<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, 1998
[ ] 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, 1997 (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 13, 1998, is 7,639,353.
1
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
<TABLE>
<S> <C>
PART 1 FINANCIAL INFORMATION
______________________________________________________________________________
ITEM 1. Consolidated Financial Statements:
Balance Sheets September 30, 1998 (unaudited) and
December 31, 1997............................................. 3-4
Statements of Operations
Three Month Periods Ended September 30, 1998 and 1997
(unaudited)................................................... 5
Nine Month Periods Ended September 30, 1998 and 1997
(unaudited)................................................... 6
Statement of Stockholders' Equity (Deficit)
Nine Month Period Ended September 30, 1998 (unaudited)........ 7
Statements of Cash Flows
Nine Month Periods Ended September 30, 1998 and 1997
(unaudited)................................................... 8
Notes to the Financial Statements (unaudited)................. 9-15
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 16-20
PART II OTHER INFORMATION
______________________________________________________________________________
Litigation.................................................... 21-22
Signature..................................................... 23
</TABLE>
2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1998 and December 31, 1997
ASSETS
------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
Current assets
<S> <C> <C>
Cash and cash equivalents $ 227,384 $ 2,199,036
Accounts receivable, less allowance
for doubtful accounts 629,334 412,289
Inventories (Notes 3 and 8) 585,133 247,611
Notes receivable - related party 104,758 10,000
Prepaid expenses and other current assets (Note 4) 322,247 269,268
----------- ------------
Total Current Assets 1,868,856 3,138,204
----------- ------------
Equipment
Manufacturing equipment 310,794 290,912
Furniture and equipment 126,667 105,160
Computer equipment 209,574 193,571
----------- ------------
647,035 589,643
Less accumulated depreciation (439,006) (347,493)
----------- ------------
208,029 242,150
----------- ------------
Other Assets
Intangible assets, net of accumulated amortization
of $144,103 and $73,163 (Notes 2 and 6) 602,173 338,091
Advances to Global International Sourcing (Note 6) 193,818
Other assets 875 -
----------- ------------
Total Other Assets 603,048 531,909
----------- ------------
$ 2,679,933 $ 3,912,263
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
Current liabilities
Notes payable - bank $ 97,119 $ 60,757
Notes payable - others (Note 8) 479,909 283,898
Accounts payable 1,238,172 909,315
Accrued expenses (Note 5) 58,249 342,437
Current maturities of long-term debt - 37,859
------------ ------------
Total Current Liabilities 1,813,449 1,634,266
------------ ------------
Long-term debt 548,352
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity
Series A, 6% Cumulative Convertible Preferred Stock,
$0.01 par value cumulative; 1,701 shares authorized,
issued & outstanding, 1,701 and 750 shares, 17 8
liquidation preference of $1,701,000 and $750,000 (Note 8)
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 110,000 shares; issued and
outstanding 1,000 shares, aggregate liquidation preference 10 10
of $50,000
Series C, Convertible Preferred Stock, $.01 par value;
authorized 450 shares; issued and outstanding 50 shares, 1 1
aggregate liquidation preference of $50,000
Common stock, $.0001 par value; authorized 30,000,000
shares; issued and outstanding 7,639,353 and 6,683,853 8,959 8,863
shares (Note 9)
Additional paid-in-capital (Note 9) 25,160,480 23,152,312
Accumulated deficit $(24,851,335) (20,883,197)
------------ ------------
Total Stockholders' Equity 318,132 2,277,997
------------ ------------
$ 2,679,933 $ 3,912,263
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $ 805,511 $ 322,116
Cost of sales 403,092 196,226
----------- -----------
Gross profit 402,419 125,890
----------- -----------
Operating expenses
Research and development 140,667 123,137
Sales and marketing 621,708 257,016
General and administrative 647,295 3,227
----------- -----------
Total operating expenses 1,409,671 383,380
----------- -----------
Loss from operations (1,007,252) (257,490)
Other income (expense)
Litigation recovery, net of costs - 4,886,947
Other income (expense) 385 (3,409)
Interest income 2,834 47,742
Interest expense (51,296) (53,585)
----------- -----------
Total other income (expense) (48,077) 4,877,695
----------- -----------
(Loss) income before income tax expense (1,055,329) 4,620,205
State income tax expense 207 -
----------- -----------
Net (loss) income (1,055,536) 4,620,205
Deemed dividend to preferred shareholders (Note 9) (279,250)
-----------
Net (loss) income allocable to common shareholders (1,334,786) 4,620,205
=========== ===========
(Loss) income per share $ (0.18) $ 0.67
=========== ===========
Weighted average number of common shares outstanding 7,547,094 6,868,277
