<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, 1997
[ ] 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
share outstanding on August 15, 1997 is 6,285,427.
1
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
______________________________________________________________________________
<TABLE>
<S> <C> <C>
ITEM 1. Consolidated Financial Statements:
Balance Sheets - June 30, 1997 and
December 31, 1996........................................ 3
Statements of Operations --
Three Month Periods Ended June 30, 1997 and 1996 and
Six Month Periods Ended June 30, 1997 and 1996........... 5
Statement of Stockholders' Deficit --
Six Month Period Ended June 30, 1997..................... 6
Statements of Cash Flows --
Six Month Periods Ended June 30, 1997 and 1996........... 7
Notes to the Financial Statements........................ 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 14
PART II -- OTHER INFORMATION
______________________________________________________________________________
ITEM 1. Legal Proceedings........................................ 19
ITEM 4. Submission of Matters of a Vote of Security Holders..... 20
ITEM 6. Exhibits and Reports on Form 8-K......................... 20
Signatures............................................... 21
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------- -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 232,663 $ 188,867
Accounts receivable-trade, net of allowance for doubtful
accounts of $67,743 at June 30, 1997 and
$79,994 at December 31, 1996 384,629 430,789
Notes receivables 55,000 56,000
Other receivables 11,367 4,464
Inventory, net 240,744 361,196
Prepaid expenses and other assets 210,963 271,731
---------- ----------
Total Current Assets 1,135,366 1,313,047
Fixed Assets:
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,538 105,160
Computer equipment 173,294 173,294
---------- ----------
Total Fixed Assets 569,744 569,366
Less accumulated depreciation and amortization (288,528) (231,592)
---------- ----------
Net Fixed Assets 281,216 337,774
Other Assets:
Intangible and other assets 411,254 481,254
Less accumulated amortization (51,763) (95,561)
---------- ----------
Net Other Assets 359,491 385,693
========== ==========
Total Assets $1,776,073 $2,036,514
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES
-----------
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable $ 624,839 $ 440,022
Accounts payable - trade 1,533,352 921,919
Accrued expenses 660,276 789,212
Other current liabilities 37,859 37,859
------------ ------------
Total Current Liabilities 2,856,326 2,189,012
Stockholders' Deficit:
Series A, 6% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 750 shares authorized,
750 shares issued and outstanding at June 30, 1997
and none at December 31, 1996 8 0
Series B, 10% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 110,000 shares
authorized 1,000 shares issued and outstanding
at June 30, 1997 and December 31, 1996; aggregate
liquidation preference of $50,000 at June 30, 1997
and December 31, 1996 10 10
Series C, Convertible Preferred stock, $0.01 par value,
450 shares authorized, 50 shares issued and
outstanding as of June 30, 1997 and December 31,
1996; aggregate liquidation preference of
$1 at June 30, 1997 and December 31, 1996 1 1
Subscribed Common stock, 76,906 shares at June 30,
1997 and 303,406 shares at December 31, 1996 76,905 341,331
Common stock, $.0001 par value. Authorized
9,000,000 shares at June 30, 1997 and 9,000,000 at
December 31, 1996, issued and outstanding
and 5,957,053 shares at June 30, 1997 and
4,830,259 at December 31, 1996, respectively. 9,006 8,886
Additional paid-in capital 22,354,495 20,547,753
Accumulated deficit (23,520,678) (21,050,479)
------------ ------------
Total Stockholders' Deficit (1,080,253) (152,498)
============ ============
Total Liabilities and
Stockholders' Deficit $ 1,776,073 $ 2,036,514
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three-Months Ended Six Months Ended
June 30, June 30,
------------------------------- ---------------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 402,788 $ 1,463,356 $ 1,175,107 $ 2,304,351
Cost of sales 334,340 1,367,082 882,628 2,075,394
----------- ----------- ----------- -----------
Gross profit 68,448 96,274 292,479 228,957
Operating expenses:
Product development 16,781 288,334 56,131 446,328
Marketing 359,430 559,468 739,226 1,109,226
General and administrative 1,304,656 707,165 1,890,887 1,029,846
----------- ----------- ----------- -----------
Total operating expenses 1,680,867 1,554,967 2,686,244 2,585,400
----------- ----------- ----------- -----------
Operating loss (1,612,419) (1,458,693) (2,393,765) (2,356,443)
Other income (expense) 16,191 ( 8,059) 23,119 9,035
Interest expense (58,942) (3,718) (99,553) (9,270)
----------- ----------- ----------- -----------
