<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, 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 November 12, 1997 is 6,777,052.
1
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<C> <S> <C>
ITEM 1. Consolidated Financial Statements:
Balance Sheets - September 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations -
Three Month Periods Ended September 30, 1997 and 1996 and
Nine Month Periods Ended September 30, 1997 and 1996. . . 5
Statement of Stockholders' Equity (Deficit)
Nine Month Period Ended September 30, 1997. . . . . . . . 6
Statements of Cash Flows -
Nine Month Periods Ended September 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 . . . . . . . . . . . . . . . . . . . . 18
ITEM 4. Submission of Matters of a Vote of Security Holders . . . 18
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
------
September 30 December 31
1997 1996
------------ -----------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $3,597,943 $ 188,867
Accounts receivable-trade, net of allowance for doubtful
accounts of $67,743 at September 30, 1997 and
$79,994 at December 31, 1996 508,852 430,789
Notes receivable 10,000 56,000
Other receivables 33,894 4,464
Inventory, net 268,989 361,196
Prepaid expenses and other assets 262,727 271,731
---------- ----------
Total Current Assets 4,682,405 1,313,047
Fixed Assets:
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,539 105,160
Computer equipment 179,827 173,294
---------- ----------
Total Fixed Assets 576,278 569,366
Less accumulated depreciation and amortization (316,997) (231,592)
---------- ----------
Net Fixed Assets 259,281 337,774
Other Assets:
Intangible and other assets 411,254 481,254
Less accumulated amortization (64,864) (95,561)
---------- ----------
Net Other Assets 346,390 385,693
========== ==========
Total Assets $5,288,076 $2,036,514
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
---------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------ -----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Deficit
Current Liabilities:
Notes payable $243,349 $ 440,022
Accounts payable 52,322 921,919
Accrued expenses 565,431 789,212
Other current liabilities 37,859 37,859
-------- ----------
Total Current Liabilities 898,961 2,189,012
Stockholders' Equity(Deficit):
Series A, 6% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 750 shares authorized,
750 shares issued and outstanding at September 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 September 30, 1997
and December 31, 1996; aggregate liquidation
preference of $50,000 at September 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 September 30, 1997 and December 31, 1996;
aggregate liquidation preference of $1 at September 30,
1997 and December 31, 1996 1 1
Subscribed common stock, 76,906 shares at September 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 September 30, 1997 and 9,000,000 at
December 31, 1996, issued and outstanding
and 5,957,053 shares at September 30, 1997 and
4,830,259 at December 31, 1996, respectively. 9,093 8,886
Additional paid-in capital 23,203,570 20,547,753
Accumulated deficit (18,900,472) (21,050,479)
----------- -----------
Total Stockholders' Equity(Deficit) 4,389,115 (152,498)
=========== ===========
Total Liabilities and Stockholders' Equity(Deficit) $ 5,288,076 $ 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 Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 322,116 $ 2,104,314 $ 1,497,223 $ 4,408,665
Cost of sales 196,226 1,912,734 1,078,854 3,988,128
---------- ----------- ----------- -----------
Gross profit 125,890 191,580 418,369 420,537
Operating expenses:
Product development 123,137 247,061 179,268 693,389
Sales and Marketing 257,016 580,798 996,242 1,690,024
General and administrative 3,227 573,929 1,894,114 1,603,775
---------- ----------- ----------- -----------
Total operating expenses 383,380 1,401,788 3,069,624 3,987,188
---------- ----------- ----------- -----------
Operating loss (257,490) (1,210,208) (2,651,255) (3,566,651)
Other income (expense) (3,409) 2,758 19,710 11,793
Interest expense (53,585) (4,423) (153,138) (13,693)
Interest income 47,742 0 47,742 0
Litigation recovery, net of costs 4,886,947 0 4,886,947 0
---------- ----------- ----------- ----------
Income(Loss) before provision
for income taxes 4,620,205 (1,211,873) 2,150,006 (3,568,551)
Provision for income taxes 0 1,105 0 3,159
---------- ----------- ---------- ----------
Net Income(Loss) $4,620,205 $(1,212,978) $ 2,150,006 $(3,571,710)
========== =========== =========== ===========
Net Income(Loss) per share $ 0.73 $ (0.28) $ 0.40 $ (0.85)
========== =========== =========== ===========
Weighted Average Shares
of Common Stock Outstanding 6,315,582 4,339,878 5,318,992 4,215,668
========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<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
========== ========== ========== =========
Common stock - consulting
Exercise of stock options
Net income
---------- ---------- ---------- ---------
Balance, September 30, 1997 $ 8 $ 10 $ 1 $ 76,905
========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional
----------------------- Paid In Accumulated
Shares Amount Capital Deficit Total
--------- ------ ----------- ------------- -----------
<S> <C> <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)
========= ====== =========== ============ ===========