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $ 1,555,505 $ 1,497,223
Cost of sales 951,407 1,078,854
----------- -----------
Gross profit 604,098 418,369
----------- -----------
Operating expenses
Research and development 280,251 179,268
Sales and marketing 1,368,052 996,242
General and administrative 2,121,026 1,894,114
----------- -----------
Total operating expenses 3,769,330 3,069,624
----------- -----------
Loss from operations (3,165,232) (2,651,255)
Other income (expense)
Litigation recovery, net or costs 4,886,947
Other income (expense) (60,000) 19,710
Interest income 38,851 47,742
Interest expense (149,202) (153,138)
----------- -----------
Total other income (expense) (170,351) 4,801,261
----------- -----------
(Loss) income before income tax expense (3,335,583) 2,150,006
State income tax expense 3,407 -
----------- -----------
Net (loss) income (3,338,990) 2,150,006
Deemed dividend to preferred shareholders (Note 9) (629,148) (305,749)
----------- -----------
Net (loss) income allocable to common shareholders (3,968,138) 1,844,257
=========== ===========
(Loss) income per share ($0.55) $ 0.32
=========== ===========
Weighted average number of common shares outstanding 7,178,791 5,762,985
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Series A
Cumulative Series B Series C
Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Common Stock
-------------------- ------------------- ------------------ -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ---------- --------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 750 $8 1,000 $10 50 $1 6,683,853 $8,863
Series A Preferred issued in connection with
a private placement, net of expenses 500 5
Common stock isssued as settlement of contract
disputes 115,000 12
Exercise of stock options 239,500 24
Stock issued for acquisition of marketing contract 60,000 6
Stock issued for services 541,000 54
Preferred stock dividends 451 4
Net Loss
--------- ---------- --------- --------- -------- --------- --------- ---------
Balance, September 30, 1998 1,701 $17 1,000 $10 50 $1 7,639,353 $8,959
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------------ ------------ ----------
<S> <C> <C> <C>
Balance, January 1, 1998 $23,152,312 ($20,083,197) $2,277,997
Series A Preferred issued in connection with
a private placement, net of expenses 498,995 499,000
Common stock isssued as settlement of contract
disputes 94,176 94,188
Exercise of stock options 213,634 213,658
Stock issued for acquisition of marketing contract 43,118 43,124
Stock issued for services 529,101 529,155
Preferred stock dividends 629,144 (629,144) -
Net Loss (3,338,990) (3,338,990)
------------ ------------ ----------
Balance, September 30, 1998 $(24,051,335) $318,132)
============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net (loss) income $(3,338,990) $2,150,006
Depreciation and amortization 136,207 124,708
Allowance for doubtful accounts (12,250)
Stock issued for services 214,706 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, 105,500 (69,640)
Inventories (332,522) 92,206
Prepaid expenses and other current assets 57,983 29,403
Other assets (875) -
Increase (decrease) in:
Accounts payable 541,443 75,969
Accrued expenses (284,188) (180,781)
----------- ----------
Cash and cash equivalents used in operating activities (2,900,736) 2,209,621
----------- ----------
Cash flows from investing activities:
Purchase of equipment (42,392) (6,912)
Advances to related parties (468) -
Advances to Global International (285,385) -
Cash acquired through acquisition of Global International Sourcing 75,462 -
----------- ----------
Cash and cash equivalents used in investing activities (252,783) (6,912)
----------- ----------
Cash flows from financing activities:
Proceeds from issuance of stock 499,000 1,633,050
Proceeds from notes payable, short term 948,352 150,000
Proceeds of line of credit 36,363 -
Repayments of notes payable (301,848) (576,683)
----------- ----------
Cash and cash equivalents provided by financing activities 1,181,867 1,206,367
----------- ----------
Increase (decrease) in cash and cash equivalents (1,971,652) 3,409,076
Cash and cash equivalents, beginning of period 2,199,036 188,867
----------- ----------
Cash and cash equivalents, end of period $ 227,384 $3,597,943
=========== ==========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 149,202 $ 45,000
Income taxes $ (3,407) -
Supplemental disclosure of non-cash operating, investing, and
financial activities
Stock issued for accounts payable $ 519,692 $ 683,870
Stock issued for prepaid consulting services $ 102,602 -
Stock issued for acquisition of marketing contract $ 43,125 -
Acquisition of Global International Sourcing:
Assets acquired, net of cash $ 535,786
Liabilities assumed, including $522,328 due to Vitafort $ 829,461
</TABLE>
See accompanying notes to consolidated financial statements
8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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 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, 1997 included in the Company's
Annual Report on Form 10-KSB/A filed August 14, 1998.