Loss before provision for income taxes (1,655,170) (1,470,470) (2,470,199) (2,356,678)
Provision for income taxes 0 600 0 2,054
----------- ----------- ----------- -----------
Net loss $(1,655,170) $(1,471,070) $(2,470,199) $(2,358,732)
=========== =========== =========== ===========
Net loss per share $ (0.29) $ (0.34) $ (0.46) $ (0.57)
=========== =========== =========== ===========
Weighted Average Shares
of Common Stock Outstanding 5,731,586 4,363,555 5,390,957 4,153,563
=========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Preferred Preferred Preferred Subscribed
Stock Stock Stock Stock
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ - $ 10 $ 1 $ 341,331
Common stock subscribed in private
placement, net of commissions 450,000
Common stock - consulting (264,426)
Exercise of stock options 183,100
Common stock issued as settlement
of contract dispute
Common stock - consulting
Net loss
----------- ----------- ----------- -----------
Balance, March 31, 1997 $ - $ 10 $ 1 $ 710,005
=========== =========== =========== ===========
Common stock issued in connection
with private placement, net of
commissions and offerings (450,000)
Exercise of stock options (183,100)
Exercise of stock options
Common stock - consulting
Series A Preferred issued in connection
with private placement, net of
commissions and offerings 8
Net loss
----------- ----------- ----------- -----------
Balance, June 30, 1997 $ 8 $ 10 $ 1 $ 76,905
=========== =========== =========== ===========
<CAPTION>
Common Stock Additional
---------------------------- Paid In Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 4,830,259 $ 8,886 $20,547,753 $(21,050,479) $ (152,498)
Common stock subscribed in private
placement, net of commissions 450,000
Common stock - consulting 235,000 23 226,477 (37,926)
Exercise of stock options 183,100
Common stock issued as settlement
of contract dispute 70,000 7 78,743 78,750
Common stock - consulting 20,000 2 22,498 22,500
Net loss (815,029) (815,029)
--------- ----------- ----------- ------------ -----------
Balance, March 31, 1997 5,155,259 $ 8,918 $20,875,471 $(21,865,508) $ (271,103)
========= =========== =========== ============ ===========
Common stock issued in connection
with private placement, net of
commissions and offerings 500,000 50 449,950 -
Exercise of stock options 183,100 18 183,082 -
Exercise of stock options 185,600 19 162,381 162,400
Common stock - consulting 10,000 1 10,619 10,620
Series A Preferred issued in connection
with private placement, net of
commissions and offerings 672,992 673,000
Net loss (1,655,170) (1,655,170)
--------- ----------- ----------- ------------ -----------
Balance, June 30, 1997 6,033,959 $ 9,006 $22,354,495 $(23,520,678) $(1,080,253)
========= =========== =========== ============ ===========
</TABLE>
6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1997 1996
(unaudited)
<S> <C> <C>
Increase (Decrease) In Cash:
Cash flows from operations:
Net loss $(2,470,199) $(2,358,732)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 83,138 63,044
(Increase) decrease in:
Inventory 120,452 (1,341,656)
Accounts receivable 46,160 (882,958)
Prepaids and other assets 54,865 (442,479)
Increase (decrease) in:
Accounts payable 611,433 818,918
Accrued expenses (128,936) 27,961
----------- -----------
Net cash used in operating activities (1,683,087) (4,115,902)
----------- -----------
Cash flows from investing activities:
Purchase of short-term investment 0 (291,000)
Purchase of property and equipment (378) (180,229)
----------- -----------
Net cash used in investing activities (378) (471,229)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock, net 1,542,444 4,871,616
Proceeds from (repayment of) notes payable, short-term 300,000 (47,457)
Repayment of note payable - bank (115,183) 0
Prepayment of long-term debt 0 (147,458)
----------- -----------
Net cash provided by financing activities 1,727,261 4,676,701
----------- -----------
Net increase in cash 43,796 89,570
----------- -----------
Cash at beginning of period 188,867 1,316,406
----------- -----------
Cash at end of period $ 232,663 $ 1,405,976
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 45,000 $ 8,061
=========== ===========
Supplemental disclosures of non-cashing investing and financing
activities:
Issuance of common stock for:
Payment for services and equipment $ 683,870 $ 550,708
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) General:
The unaudited consolidated financial statements have been prepared on the
same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the
periods presented. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under item
310(b) of Regulation S-B, the accompanying consolidated financial
statements and related footnotes have been 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, 1996 included in the Company's Annual Report on
Form 10-KSB.
