<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 JUNE 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
-------
VITAFORT INTERNATIONAL CORPORATION
----------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 68-0110509
-------- ----------
(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
---------------------------------------------------
(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 August 2, 1996 was 86,848,952.
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART 1 - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
ITEM 1 Financial Statements:
Condensed Consolidated Balance Sheets - June 30, 1996
and December 31, 1995....................................... 3-4
Condensed Consolidated Statements of Operations - Three
Month Periods Ended June 30, 1996 and 1995 and Six-Month
Periods Ended June 30, 1996 and 1995........................ 5
Condensed Consolidated Statements of Cash Flows - Six
Month Periods Ended June 30, 1996 and 1995.................. 6
Notes to the Condensed Consolidated Financial Statements.... 7-9
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10-13
Signatures............................................. 14
Page 2
<PAGE>
ITEM I. FINANCIAL STATEMENTS
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $1,405,976 $1,316,406
Time Certificates of Deposit 291,000 0
Accounts receivable-trade, net allowance for doubtful
accounts of $193,500 at June 30, 1996 and $45,650 at
December 31, 1995 922,381 39,423
Notes receivable 12,000 19,778
Other receivables 4,842 147,974
Inventory, net of valuation reserve of $86,000 at
June 30, 1996 and $0 at December 31, 1995 2,022,532 680,876
Prepaid expenses and other assets 792,551 365,117
----------- -----------
TOTAL CURRENT ASSETS 5,451,282 2,569,574
FIXED ASSETS:
Manufacturing equipment 292,009 165,931
Furniture and office equipment 119,759 82,465
Computer equipment 164,931 148,074
----------- ----------
TOTAL FIXED ASSETS 576,699 396,470
Less accumulated depreciation and amortization (196,173) (139,991)
----------- ----------
NET FIXED ASSETS 380,526 256,479
OTHER ASSETS:
Intangible and other assets 591,449 425,494
Less accumulated amortization (74,564) (67,703)
----------- ----------
NET OTHER ASSETS 516,885 357,791
----------- ----------
----------- ----------
TOTAL ASSETS $6,348,692 $3,183,844
----------- ----------
----------- ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable - trade $ 1,055,845 $ 236,927
Accrued expenses 814,475 636,514
Notes payable 27,543 75,000
Current maturities of long-term debt 50,138 174,364
Other current liabilities 0 150,000
------------ ------------
TOTAL CURRENT LIABILITIES 1,948,001 1,272,805
Long-term debt, exclusive of current maturities 11,316 34,548
------------ ------------
TOTAL LIABILITIES 1,959,317 1,307,353
STOCKHOLDERS' EQUITY:
Series B, 10% Cumulative Convertible Preferred Stock $0.01
par value, cumulative, 110,000 shares authorized, 1,500
shares issued and outstanding at June 30, 1996 and December
31, 1995; aggregate liquidation preference of $75,000 at
June 30, 1996 and December 31, 1995. 15 15
Series C, Convertible Preferred Stock, $0.041 par value, 450
shares authorized, 50 shares issued and outstanding as of
June 30, 1996 and December 31, 1996; aggregate liquidation
preference of $1 at June 30, 1996 and December 31, 1995. 1 1
Subscribed stock, 3,337,131 shares at June 30, 1996 and
24,589,484 shares at December 31, 1995. 684,720 3,418,196
Notes Receivable - Stock (36,000) 0
Common stock, $.0001 par value. Authorized 180,000,000 shares
at June 30, 1996 and December 31, 1995, issued and
outstanding 85,505,822 and 38,223,704 shares at
June 30, 1996 and December 31, 1995, respectively. 8,550 3,823
Additional paid-in capital 19,018,484 11,382,120
Accumulated deficit (15,286,395) (12,927,664)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 4,389,375 1,876,491
------------ ------------
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,348,692 $ 3,183,844
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTHS ENDED JUNE 30, SIX-MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1996 1995 1996 1995