Common stock - consulting 773,686 78 763,284 763,362
Exercise of stock options 90,000 9 85,791 85,800
Net income 4,620,206 4,620,206
--------- ------ ----------- ------------ -----------
Balance, September 30, 1997 6,897,645 $9,093 $23,203,570 $(18,900,472) $ 4,389,115
========= ====== =========== ============ ===========
</TABLE>
6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
<S> <C> <C>
Increase (Decrease) In Cash: (unaudited)
Cash flows from operations:
Net Income/(Loss) $2,150,006 $(3,571,710)
Adjustments to reconcile net income/(loss) to net cash
used in operating activities:
Depreciation and amortization 124,708 94,998
Allowance for doubtful accounts (12,250) 0
Inventory reserves (832,296) 0
(Increase) decrease in:
Inventory 924,502 (1,516,839)
Accounts receivable (69,640) (1,150,328)
Prepaids and other assets 29,403 (477,613)
Increase (decrease) in:
Accounts payable (639,587) 1,325,140
Accrued expenses (223,781) (205,668)
---------- -----------
Net cash provided by (used) in operating activities 1,451,065 (5,502,020)
---------- -----------
Cash flows from investing activities:
Purchase of short-term investment 0 (41,000)
Purchase of property and equipment (6,912) (180,741)
---------- -----------
Cash paid for acquisition 0 (183,907)
---------- -----------
Net cash provided by(used) in investing activities (6,912) (405,648)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and preferred stock, net 2,391,607 5,118,501
Proceeds from (repayment of) notes payable, short-term 0 (75,000)
(Repayment of) note payable - bank (426,683) 896,587
Prepayment of long-term debt 0 (164,505)
---------- -----------
Net cash provided by financing activities 1,964,924 5,775,583
---------- -----------
Net increase(decrease) in cash 3,409,076 (132,085)
---------- -----------
Cash at beginning of period 188,867 1,316,406
---------- -----------
Cash at end of period $3,597,944 $ 1,184,321
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 45,000 $ 5,632
========== ===========
Supplemental disclosures of non-cash investing and financing
activities:
Issuance of common stock for: Conversion of debt $ 0 $ 973,207
========== ===========
</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 years or less.
(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. As of September
30, 1997, inventory consisted of the following:
Finished Goods $ 68,390
Packaging and Raw Material 551,427
Less: Reserves for slow moving and spoilage (350,828)
---------
$ 268,989
=========
(5) Prepaid Expenses and Other Assets:
Prepaid expenses and other current assets as of September 30, 1997 and
December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Deposits $ 1,600 $ 10,000
Trade promotion expenses 15,653 177,865
Insurance 45,253 14,897
Consulting (Current Portion) 151,194 0
Other prepaids 48,973 68,969
-------- --------
Total Prepaid and Other Current Assets $262,673 $271,731
======== ========
</TABLE>
(6) Accrued Expenses
Accrued expenses and other current liabilities as of September 30, 1997 and
December 31, 1996 are detailed as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ -----------
<S> <C> <C>
Accrued Compensation $ 0 $ 65,570
Accrued Insurance 0 0
Accrued Interest Payable 0 436
Accrued Legal Fees 0 70,811
Accrued Consulting Fees 0 22,500
Accrued Commissions 89,276 0
Accrued Advertising/Promotion 272,716 407,359
Other Accrued Expenses 203,439 222,536
-------- --------
$565,431 $789,212
======== ========
</TABLE>
9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(7) Notes Payable - Bank:
The Company is no longer in default with respect to certain financial
covenants under the terms of its agreement with the secured lender. For
financial statement purposes, the entire amount is classified as a current
liability, however, due to the financial uncertainty of the business.
(8) Other Current Liabilities:
Other current liabilities consists of a $37,859 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.
(9) Stockholders' Equity:
During the nine-month period ended September 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
September 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.
10
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
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% (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.
i. On July 16, the Company accepted a cashless exchange of expenses for
options on 30,000 shares to a consultant.
j. The Company issued 418,086 shares at $1.25 per share to various
providers of services under an S-8 filing.
k. 100,000 shares at $.93 per share was issued to a professional firm for
previous services rendered.
l. On August 28, the Company issued 255,600 shares at $.93 per share in
compensation for services rendered.
m. The Company allowed a cashless option of 60,000 shares at $.93 per
share for consulting services.
(10) Going Concern:
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. At September
30, 1997, total current liabilities were exceeded by current assets by
$3,783,444 and the Company had a positive net worth of $4,389,115. Although
the Company received $6,750,000 as proceeds from the Keebler arbitration,
it 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
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(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 FAS 121 did not have a material impact on the
Company's financial position or results of operations.