The Company is presently engaged in formulating, marketing and distributing
fat-free, low fat and reduced fat foods.
(2) Summary of significant accounting policies:
(a) The accompanying 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.
(b) Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
(c) Prepaid assets include product introduction expenses which are
recorded at cost and amortized over the economic life thereof, but not
in excess of twelve months.
(d) Fixed assets are composed of manufacturing equipment, furniture, office
equipment, and computer equipment and are recorded at cost.
Depreciation is computed on a straight-line basis over the estimated
useful life, generally five or less years.
(e) Intangible assets are composed of debt issuance costs, customer lists,
acquisition costs of Auburn Farms and Natures Warehouse trademarks,
prepaid professional services contracts and are recorded at cost. The
acquisition costs associated with trademarks are being amortized on a
straight-line basis over twenty years. All other intangible assets are
being amortized on a straight-line basis over periods not exceeding
five years.
(f) For the purpose of cash flow, the Company considers all highly liquid
investments purchased with an original maturity of three months or less
to be cash equivalents.
(g) Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(4) Inventories:
Inventories are stated at the lower of 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.
(5) Prepaid Expenses and Other Assets:
Prepaid expenses and other current assets as of June 30, 1997 and
December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Deposits $ 1,600 $ 10,000
Trade promotion expenses 42,180 177,865
Insurance 80,382 14,897
Consulting (Current Portion) 55,933 -0-
Other prepaids 30,868 68,969
-------- --------
Total Prepaid and Other Current Assets $210,963 $271,731
======== ========
</TABLE>
(6) Accrued Expenses
Accrued expenses and other current liabilities as of June 30, 1997 and
December 31, 1996 are detailed as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -----------
<S> <C> <C>
Accrued Compensation $ 49,303 $ 65,570
Accrued Insurance 68,426 0
Accrued Interest Payable 12,857 436
Accrued Legal Fees 0 70,811
Accrued Consulting Fees 0 22,500
Accrued Commissions 90,133 -0-
Accrued Advertising/Promotion 243,713 407,359
Other Accrued Expenses 195,844 222,536
-------- --------
$660,276 $789,212
======== ========
</TABLE>
(7) Notes Payable - Bank:
The Company was in default with respect to certain financial covenants
under the terms of its agreement with the secured lender. Discussions are
ongoing with respect to curing the defaults. For financial statement
purposes, the entire amount is classified as a current liability.
9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(8) Other current liabilities:
<TABLE>
<CAPTION>
Current Long-Term Total
------- --------- --------
<S> <C> <C> <C>
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 $37,859 $ -0- $ 37,859
======= ===== ========
</TABLE>
(9) Stockholders' Equity:
During the six-month period ended June 30, 1997, the following common stock
transactions occurred:
a. The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
b. The Company issued 20,000 shares at a value of $1.125 per share upon
the exercise of an option granted to a former employee as compensation
for consulting services and past unpaid accrued vacation.
c. The Company issued 183,100 shares at $1.00 per share upon the exercise
of options granted under the Non-Incentive Stock Option Plan. Non-
officers of the Company paid the exercise price of such options through
the application of accrued payroll and other various expenses.
d. The Company entered into a subscription agreement in February, 1997
with an investor who purchased 500,000 shares of common stock at $1.00
per share. At funding, a 10% fee was paid to a facilitator and warrants
were given to that same facilitator to purchase 125,000 shares of
common stock at a price of $1.375 per share. During the period ended
June 30, 1997, the Company reduced the exercise price of these options
to $1.00.