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales $ 1,463,356 $ 757,678 $ 2,304,351 $1,596,715
Cost of sales 1,446,345 429,070 2,154,658 836,674
----------- --------- ----------- ----------
Gross profit 17,011 328,608 149,693 760,041
Operating expenses:
Product development 288,334 57,260 446,328 90,801
Marketing 480,204 462,448 1,029,962 786,307
General and administrative 707,165 399,505 1,029,846 729,700
----------- --------- ----------- ----------
TOTAL OPERATING EXPENSES 1,475,703 919,213 2,506,136 1,606,808
----------- --------- ----------- ----------
Operating loss (1,458,692) (590,605) (2,356,443) (846,767)
Other income/expense (7,949) 2,858 9,146 4,911
Interest expenses (3,718) (47,918) (9,270) (57,507)
----------- --------- ----------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES (1,470,359) (635,665) (2,356,567) (899,363)
Income taxes 711 0 2,165 0
----------- --------- ----------- ----------
NET LOSS $(1,471,070) $(635,665) $(2,358,732) $ (899,363)
----------- --------- ----------- ----------
----------- --------- ----------- ----------
NET LOSS PER SHARE $ (0.02) $ (0.03) $ (0.03) $ (0.04)
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTHS ENDED JUNE 30,
------------------------------
1996 1995
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net loss $(2,333,632) $(899,362)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 63,044 57,545
(Increase) decrease in:
Inventory (1,341,656) 112,626
Accounts receivable (882,958) (21,012)
Prepaids and other assets (442,479) (229,315)
Increase (decrease) in:
Accounts payable 818,918 (191,373)
Accrued expenses 195,481 353,273
----------- ---------
NET CASH USED IN OPERATING ACTIVITIES (3,923,282) (817,618)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES-
----------- ---------
Purchase of time certificates of deposit (291,000) 0
Purchase of property and equipment (180,229) (4,567)
----------- ---------
NET CASH USED IN INVESTING ACTIVITIES (471,229) (4,567)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,678,996 41
Proceeds from (repayment of) notes payable, short term (47,457) 575,000
Repayment of long term debt (147,458) (74,143)
----------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 4,484,081 500,898
----------- ---------
NET INCREASE(DECREASE) IN CASH 89,570 (321,287)
----------- ---------
CASH AT BEGINNING OF PERIOD 1,316,406 330,977
----------- ---------
CASH AT END OF PERIOD $ 1,405,976 $ 9,690
----------- ---------
----------- ---------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 8,061 $ 57,507
----------- ---------
----------- ---------
Cash paid during the period for taxes 2,165 0
----------- ---------
----------- ---------
SUPPLEMENTAL DISCLOSURES OF NON CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of common stock for:
Payment for services $ 430,708 $ 134,940
Payment for equipment 120,000 0
----------- ---------
TOTAL NON-CASH TRANSACTIONS $ 550,708 $ 134,940
----------- ---------
----------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page 6
<PAGE>
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 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,
acquisition costs of Auburn Farms and Nature's Warehouse trademark and
prepaid professional service contracts and are recorded at cost. The
acquisition costs associated with Auburn Farms 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. All intangible assets associated with Future Foods (a
subsidiary) were written-off during 1994.
(e) For the purpose of cash flow, the Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
(f) Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
Page 7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(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 83,071,254
and 24,155,999 for the six-month period ended June 30, 1996 and 1995,
respectively and 87,271,106 and 24,249,197 for the three month period ended
June 30, 1996 and 1995, respectively.
(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 $86,000 as an estimate of the potential
additional marketing costs needed to aggressively distribute such slow
moving products.