12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(14) Legal Proceedings
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 on his $75,000 investment.
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. Counsel for Vitafort is
reviewing the case to determine the best course of action to continue
forward.
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 has filed an amended
complaint against the Company. The Company is in the process of document
discovery and is defending the action vigorously.
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 September 30, 1997 and 1996
- ----------------------------------------------
Results of Operations:
The net proceeds from the damage award in the Keebler Company arbitration
has eliminated, at least in the short term, the liquidity problem that has
plagued the Company over the past year. Currently, the Company is
negotiating payout terms with certain vendors and reestablishing credit
terms with its current co-packers to improve its inventory levels to meet
customer requirements while at the same time prolonging its current cash
position.
Although the cash position has improved, the problems associated with the
lack of resources in the past continue to hamper customer relations through
the impact of returned products on the ability of the Company to collect
its trade accounts receivable in full, the position of some customers who
will continue to do business with the Company only after the past amounts
due them for advertising and returns are settled in full, and other
customers who are waiting to see new products introduced by the Company
before agreeing to continue to be a customer of the Company.
Since the cash infusion, the Company has focused on continuing to repair
the relationships with its customers and vendors by insuring that the
records of both organizations are in agreement, establishing a payment
schedule, if necessary, agreeable to both parties, and using this
communication to open the relationship to future business. In addition, the
Company is using its resources to prepare for the new products that it will
need to launch to maintain its position in the market and improve its
visibility with the ultimate customer, the consumer.
Net Sales:
For the three month period ended September 30, 1997, net sales were
$322,116 compared to $2,104,314 for the same period in 1996, a decrease of
$1,782,198 from the previous year. The lack of customer confidence in some
of the products, mainly Fudgets and Caketts, is reflected in the decline in
sales of those products from $1,342,334 for the three months ended
September 30, 1996 to $151,989 for the same period in 1997. Additionally,
the cash flow constraints imposed upon the Company during the first part of
1997 has contributed to the reduction of sales for the nine month periods
from $4,408,665 in 1996 to $1,497,223 in 1997, a decrease of $2,911,442.
The Toast'N Jammers brand of low fat toaster pastries continues to
represent almost one-half of the total net sales for the three months ended
September 30, 1997 and over one-third for the nine month period ended
September 30, 1997.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Gross Profit:
Gross profit increased from 9.1% of net sales for the three months ended
September 30, 1996 to 39.1% for the same three-month period in 1997.
Absolute dollar amounts, however, declined from $ 191,580 to $ 125,890 for
the three-month periods ending September 30, 1996 and 1997 respectively.
The overall increase in the Company's gross profit margin reflects the
continued effort to maintain overall profit targets without major discounts
and allowances. For the nine months ended September 30, 1996 the gross
profit margin was $ 420,537 or 9.5% of net sales compared to $ 418,369 or
27.9% for the same period ended September 30, 1997. This increase in gross
margin as a percent of net sales continues to reflect the Company's effort
toward improving this area.
Operating Expenses:
Overall expenses have been reduced due to the cost control procedures
implemented by the Company. In addition, the reimbursement of $ 767,000 in
this quarter of legal fees and costs associated with the Keebler
arbitration award is reflected in the reduction in general and
administrative expenses. The reduction in both product development and
sales and marketing expenses reflects the effort by the Company in these
areas to increase performance without significant expenditures of
resources. The reduction in general and administrative expenses would have
been greater had the final legal fees and associated costs relating to the
Keebler arbitration not been included. Since the award, the Company is
beginning to both refocus its efforts in the product development area to
introduce new products and in the sales and marketing area as it
reestablishes its customer, broker, and support organizations.
Product Development:
During 1997, the Company has been forced to substantially reduce its
expenditures in this area due to the financial constraints in the first
half of the year. This has resulted in a drop in expenditures of $ 514,121
for the nine months ended September 30, 1997 compared to the same period of
1996. The drop in expenses are primarily in salaries, travel, and
laboratory research and development where the expenses in 1996 were $
137,665 for the three months ended September 30, 1996 compared to $ 0 for
the same period in 1997. This was partially offset, however, by the
increase in consulting expenses during the three month period in 1997 which
was $ 57,925 more than the same period of 1996. As a result of the Keebler
award, the Company is again starting to apply resources to this area both
to improve or modify existing products and to introduce new products during
the end of 1997 and 1998 and 1999. However, in keeping with its new
strategies, it will seek to utilize co-packers and their resources to
improve and develop products so that the Company's costs may be minimized.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Sales and Marketing:
The Company's expense levels in these disciplines continues to be reduced
as a result of both lower net sales volume and concerted effort by
management to continue to eliminate expenses where appropriate. For the
nine months ended September 30, 1997 expenses were $ 996,242 compared to
$1,690,024 for the same nine month period in 1996, a decrease of $693,782
from 1997 to 1996. The majority of these cost reductions are in salaries,
consultants and travel, $361,500; freight of $59,335; sales promotions,
$242,708; and commissions and royalties of $101,020. For the three month
period ended September 30, 1997, the total sales and marketing expenses
were $257,016 compared to $580,798 for the same period of 1996, a decrease
of $323,782. The reduction was primarily in the areas directly related to
volume of net sales, such as commissions and royalties, freight out, sales
promotions, and travel. The Company is beginning to reenter the
distribution network by reestablishing relationships with existing
customers, adding new brokers and customers as appropriate, and starting
the process of improving its customer relations with all customers.