e. The Company entered into a subscription agreement in April 1997 with an
unrelated investor for $500,000 of Preferred 1997 Series A stock. The
preferred stock has a cumulative dividend rate of 6% (six percent) with
no voting rights. The conversion price is the lower of $1.25 per share
or a 30% (thirty percent) discount to the market price at the time of
conversion. The preferred stock is convertible at any time. The
facilitator received a 10% (ten percent) fee from the proceeds, as well
as warrants to purchase 35,000 shares of common stock at an exercise
price of $1.00 per share.
f. The Company issued 185,600 shares at $0.875 per share upon the exercise
of options granted under the Non-Incentive Stock Option Plan. Non-
officers of the Company exercised such options through the application
of accrued payroll and other various expenses.
g. The Company entered into a subscription agreement in May 1997 with
another investor for $250,000 of Series "A" Preferred Stock. The series
has a cumulative dividend rate of 6% (six percent), no voting rights,
and is convertible at any time at the lower of $1.25 or a 30%
10
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(thirty percent) discount to the market price at the time of
conversion. The facilitator received a 10% (ten percent) fee from the
proceeds and a warrant to purchase 17,500 shares of common stock at an
exercise price of $1.00 per share.
h. The Company issued 10,000 shares at a value of $1.06 per share upon the
exercise of an option granted to a former employee as compensation for
consulting services and related expenses.
(10) Going Concern:
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. At June 30,
1997 total current liabilities exceeded current assets by $1,720,960 and
the Company had a negative net worth of $1,080,253. The Company received
$6,750,000 as proceeds from the Keebler arbitration but the Company must
realize a satisfactory level of profitability from its current and future
operations in order to remain a viable entity. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of any uncertainty.
(11) Reverse Stock Split:
Pursuant to a Board of Directors' resolution, the Company effected a 1 for
20 reverse common stock split for common shareholders of record as of
October 4, 1996. The prior year earnings per share and common shares
outstanding have been restated to reflect the reverse split.
(12) 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.
(13) 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
11
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
FAS 121 did not have a material impact on the Company's financial position
or results of operations.
(14) Legal Proceedings
On November 1, 1995, Keebler Company (Keebler) and the Company entered
into a co-packer agreement (the Agreement) to manufacture Caketts. In
1996, the Company suffered losses and terminations of business
relationships by a number of the Company's distributors, retailers and
brokers due to mold in the Caketts product. In August 1996, Keebler gave
the Company thirty (30) days notice of termination of the Agreement
between the parties, and indicated that it had discontinued further
production of the Company's product. The Agreement between Keebler and the
Company provides for the binding arbitration of disputes. On August 15,
1996, the Company filed a demand for arbitration seeking compensatory
damages, which was heard during May 1997. The Company sought damages in
excess of $5,000,000. In defending the arbitration proceeding, Keebler had
alleged that Vitafort was responsible for the quality control problems and
failed to comply with certain labeling requirements. Keebler had filed a
counterclaim against the Company for breach of contract which alleges
damages in excess of $300,000. The Company believed that Keebler breached
the agreement by failing to meet its warranties to Vitafort to manufacture
the products in an acceptable process manner, improperly terminating the
agreement; and, made intentional misrepresentations regarding the cause of
the mold problems. In June 1997, the Arbitrator awarded the Company
$5,983,000 in damages plus expenses and costs associated with this
arbitration. In July 1997, the Company received $6,750,000 in full and
final settlement of the above action.
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in
Superior Court, Orange County, California against his stockbroker, two
national brokerage firms, several companies in which he had invested; and,
certain of those company's officers. Included among the defendants were
the Company and its then Chief Executive Officer. The complaint seeks
damages in an unspecified amount in excess of $500,000 and punitive
damages in an unspecified amount in excess of $5,000,000. The Court has
dismissed the class action claims as to the Company and granted a motion
that the claims against the brokerage firms and associated persons must be
submitted to arbitration. The Plaintiff has appealed that ruling. The
Company denies any liability to the plaintiff and intends to vigorously
defend this action. The Company notes that the plaintiff sold a portion of
the securities he purchased from the Company, realizing a profit; that the
balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment and realize a
profit on his $75,000 investment.