(5) PREPAID EXPENSES & OTHER ASSETS:
Prepaid expenses and other current assets as of June 30, 1996 and December
31, 1995 consist of the following
JUNE 30, DECEMBER 31,
DESCRIPTION OF PREPAID 1996 1995
- ---------------------------------------------- --------- --------------
Deposits $ 12,000 $ 1,000
Artwork 39,379 9,452
Packaging Costs 5,998
Trade Promotion Expenses 440,782
Insurance 45,152 90,303
Consulting (Current Portion) 249,140 264,362
Other Expenses 100
----------
Total Prepaid and Other Current Assets $792,551 $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 AND LONG TERM DEBT:
<TABLE>
<CAPTION>
CURRENT LONG TERM TOTAL
--------- --------- -------
<S> <C> <C> <C>
10% note payable, due in monthly installments of
$3,125 plus interest through July 1996.
Secured by tangible assets. $ 6,250 ---- 6,250
14% note payable, due in monthly installments of
$4,033, including interest, through October
1997. Secured by certain of the Company's
fixed assets 43,888 11,316 55,204
8% note payable, due in monthly installments of
$9,304 including interest, commencing January 1,
1996 27,543 --- 27,543
------- -------- ------
$77,681 11,316 88,997
------- -------- ------
------- ---------- ------
</TABLE>
Page 8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(7) STOCKHOLDERS EQUITY:
During the six-month period ended June 30, 1996, the following common
stock transactions occurred:
a) The Company completed the Private Placement transactions
representing the sales of 23,000,000 shares 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 Employee's deferred wages of
approximately $43,000 at the Private Placement rate of $.15 per
share.
c) The Company issued 250,000 shares 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 cents per share for $120,000, for total proceeds to the
Company upon exercise of $270,000, or 27 cents per share (12 cents
purchase cost plus 15 cents exercise price). The purchase proceeds
were used to acquire production assets.
(8) GOING CONCERN:
The Company's condensed consolidated financial statements have been
prepared assuming that the Company will continue as a going concern. At
June 30, 1996, current assets exceed current liabilities by $3,645,908,
however the Company's accumulated deficit aggregates $15,143,767. 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) SUBSEQUENT EVENTS:
On August 1, 1996, after trial, the Los Angeles Superior Court entered
judgment in the matter of S.D. Clow vs. Vitafort International
Corporation, in the amount of $18,061.51, plus interest at 10% per annum
from August 23, 1991. Futher, the Court ruled that Vitafort was the
prevailing party, entitling it to recover certain statutory costs as an
offset against the award to Clow.
On August 12, 1996, the Keebler Company, a manufacturer of one of the
Company's product lines (Caketts-TM-) gave the Company 30 days' notice
of termination of the Agreement between the parties and has indicated
that it has discontinued further production of the product. The
Agreement provides for arbitration of disputes, and the Company has
filed a demand for arbitration seeking compensatory damages according
to proof, punitive damages, plus attorneys fees and costs. The Company
believes it has sufficient evidence to prove that Keebler breached the
Agreement in that it did not manufacture product which complied with
the Company's requirements as set forth in the Agreement. Management
is working with alternative manufacturers and affected wholesale
customers to minimize the disruption in the ability of the Company to
meet customer demand, but no assurance is given that these
developments will not have a material adverse impact upon the Company.
Page 9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the
Private Securities Litigation Reform Act 1995:
Except for historical facts, all matters discussed in this report which
are forward looking involve 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 time in the Company's Securities and Exchange
Commission filings.
Results of operations:
The Company's focus for the second three months of 1996 centered around
three basic challenges: 1) Completing the acquisition of the Auburn
Farms-Registered Trademark-/Natures Warehouse-Registered
Trademark-trademarks and trade dress, and reintroducing them to full
distribution, including developing products and sourcing of interim
and long term co-packers; 2) Continuing the expansion of our
broker-distribution network for our products, and pursuing the
authorization of our products by the major grocers throughout the
United States; and 3) Reviewing and expanding our contract
manufacturer ("co-packer") relationships to improve the quality,
consistency, and capacity of our production.
The operations, in terms of products, scope, and distribution are very
different than they were in the 2nd quarter of 1995, and comparison of
net sales, gross profits, and operating expenses during the two periods
should be considered carefully before deducing any trends or
anticipating future results.