General and Administrative:
For the nine months ended September 30, 1997, expenses were $1,894,114
compared to $1,603,775 for the nine months ended September 30, 1996, an
increase of $290,339. The majority of the increase in expenses are in the
professional services area, particularly legal expenses totaling $1,183,718
less the Keebler arbitration reimbursement of $767,000; insurance of $
80,759; and amortization and depreciation of $52,154. The professional
services increase is almost directly related to the litigation defenses of
the Company, primarily for the Keebler arbitration. For the three months
ended September 30, 1997 expenses were $770,227 before the award of
$767,000 which resulted in a balance of $(3,227) compared to $573,929 for
the three month period ended September 30, 1996. The increases in 1997 over
1996 of $192,298 are in the areas of amortization and depreciation of
$30,564; an increase in bad debts of $45,000 from an employee due to the
filing of personal bankruptcy; and the increase in insurance cost of
$65,666.
Other income (expense) including interest and litigation recovery, net of
expenses:
Interest expenses reflects the continuing cost of the line of credit with
Coast Business Credit, the primary lender. Upon receipt of the Keebler
arbitration, the Company immediately invested the proceeds in short-term
government securities, with the approval of the Board of Directors. The
interest income for the three months ended September 30, 1997 reflects the
receipts from these short term investments.
Upon the Keebler arbitration award, the Company has recorded the $5,983,000
as income under the heading litigation recovery, net of costs. In addition,
the Company was able to cancel outstanding debt in the amount of $140,829
due to the Keebler Company and incurred and paid $1,236,883 to ATCOLP
INVESTMENT PARTNERS under the existing agreement with them for the
advancement of certain funds to pay the litigation expenses.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- -----------
<S> <C> <C>
Net Cash Generated (Used) for Operations $1,451,065 $(5,502,020)
Net Cash Used for Investing Activities 6,912 (405,648)
Net Cash Provided by Financing Activities 1,964,924 5,775,583
Working Capital (Deficit) 3,783,444 (875,965)
</TABLE>
The Keebler award has eliminated the short-term cash requirements of the
Company and has allowed the Company the time to begin increasing its
efforts in the areas of product development and sales and marketing. In
addition, the Company has negotiated long term payment schedules with
certain of its old vendors, which will allow it to further concave cash.
Although the cash position has improved, the long term financial viability
still remains in doubt due to the lack of customer acceptance of the
Fudgets and Caketts and the loss of distribution and shelf space due to the
past inability to ship product in a timely manner. While the Company is now
able to ship product timely, the rebuilding of the customer relationship
and the continuing effort in the product development function will continue
to adversely impact the Company's liquidity in the near term.
17
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. Counsel for Vitafort is reviewing the case to determine the
best course of action to continue forward.
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 Company is in
the process of documents discovery and is defending the action vigorously.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarters ended September 30, 1997, the Company obtained 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
(a) Exhibits. None
(b) Reports on Form 8-K.
Report on Form 8-K dated June 19, 1997, reporting the interim award in
the Keebler Arbitration as an "Item 5. Other Event."
18
<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: November 14, 1997
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,597,943
<SECURITIES> 0
<RECEIVABLES> 620,489
<ALLOWANCES> 67,743
<INVENTORY> 619,818
<CURRENT-ASSETS> 4,682,405
<PP&E> 576,278
<DEPRECIATION> 316,997
<TOTAL-ASSETS> 5,288,076
<CURRENT-LIABILITIES> 898,962
<BONDS> 0
0
19
<COMMON> 9,093
<OTHER-SE> 76,905
<TOTAL-LIABILITY-AND-EQUITY> 528,807
<SALES> 1,497,223
<TOTAL-REVENUES> 1,497,223
<CGS> 1,078,854
<TOTAL-COSTS> 4,148,478
<OTHER-EXPENSES> 1,096,729
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 153,138
<INCOME-PRETAX> 2,150,006
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,150,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,150,006
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 5,318,992
</TABLE>