In February 1996, Cottage Bakery, Inc., a former co-packer of Fudgets,
initiated a lawsuit against the Company in Superior Court, San Joaquin
County, California. The Complaint alleges breach of contract and fraud
against the Company and seeks damages in an unspecified amount in excess
of $150,000. The Company disputes this liability and filed a cross
complaint against Cottage Bakery. The parties have executed a settlement
agreement, which does not subject the Company to any material liability.
12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-
packer and against Barbara's Bakery. The Company is pursuing these rights,
and in May 1996, initiated an action alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition and related claims.
The defendants have filed counterclaims against the Company and Auburn
Farms alleging various tort and contract claims. The litigation is in the
early stages and the Company intends to vigorously pursue the same.
Michel's Bakery, Inc., a former co-packer of Fudgets, initiated an action
in state court in Philadelphia, Pennsylvania, seeking damages in excess of
$140,000 under various contract and tort theories. In November 1996, the
Company removed this action to the Federal District Court for the Eastern
District of Pennsylvania. The Company has filed a counterclaim alleging
breach of contract and other claims relating to the product manufactured
by Michel's. The parties have agreed to discuss a settlement, which if
completed, would be favorable to the Company. If, however, the matter is
not resolved through mediation, the Company intends to vigorously
prosecute this lawsuit.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other
similar claims arising out of the consulting relationship that previously
existed between the Company and Mr. Ellis. The Complaint seeks damages in
an unspecified amount. The court has sustained, without leave to amend, a
demurrer to the claims against Mark Beychok and sustained the demur, with
leave to amend, against the Company. Mr. Ellis recently filed an amended
complaint against the Company. The litigation is in its early stages and
the Company will vigorously defend the action.
(15) Subsequent Events
In June, 1997 the Company was awarded a preliminary ruling by the
arbitrator in the Keebler arbitration. This ruling provided for damages to
be awarded to the Company in the amount of $5,983,000 plus legal fees and
costs. The fees and costs expenses in the three month period ended June
30, 1997 related to this arbitration were $667,166. In addition, the award
found that the Company was not required to pay Keebler or any of its
operating units the amount of unpaid invoices currently reflected by the
Company on its financial statements. On July 15, 1997, the two parties
reached an agreement and Keebler wired $6,750,000 to the Company in full
and final settlement of the award. After payment of legal fees and costs,
and the payment to ATCOLP INVESTMENT PARTNERS, the Company should have
approximately $4,500,000 with which to meet past obligations, fund future
new products and support the sales programs for existing products. In
addition, the Company may use some portion of the proceeds in a potential
merger and/or acquisition should it locate an organization, which the
Company believes will fit with its long-term plans.
13
<PAGE>
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
TIME IN THE COMPANY'S SECURITIES AND EXCHANGE COMMISSION FILINGS.
Three Months Ended June 30, 1997 and 1996
- -----------------------------------------
Results of Operations:
The Company's liquidity problem continued to erode its ability to maintain
adequate inventory levels to swiftly complete shipping orders to customers
orders without shortages and in a timely manner. In addition, the mold
problem associated with the product produced by Keebler continues to
interfere with the operation of the Company's ongoing business and results
in product returns.
The preparation for the Keebler arbitration and the associated human
resources and cost were incurred substantially in this quarter and the
application of resources to this effort negatively impacted sales. Such
effort was also incurred during the six to nine months previous to this
quarter. The arbitrator announced an award in June 1997 of $5,983,000 for
damages plus legal costs and fees. See Subsequent Events for more
information concerning this award.
Net Sales:
For the three months ended June 30, 1997, net sales were $402,788 compared
to $1,463,356 for the three-month period ended June 30, 1996, a decrease of
$1,060,568 from the previous year. The customer reaction to the mold issue
manifests itself in the sales mix. In the three months ended June 30, 1997,
Auburn Farms/Natures Warehouse brands represented approximately 71% of
total sales for the quarter compared to approximately 18% of net sales in
the three months ended June 30, 1996. The Toast'N Jammers brand of low fat
toaster pastries continues to increase in both volume and margin and
represented approximately one-half of the Company's sales volume in the
three months ended June 30, 1997.