Our operational results reflect the focus defined above. Specifically,
we achieved net sales revenue of $1,463,000 in the quarter from
sales & distribution of our products, an increase of $622,000/74%
over the first quarter of 1996, and an increase of $706,000/93%
over the same quarter of 1995. Net income was a loss of $1,471,000
(compared to a loss of $636,000 for the same period last year), and
this is a direct reflection of the Company's focus, and related costs of
that focus.
Second Quarter results were also negatively impacted by production
problems which developed at Keebler Company, then principal co-packer
of Caketts-TM- (See Note 9, SUBSEQUENT EVENTS).
Net sales:
The net sales for the three months ended June 30, 1996 were
$1,463,000, compared to the prior year 2nd quarter net sales of
$758,000, and first quarter 1996 net sales of $841,000. Auburn
Farms-Registered Trademark-/Natures Warehouse-Registered
Trademark- brand sales were $269,000 for the quarter ended June
30, 1996, or 18% of net sales. Sales for the quarter were somewhat
constrained early in the quarter as we struggled to match
production schedules of its co-packers to the flavor and delivery
requirements of its customers for Vitafort brands (Caketts-TM-,
Fudgets-Registered Trademark-, Juliettes-TM-), and similar
challenges were faced in the first months of production, sales,
and distribution of Auburn Farms-Registered Trademark-/Natures
Warehouse-Registered Trademark- branded products.
Page 10
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
The Company's performance in this area continues to improve over
time, as the Company address and refine its sales, production, and
distribution systems and methods. These efforts appeared to bear
fruit in the month of June 1996, when net sales were nearly
$1 million dollars.
Gross profit:
The gross profit for the three months ended June 30, 1996 was
$17,000, or 1.2% of sales. Gross profit was depressed during
the first two quarters of 1996 as a result of the usual costs
associated with bringing new production up to full efficiency and
quality consistency. In addition, new package production startup
costs (for shipper displays & new products) are generally expensed
in the period incurred, and this further depressed the gross margin.
These challenges continued into the 2nd quarter of 1996 as the
Company commenced the production of the full Auburn Farms-Registered
Trademark-/Natures Warehouse-Registered Trademark- product line, and
as we continued to address the improvement in the quality and
consistency of product produced by contract manufacturers
("co-packers").
Management believes these start-up and expense timing issues
totaled approximately $395,000 in the second quarter, and
$522,000 year to date, or 27% and 23% of net sales dollars,
respectively. The resultant gross margin (adjusted for these
effects) was approximately $412,000 (28% of net sales) for the
quarter and $672,000 (30% of net sales) year to date. Management
further believes these margins will continue to improve as
economies derived from product developments implemented in the
first six months are realized, as well as from growing sales
volumes. In 1995 the meatless cold cuts were less than 5% of net
sales and the Fudgets-Registered Trademark- were the balance. Year
to date in 1996, Fudgets-Registered Trademark- represented 40% of
sales, Caketts-TM- were 45% of sales, Juliettes-TM- 2%, Auburn
Farms-Registered Trademark-/Natures Warehouse-Registered
Trademark- 12%, and meatless coldcuts were 1% of sales.
Operating expenses:
Operating expenses for the six-month period ended June 30, 1996 were
approximately $2,506,000, compared to approximately $1,607,000
for the same period in 1995, an increase of approximately $899,000
or 56% due primarily to a 44% growth in sales between the two
periods, exacerbated by the costs of establishing the production of
the Company's products at new co-packers, and expanding the
distribution of those products in new and existing retail markets.
PRODUCT DEVELOPMENT: Establishing and refining of production to
maximize the quality and consistency of new products, requires
an up front investment in product development staff time and
travel. During the second quarter, in addition to the
challenges of initiating production of new products, the
Company continued its quest for secondary sources of
production capacity to reduce the reliance on individual
manufacturers, to ensure alternate source of supply for
contingencies, and to increase its ability to respond to
market demands. A result of this focused effort was $288,000
dollars in product development costs in the
Page 11
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
quarter and $446,000 year to date, an increase of $231,000
over the same quarter last year, and a year to date increase
of $356,000 over the same period last year. For the current
product mix, Management anticipates that this level of Product
Development expense should fall as a percentage of sales as
sales grow, but fall only slightly on a nominal basis in future
periods as the Company continually improves its products and
introduces new products to the market.