The Company is presently engaged in formulating, marketing and distributing
fat-free, low fat and reduced fat foods.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated.
(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, consulting and other prepaids.
(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, which are recorded at cost, are composed of debt
issuance costs, acquisition costs of Auburn Farms and Natures
Warehouse trademarks, and goodwill associated with the acquisition of
Global International Sourcing, Inc. The acquisition costs associated
with trademarks and goodwill 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. These costs are reviewed by management periodically and written
down to the value of the future benefit expected to be derived.
(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.
9
<PAGE>
(g) For the three and nine months ended September 30, 1998 and 1997, basic
and diluted loss per share have been compiled using the weighted
average number of common shares outstanding during the period. Options
and warrants outstanding to purchase shares of common stock at various
prices per share at September 30, 1998, were not included in the
computation of diluted loss per share, as the effect would be
antidilutive. For the loss at September 30, 1998, the numerator in the
computation was adjusted by deducting the preferred deemed dividend to
arrive at the net loss allocable to common shareholders. Dividends on
cumulative preferred stock are not material.
(h) Advertising: Costs are expensed as incurred or prepaid until the
advertisement is published, at which time the related costs are
expensed.
(i) Reporting on the Cost of Start-Up Activities: Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities," ("SOP 98-5")
issued by the Accounting Standards Executive Committee is effective
for financial statements with fiscal years beginning after December
15, 1998. SOP 98-5 requires that the costs of start-up activities
should be expensed as incurred. At the time of adopting this SOP, the
initial application should be reported as the cumulative effect of a
change in accounting principles. At September 30, 1998, and December
31, 1997, the Company capitalized product introduction costs of
$37,250 and $10,711, respectively. These costs are considered as
start-up activities under SOP 98-5. The Company does not believe that
the adoption of this SOP will have a material effect on its financial
position, results of operations or cash flows.
NOTE 3 INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market. Market-based valuations are based upon estimates and assumptions, and
are generally limited to slow moving product offerings. Inventory consists of
the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Finished goods $329,927 $ 30,188
Packaging and raw material 255,206 217,423
-------- --------
$585,133 $247,611
======== ========
</TABLE>
NOTE 4 PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Deposits $ - $ 1,100
Product introduction costs 37,250 10,711
Insurance 66,250 36,377
Consulting 200,747 108,080
Other prepaids 18,000 113,000
-------- --------
Total prepaid expenses and other current assets $322,247 $269,268
======== ========
</TABLE>
10
<PAGE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Accrued compensation $36,179 $156,764
Accrued legal fees - 40,112
Accrued consulting fees - 4,919
Other accrued expenses 22,070 140,642
------- --------
Total accrued expenses $58,249 $342,437
======= ========
</TABLE>
NOTE 6 ACQUISITION OF SUBSIDIARY
As of March 31, 1998, the Company acquired 100% of the outstanding stock of
Global International Sourcing, Inc. (Global) for $25. The acquisition was
accounted for as a purchase and the operations of Global are included herein
commencing April 1, 1998. The assets and liabilities of Global were recorded at
fair value and resulted in goodwill of $218,213. Had the Company consolidated
its operating performance for the nine months ended September 30, 1998, the
results would have been as follows:
<TABLE>
<S> <C>
Net Sales $ 1,941,310
Gross Profit 648,953
Net Loss (3,454,369)
Net Loss Allocable to Common Shareholders (4,083,517)
Net Loss Per Share ($0.57)
</TABLE>
Global was formed in October 1997 and its financial position and results of
operations are not material compared to the Company's financial position at
December 31, 1997 or its results of operations for the year ended December 31,
1997.
NOTE 7 CONVERTIBLE DEBENTURE
On August 24, 1998, the Company issued a convertible debenture due August
24, 2000 and received proceeds in the amount of $548,352. Interest is payable
quarterly or at the time of conversion if such conversion is prior to a quarter
end until the principal is paid in full or has been converted. Each payment
shall be paid in cash or in common stock, at the Company's option. The holder of
the debenture shall have the right 120 days following August 24, 1998, at its
option, to convert it, plus any accrued interest, into shares of common stock at
any time prior to the maturity date. The conversion rate shall be at 75% of the
5 day average closing bid price as reported for the 5 consecutive trading days
immediately preceding the conversion date.
