months ended September 30, from 92.8%
in 1995 to 27.3% in 1996. For the comparable nine-month period,the percent
decline was from 56.2% in 1995 to 36.4% in 1996. Approximately $146,000 of
the increase for the 1996 quarter ended September 30, over the same 1995
period is represented by the increase in legal and other professional fees
related to the open legal issues, including the contract termination with
the co-packer, plus the effort expended to continue protecting the trade
names and trademarks on the Company's brands. For the nine-month period
ended September 30, the increase of $446,962 is due to the increase in
provision for bad debts of $142,850, the increase in legal and professional
fees of around $200,000, both of which are primarily the result of the
product problems and the contract termination with the major co-packer, and
approximately $132,000 related to staff additions and the increase in
general business activity.
Interest Expense:
The decline in interest expense results from the conversion and/or
retirement of the indebtedness of the Company and the termination of the
high interest costs related thereto when compared to current market
conditions.
Liquidity and Capital Resources:
Nine Months Ended
September 30,
1996 1995
----------- -----------
Net Cash Used for Operations $(5,502,000) $(1,388,992)
Net Cash Used for Investing Activities (405,648) (5,897)
Net Cash Provided by Financing Activities 5,775,583 1,381,393
Working Capital Surplus (deficit) 2,965,808 1,296,769
Trends:
The Company continued to increase inventory during the three months ended
September30,1996 due to returned products and reduced sales of the
Company's two major products. The increase in accounts receivables is from
the increased sales level
13
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AS RESULTS OF OPERATIONS
(UNAUDITED)
during the period. Operating losses are eroding the overall liquidity of
the Company and the completion of an asset-based revolving loan alleviates
the near term potential liquidity issues. The Company continues to take a
cash conservation posture by delaying and/or postponing any capital
expenditures not directly related to production, exchanging services for
equity from several providers, and conferred with suppliers regarding
payment schedules for past term amounts.
Continued equity financing and the utilization of the bank line continue to
provide the means to cover the continuing operating deficits. Management
believes these deficits will begin to decline significantly in the fourth
quarter of 1996 if the sales level achieved in the recent quarter ended
September 30, 1996 can be maintained or increased. Although the Company is
not considered a going concern at its current level of profitability,
Management believes a level of profitability will be achieved to allow the
Company to become a going concern from a financial standpoint. This belief
is not, however, without risk on the ability of the Company to achieve the
necessary sales levels and cost efficiencies necessary to become
profitable.
14
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VITAFORT INTERNATIONAL CORPORATION
----------------------------------
(Company)
/s/ Mark Beychok
----------------------------------
Mark Beychok
Chief Executive Officer
Date: November 18, 1996
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-01-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,184,321
<SECURITIES> 41,000
<RECEIVABLES> 1,370,342
<ALLOWANCES> 156,775
<INVENTORY> 2,197,715
<CURRENT-ASSETS> 5,623,629
<PP&E> 577,211
<DEPRECIATION> 223,562
<TOTAL-ASSETS> 6,507,189
<CURRENT-LIABILITIES> 2,657,461
<BONDS> 0
0
11
<COMMON> 8,834
<OTHER-SE> 3,836,936
<TOTAL-LIABILITY-AND-EQUITY> 6,507,189
<SALES> 2,104,314
<TOTAL-REVENUES> 2,104,314
<CGS> 1,978,979
<TOTAL-COSTS> 1,335,543
<OTHER-EXPENSES> 1,776
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,423
<INCOME-PRETAX> (1,211,984)
<INCOME-TAX> 994
<INCOME-CONTINUING> (1,212,978)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,212,978)
<EPS-PRIMARY> 0
<EPS-DILUTED> (.01)
</TABLE>