Gross Profit:
Gross profit increase from 6.6% for the three months ended June 30, 1996 to
17.0% for the same three month period in 1997, however the absolute dollars
declined from $96,275 to $68,448. The continued improvement in margin is a
result of the Company's focus of improving production efficiency and
reducing manufacturing overhead expenses whenever possible.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Operating Expenses:
Product Development: The Company continues its shift of product development
from an independent unit within the Company to a working relationship with
a co-packer to be involved in the ultimate manufacture of the new product.
The reduction in product development costs from $288,344 for the three
months ended June 30, 1996 to $16,781 for the same period in 1997 reflects
the savings. The other most significant factor in reducing expenses was the
lack of a significant production problem, which had been partially
responsible for the expense increase in the 1996 three-month period ended
June 30 1996 compared to earlier periods.
Sales & Marketing: The expenses in this area declined from $559,468 in the
three months ended June 30, 1996 to $359,430 for the same period in 1997, a
reduction of $200,038 or approximately 35.7%. The reduction reflects the
Company's liquidity problems which resulted in a reduced marketing effort.
General & Administrative: The Company continued to incur increased
administrative costs due to the Keebler arbitration and other litigation
matters. In addition, the Company incurred the legal and other professional
expenses related to the 10-KSB filing and other securities issues. For the
three months ended June 30, 1997, the expenses of the Company in the
general & administrative area were $1,304,656 compared to $707,165 for the
same three month period in 1996, a increase of $597,491. Legal and other
professional service costs for the three months ended June 30, 1997 were
approximately $1,036,000 compared to $140,800 for the identical period in
1996, an increase of $895,200. The Keebler award and subsequent settlement,
which provided for the recovery of legal fees and costs associated with the
arbitration, is estimated to provide for the payment to the Company of
$767,000 of the costs incurred in this three-month period. The remainder of
the expenses represents the ongoing costs of public reporting and continued
legal and consulting services. See Note (15) Subsequent Events of the notes
to financial statements for further explanation of the Keebler award.
Other income (expense) including interest:
The increase in interest expense is due primarily to the secured lender.
Under the terms of the Loan and Security Agreement, the interest charges
are now at a minimum level of $15,000 per month. In addition, there were
other short-term loans made during the period, which carried nominal
interest rates.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, 1997 and 1996
- ---------------------------------------
Results of Operations:
While the liquidity problems and the customer response to the product mold
hampers the Company's ability to move forward aggressively, it is still
moving forward by increasing its gross profit margins and developing new
products while it attempts to improve communication with its customers and
vendors to prepare them for the Company's anticipated efforts for the
remainder of the year. Overall operating costs were reduced, except that
legal fees for litigation, particularly related to the Keebler arbitration,
continue to be heavy.
Net Sales:
Net sales for the six months ended June 30, 1997 were $1,175,107 compared
to $2,304,351 for the same period in 1996, a decline of $1,129,244. This
decline is due primarily to the continued resistance of customers to the
same products introduced last year, which now have a reputation within the
customer base that they will become moldy. While the Company has selected a
new co-packer and does not believe that the problems of last year will
reoccur, there is continued resistance by customers. The Company believes
that new products and/or repackaging and renaming of old products is the
only solution to overcoming this resistance.
Gross Profit:
The Gross profit margin for the six-month period ended June 30, 1997 was
24.9% compared to 9.9% for the same period last year. The Company believes
it is making progress in reducing manufacturing overhead expenses while at
the same time assisting the co-packer with improvements in the
manufacturing process, resulting in lower cost for the co-packer and thus
for the Company. This process continues as the Company looks for strategic
partners as co-packers who can provide both product development capability
and manufacturing knowledge thereby providing a good tasting, extended life
product at a reasonable cost.
Operating Expenses:
Overall operating expenses increased by $100,844 for the six months ended
June 30, 1997 compared to the same period in 1996. Continued litigation and
other professional service costs increased from $212,867 for the six months
ended June 30, 1997 to $1,347,486 for the same period in 1997. Total other
operating expenses declined from $2,372,533 for the six months ended June
30, 1996 to $1,338,758 for same period in 1997, a reduction of $1,033,775.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Product Development: The Company has significantly reduced its product
development expenditures for the first six months of 1997 as a result of
the liquidity problems which forced delays in the development of some of
its new product programs, and the change in strategy which is now to become
a partner with the co-packer that will ultimately manufacture the products.