NOTE 8 NOTES PAYABLE
Bank
----
On June 26, 1998, the Company's current lender, Coast Business Credit
("Bank") notified the Company that it would not renew the credit line when it
expired on August 31, 1998. The Bank also agreed to eliminate from its
collateral the inventory to be used for the Purchase Order Financing discussed
below.
11
<PAGE>
The Company is in negotiations with other lenders to replace Coast Business
Credit and believes it will do so at rates and terms similar to those of Coast
Business Credit.
Other
-----
In June 1998, the Company entered into purchase order financing agreements
which provided the Company with $400,000 to purchase inventory. These advances
bear interest at 15% per annum and are to be repaid from the proceeds of the
related sales of the inventory if the inventory level falls below the amount of
the financing. In addition, the lender received options to purchase 100,000
shares of the Company's common stock at $1.00 per share. The Company has
pledged its inventory as collateral for these advances.
NOTE 9 - STOCKHOLDERS' EQUITY
During the nine month period ended September 30, 1998, the following stock
transactions occurred, all of which were valued at fair market:
(a) The Company issued 85,000 shares of common stock at a value of $1.00
per share as settlement for contract disputes previously recorded as a
liability.
(b) The Company issued 30,000 shares of common stock at a value of $.30625
per share as settlement of a contract dispute related to consulting
services previously recorded as a liability.
(c) The Company issued 60,000 shares of common stock at a value of $.71875
per share and forgave a $25,000 note receivable in exchange for the
distribution rights with respect to all marshmallow products in North
America. The Company also received $5,000 of sample inventory and
$15,000 of furniture and equipment as part of this transaction.
(d) The Company issued 100,000 shares of common stock at a value of $0.74
per share upon the exercise of an option granted a consultant in
exchange for future consulting services.
(e) The Company issued 15,000 shares of common stock at a value of $1.00
per share upon the exercise of an option granted a consultant in
exchange for services rendered previously recorded as a liability.
(f) The Company entered into a subscription agreement in March 1998 with
an unrelated investor for $500,000 for 500 shares of 1997 Series A
Preferred Stock. The preferred stock has a cumulative dividend of 6%
with no voting rights. The preferred stock is convertible beginning
August 10, 1998 at a 21.5% discount if the fair market value of the
stock on the date of conversion is $0.6875 per share or less. If the
fair market value of the stock on the date of conversion is more than
$0.6875 per share, the preferred stock is convertible at fair market
value. However, if the preferred shares are converted at fair market
value, the preferred shareholder will receive sufficient warrants upon
conversion to purchase common stock at $0.6875 per share to generate a
$275 profit per share of preferred stock converted.
As part of this transaction, the Company also issued 451 shares of
preferred stock, as well as warrants to purchase 282,422 shares of
common stock at $0.6875 per share to the holders of the 1997 Series A
Preferred Stock in exchange for the preferred stockholders accepting
an adjustment in the terms of the 1997 Series A Preferred Stock. The
warrants may be exercised over a five year period beginning August 10,
1998.
12
<PAGE>
For accounting purposes, the issuance of the warrants to the 1997
Series A Preferred stockholders results in a deemed dividend of
$147,381 which will be recognized as a deemed dividend at a rate of
$24,564 per month through August 10, 1998.
The modified terms of the 1,701 total shares of 1997 Series A
Preferred Stock outstanding would result in an issuance of 787,563
warrants to purchase shares of common stock. The value of these
potential warrants issued is reflected as an original issued discount
of $411,128 at the time of the transaction. This original issue
discount is being treated as a deemed dividend that will be recognized
at a rate of $68,521 per month through August 10, 1998.
(g) The Company issued 40,000 shares of common stock at a value of $1.00
per share upon the exercise of an option granted to a consultant in
exchange for consulting services.
(h) The Company issued 37,500 shares of common stock at a value of $1.004
per share upon the exercise of an option granted a previous employee
as part of a litigation settlement.
(i) The Company issued 339,500 shares of common stock at a value of $1.00
per share in June 1998 under an S-8 filing as payment for services
rendered and to be rendered.
(j) The Company issued 49,500 shares of common stock at a value of $.805
per share to various consultants and professional firms for previous
services rendered.