SALES & MARKETING: The Company used both its improved accounting
systems and expanded sales team to enhance its understanding
of trade promotion costs and economics, using this understanding
to improve our effective spending and matching of trade promotion
costs to the resultant sales. This effort allowed the Company to
enjoy a $708,000/44% increase in net sales in the first half of
1996 compared with the same period in 1995, with only a
$246,000/31% increase in sales and marketing expenses between the
same periods, for a total expense of $1,030,000 for the
six months ended June 30, 1996.
GENERAL & ADMINISTRATIVE: General & Administrative expenses of
$1,030,000 for the six months ended June 30, 1996 were $300,000
greater than the same period in the previous year. This
increased cost is primarily related to the expansion of the
Allowance for Doubtful Accounts to reflect the significant sales
in the last weeks of the second quarter, the expenditure of
legal fees to pursue resolution of the open legal issues created
and/or carried forward from previous years (SEE NOTE 9/SUBSEQUENT
EVENTS ON PAGE 9), and the expenditure of legal fees to protect
the full value of the Auburn Farms-Registered Trademark-/Natures
Warehouse-Registered Trademark- trademark/trade dress
acquisition.
Interest expense:
Interest expenses were $3,700 for the quarter ended June 30, 1996,
and $9,300 for the six months then ended, compared to $48,000 and
$58,000 for the comparable periods in 1995. This is directly the
result of the retirement, and/or conversion directly into equity, of
most significant interest bearing debt between November 1995 and
January 1996, concurrent with the Private Placement transactions.
Liquidity and capital resources:
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995
------------- -------------
Net cash used for operations ($3,923,282) ($817,558)
Net cash used for investing activities (471,229) (4,567)
Net cash provided by financing activities 4,484,081 500,898
Working capital surplus (deficit) 3,503,281 (1,217,081)
Page 12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(UNAUDITED)
Trends:
The Company's net cash used in operations for the six-month period
ended June 30, 1996 was significantly higher than expected in
typical periods (as compared to sales) due to the start-up of
marketing and production of new products. This adverse relationship
is expected to improve over time.
The Company continues to use strategic capital exchanges to reduce
its cash needs, as successfully demonstrated in the last three
quarters of 1995. This included exchanging services for equity (or
equity options) with several service providers, and converting
deferred executive salaries into equity, saving $249,000 in cash
assets in the first half of 1996. The Company intends to enter
into similar transactions in the future where practicable. While
saving valuable cash resources, these transactions have some dilutive
effect to existing shareholders.
Several key management members continue to defer $8,300 in wages and
benefits per month, in the interest of conserving current working
capital. All earned deferrals through January 1996 were converted into
equity at the private placement rates. The remaining deferral balances
will be retired during the third quarter via payment and/or applying
the deferral balances against the exercise of existing options.
The Company continues to limit significant capital expenditures to
machinery and equipment directly related to the pursuit of
profitability. The Company intends to continue the ongoing investment
into research and development projects as the Company is positioning
itself to formulate, market and distribute additional and improved
products.
Management believes the Company must become profitable and continue to
access outside capital resources in order to be a going concern. As
disclosed in the December, 1995 "Notes to Consolidated Financial
Statements" included in Form 10-KSB (Note 8), the Company began Private
Placement transactions in September of 1995, and completed the process
on January 29, 1996. This has allowed the Company to pursue and expand
distribution on existing and new products, purchase the inventory
necessary products, and initiate the launch of several new products.
THIS SPACE LEFT INTENTIONALLY BLANK
Page 13
<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: August 19, 1996
Page 14
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