In addition, the mold problem which was the cause of the Keebler
arbitration began to manifest itself in customer complaints in the end of
the second quarter (June, 1996), which resulted in increased cost impact in
both product development and sales and marketing areas during the past
twelve months.
Sales and Marketing: The decline in expenses is primarily due to the
decline in overall net sales, and the decision to monitor the sales
promotion expenses to insure adequate margins and customer cooperation in
moving forward with new products. In addition, the Company decided not to
participate in the trade shows so far this year due primarily to the
illiquid position of the Company. Expenses for the six months ended June
30, 1997 were $739,226 compared to $1,109,226 for the same period in 1996,
a reduction of $370,000. Samples, trade shows and sales promotions were
reduced by approximately $260,000 from the six months ended June 30, 1996
to the same period of 1997. Additionally, travel and related expenses were
likewise reduced by approximately $127,000 during the comparable period.
Such reductions reflect the Company's attempt to reduce overall
expenditures, the focus on improving margins by preparing communication to
the customers first, and the past liquidity constraints.
General and Administrative: The Company increased the general and
administrative expenses for the six months ended June 30, 1997 by $861,041
over the same six month period in 1996. This increase is primarily due to
the litigation expenses, especially with respect to the Keebler
arbitration, where the increase was over $800,000 from the six months ended
June 30, 1996 compared to the six months ended June 30, 1997. In addition,
the increase in other professional services is the result of the increased
financing activities and the services rendered in assisting the Company in
the formulation of its litigation strategy against Keebler.
Interest Expense:
The increase in interest expense is due to the new financing Agreement with
the secured lender that was signed in August, 1996. This Agreement calls
for increasing base interest charges to a minimum of $15,000 per month. The
six months ended June 30, 1997 reflect this minimum interest fee.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
----------- -----------
<S> <C> <C>
Net Cash Used for Operations $(1,683,087) $(3,923,282)
Net Cash Used for Investing Activities (378) (471,229)
Net Cash Provided by Financing Activities 1,727,261 4,484,081
Working Capital (Deficit) (1,720,960) 3,503,281
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Trends:
The Company has continued to attempt to conserve cash by using capital
exchanges to assist it in relieving the liquidity pressure it constantly
faces. While the Keebler award has removed the near term threat that the
Company might drastically reduce or operations, it has not provided
sufficient capital to meet what Management believes are the long term
capital requirements of the business on a going forward basis.
The Company is in the planning stages for some new products and
enhancements to existing products, so now that the liquidity limitation has
now been relieved, the Company can now progress forward within its business
plan. The ongoing search for co-packer partners that can provide both
product development capability as well as manufacturing capability is
continuing. This is a major focus, in concert with the product development
(marketing) area, to introduce well thought out, quality and good tasting
products that will generate new customer interest and increase the
profitability of the Company.
18
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings
On November 1, 1995, Keebler Company (Keebler) and the Company entered into
a co-packer agreement (the Agreement) to manufacture Caketts. In 1996, the
Company suffered losses and terminations of business relationships by a
number of the Company's distributors, retailers and brokers due to mold in
the Caketts product. In August 1996, Keebler gave the Company thirty (30)
days notice of termination of the Agreement between the parties, and
indicated that it had discontinued further production of the Company's
product. The Agreement between Keebler and the Company provides for the
binding arbitration of disputes. On August 15, 1996, the Company filed a
demand for arbitration seeking compensatory damages, was heard during May
1997. The Company sought damages in excess of $5,000,000. In defending the
arbitration proceeding, Keebler had alleged that Vitafort was responsible
for the quality control problems and failed to comply with certain labeling
requirements. Keebler had filed a counterclaim against the Company for
breach of contract which alleges damages in excess of $300,000. The Company
believed that Keebler breached the agreement by failing to meet its
warranties to Vitafort to manufacture the products in an acceptable process
manner, improperly terminating the agreement; and, made intentional
misrepresentations regarding the cause of the mold problems. In June 1997,
the Arbitrator awarded the Company $5,983,000 in damages plus expenses and
costs associated with this arbitration. In July 1997, the Company received
$6,750,000 in full and final settlement of the above action.