(k) The Company issued 47,000 shares of common stock at a value of $1.00
per share upon the exercise of an option granted to a consultant in
exchange for future consulting services.
(l) The Company issued 125,000 shares of common stock to officers at a
value of $1.00 per share in payment of accrued bonuses.
(m) The Company issued 20,000 shares of common stock at a value of $.94
per share to a consultant in payment of services rendered.
(n) The Company issued 7,000 shares of common stock at a value of $.86 per
share to a consultant in payment of services rendered.
NOTE 10 GOING CONCERN
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. The Company has
continued to suffer recurring losses from operations through September 30, 1998.
As of September 30, 1998, the Company has working capital of $55,407. The
Company needs to raise additional capital and realize a satisfactory level of
profitability from its current and future operations in order to remain a viable
entity. The Company's auditors have included an explanatory paragraph in their
report for the year ended December 31, 1997 indicating there is substantial
doubt regarding the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of any uncertainty. The Company is attempting
to raise additional capital to meet future financial obligations, but may not be
able to do so. Should the Company not be able to raise additional capital, it
may have to severely curtail operations.
13
<PAGE>
NOTE 11 - LITIGATION
The Company is subject to pending claims and litigation, the most
significant of which are discussed below.
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 `s losses might be as little as $15,000.
In connection with the acquisition of assets of Auburn Farms, Inc.,
("AFI"), the Company acquired the intellectual property and certain claims of
AFI which it was asserting against AFI's co-packer, New Life Bakers ("New Life")
and against a customer of New Life, Barbara's Bakery ("Barbara's"). In May 1996,
the Company filed an action in federal court alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition, conspiracy and related
claims arising out of New Life and Barbara's misappropriation of Auburn Farms'
principal products. Although no trial date has been set, the Company expects the
case to proceed to a jury trial in the first half of 1999.
On March 25, 1998, New Life and Barbara's purported to purchase from AFI's
bankruptcy estate certain claims against Barbara's and New Life for $300,000.
The purchased claims do not include any of the claims previously acquired by the
Company. The Company has been advised by outside litigation counsel that
evidence supports a claim for damages in excess of $3 million for the
destruction of AFI's and Vitafort's business and intellectual property rights.
The Company may be obligated to pay a portion of any recovery against New Life
to AFI's bankruptcy estate and/or its creditors. The Company intends to pursue
this litigation vigorously. There is no assurance given that the Company will
receive any recovery.
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 dismissed the complaint against Mark Beychok without leave to
amend. Mr. Ellis recently filed an amended complaint against the Company. The
Company is defending the action vigorously and trial is imminent. In a related
action, the Company filed a lawsuit against Ellis charging violations of Section
16(b) of the Securities Exchange Act of 1934 (short swing profits). Ellis sold
stock in violation of that section and, therefore, the profits, estimated at
$20,000, belong to the Company. In March 1998, the court ruled in favor of the
Company in this matter and awarded $21,260. Ellis has appealed the ruling. On
June 2, 1998 the parties resolved both the Ellis issues. Under the terms of the
agreement, the settlement is treated as confidential and the public response has
been agreed to as follows: "The matter has been resolved."
On September 25, 1998, a complaint was filed in Superior Court, the County
of Los Angeles, in an action entitled "Jonathan Neil & Associates, Inc., a
California corporation vs. Vitafort International Corporation, a Delaware
corporation and Does 1 through 50 inclusive." The complaint is for "Money for
Goods and Services Sold and Delivered, Account Stated, and Open Book Account."
The plaintiff is the assignor for Stone Container Corporation who are alleging
the defendant is indebted in the amount of $29,476.96 plus interest and
attorneys' fees. The Company is vigorously defending the suit.
On September 29, 1998, a complaint was filed in Superior Court, the County
of Los Angeles, in an action entitled "Kirtland & Packard LLP, a California
Limited Liability Partnership vs. Vitafort, Inc., a Delaware Corporation; and
Does 1-25 inclusive." The complaint alleges Breach of Contract, Fraud,
Negligent Misrepresentation, Common Counts, Breach of Implied Covenant of Good
Faith and Fair Dealing, Negligent Performance of Contract, and Declaratory
Relief, arising out of a contract for legal services. The Complaint seeks
damages in the amount of $85,000.00 plus interest and attorneys fees, and for
such other and further relief as the Court deems just and proper. The Company
is vigorously defending the suit.