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in
Superior Court, Orange County, California against his stockbroker, two
national brokerage firms, several companies in which he had invested; and,
certain of those company's officers. Included among the defendants was the
Company and its then Chief Executive Officer. The complaint seeks damages
in an unspecified amount in excess of $500,000 and punitive damages in an
unspecified amount in excess of $5,000,000. The Court has dismissed the
class action claims as to the Company and granted a motion that the claims
against the brokerage firms and associated persons must be submitted to
arbitration. The Plaintiff has appealed that ruling. The Company denies any
liability to the plaintiff and intends to vigorously defend this action.
The Company notes that the plaintiff sold a portion of the securities he
purchased from the Company, realizing a profit; that the balance of the
securities became salable under Rule 144; and that, if sold, the Plaintiff
could recoup his entire investment and realize a profit on his $75,000
investment.
In February 1996, Cottage Bakery, Inc., a former co-packer of Fudgets,
initiated a lawsuit against the Company in Superior Court, San Joaquin
County, California. The Complaint alleges breach of contract and fraud
against the Company and seeks damages in an unspecified amount in excess of
$150,000. The Company disputes this liability and filed a cross complaint
against Cottage Bakery. The parties have executed a settlement agreement,
which does not subject the Company to any material liability.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-
packer and against Barbara's Bakery. The Company is pursuing these rights,
and in May 1996, initiated an action alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition and related claims.
The defendants have filed counterclaims against the Company and Auburn
Farms alleging various tort and contract claims. The litigation is in the
early stages and the Company intends to vigorously pursue the same.
19
<PAGE>
Michel's Bakery, Inc., a former co-packer of Fudgets, initiated an action
in state court in Philadelphia, Pennsylvania, seeking damages in excess of
$140,000 under various contract and tort theories. In November 1996, the
Company removed this action to the Federal District Court for the Eastern
District of Pennsylvania. The Company has filed a counterclaim alleging
breach of contract and other claims relating to the product manufactured by
Michel's. The parties have agreed to discuss a settlement, which if
completed, would be favorable to the Company. If, however, the matter is
not resolved through mediation, the Company intends to vigorously prosecute
this lawsuit.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other
similar claims arising out of the consulting relationship that previously
existed between the Company and Mr. Ellis. The Complaint seeks damages in
an unspecified amount. The court has sustained, without leave to amend, a
demurrer to the claims against Mark Beychok and sustained the demur, with
leave to amend, against the Company. Mr. Ellis recently filed an amended
complaint against the Company. The litigation is in its early stages and
the Company will vigorously defend the action.
ITEM 4. Submissions of Matters to a Vote of Security Holders
During the quarter ended June 30, 1997, the Company sought written consent
of the holders of a majority of its issued and outstanding common shares,
which the Company has the authority to issue, from 9,000,000 shares to
30,000,000 shares. The holders of 3,218,102 common shares gave their
consent to the proposal; the holders of 182,761 common shares did not
consent; and the holders of 20,655 common shares abstained from voting
based on the written consents received by the Company's transfer agent
through July 7, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company filed a report on Form 8-K dated June 19, 1997 reporting the
Interim Award from the Keebler Arbitration.
20
<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
/s/ Jack B. Spencer
----------------------------------
Jack B. Spencer
Chief Operating Officer
Chief Financial Officer
Date: August 19, 1997
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 232,663
<SECURITIES> 0
<RECEIVABLES> 383,253
<ALLOWANCES> (67,743)
<INVENTORY> 240,744
<CURRENT-ASSETS> 1,135,366
<PP&E> 569,744
<DEPRECIATION> (288,528)
<TOTAL-ASSETS> 1,776,073
<CURRENT-LIABILITIES> 2,856,326
<BONDS> 0
0
19
<COMMON> 9,006
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,776,073
<SALES> 1,175,107
<TOTAL-REVENUES> 1,175,107
<CGS> 882,628
<TOTAL-COSTS> 2,686,244
<OTHER-EXPENSES> 2,370,646
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 99,553
<INCOME-PRETAX> (2,470,199)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,470,199)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,470,199)
<EPS-PRIMARY> ($0.46)
<EPS-DILUTED> ($0.46)
</TABLE>