14
<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 and Nine Months Ended September 30, 1998 and 1997
- --------------------------------------------------------------
Results of Operations:
A significant portion of the Company's efforts in new product development
culminated in the manufacture and shipment of two new product lines during the
first half of 1998: Toast `N Jammers Low Fat Toaster Pastries and The Wizard of
Oz brand marshmallows. The development of Juliette's Private Collection Low Fat
Cookies was completed in the second quarter and, because consumer demand and
overall retail cookie sales are relatively unaffected by the seasons, the timing
of their introduction will not present serious obstacles to distribution over
the remainder of 1998. Management is encouraged by steady retail sales of Toast
`N Jammers at Trader Joe's.
At the end of the second quarter, the majority of the inventory of
marshmallow product was at the Mexican border undergoing inspection by both the
Food and Drug Administration and the U. S. Customs Service. Both inspections
are routine; however, this was the first significant shipment of marshmallows
and thus the procedure and process took longer than anticipated. When the
product finally was released and delivered to the Company's subcontracted public
warehouse, there was not enough time to receive the goods, process the orders,
and re-ship the product to the customers. Thus, revenue of $257,004 was
recorded in July for the third quarter that would have been recorded in June
were it not for the inspection delays encountered.
Overcoming retailer resistance resulting from problems in the past with
Vitafort Fudgets and Caketts previously reported remains an obstacle; however,
recent orders for The Wizard of Oz marshmallows to some of those retailers point
to a reconsideration of past resistance. Management hopes that these
marshmallows will help overcome lingering resistance by others to all of the
Company's products. The Company is presently using acceptance by these
retailers to help restore its former position in other markets, especially in
its home state of California.
From the standpoint of the Company's retailers, successful sell-through and
restocking of the products are one way to re-establish the level of credibility
the Company enjoyed prior to the manufacturing problem referred to above. The
planned promotion of the re-release of The Wizard of Oz motion picture by Warner
Bros. and the Company's tie-ins as an official licensee are an important element
of the Fall marketing activities to support retail sales.
The acquisition of Global International Sourcing has to date proved
fortuitous because Global handled the manufacturing arrangements for the "The
Wizard of Oz" brand marshmallows. The
15
<PAGE>
Company plans to make full use of Global's sourcing skills in the future for
rounding out the licensed products brands with the additional snack food
products needed for continuity and category growth.
Net Revenues:
For the three months ended September 30, 1998, net sales were $805,511
compared to $322,116 for the same period in 1997, an increase of $483,395 or
approximately 150%. As stated above, $257,004 of revenue was recorded in the
third rather than the second quarter due to a customs inspection delay. Without
this extraordinary event, revenue would have been $548,507, or an increase of
$226,391 over the same period in the prior year. The loss of Fudgets and Caketts
sales, which in the three months ended September 30, 1997 were $151,989, were
not replaced by any other of the Company's other products, but sales of these
products were not sufficient to allow substantial overall sales growth. In May
1998, the Company discontinued the Caketts line of three products and two of the
three Fudget products. The introduction of The Wizard of Oz(TM) marshmallows in
the second quarter of 1998 generated sales of $531,566 for the three months
ended September 30, 1998 compared to no sales for the same period in 1997. The
Auburn Farms/Natures Warehouse product lines weakened somewhat in the quarter
ended September 30, 1998 where sales were $238,813 compared to $119,546 for the
same period in 1997. Global International Sourcing contributed $108,004 in sales
during the three month period ended September 30, 1998.
For the nine months ended September 30, 1998, net sales were $1,555,505
compared to $1,497,223 for the same period in 1997, an increase of $58,282. The
sales totals reflect a declining product mix with losses of Caketts and Fudget
sales being offset by sales of marshmallows and Toast `N Jammers. The Company
introduced The Wizard of Oz marshmallows under its Avenue of the Stars(TM) brand
in the month of June 1998 and recorded sales at the end of the second quarter of
$92,736. Sales of $624,334 were recorded in the third quarter. The Auburn
Farms/Natures Warehouse product lines continued to weaken in the nine months
ended September 30, 1998 where sales were $668,861 compared to $707,400 for the
same period in 1997.
Gross Profit:
Gross profit increased from $125,890 or 39% for the three months ended
September 30, 1997 to $402,419 or 50% for the three months ended September 30,
1998, an increase of $276,529. The increase reflects a shift in product mix for
1998.
Gross profit increased from $418,369 for the nine months ended September
30, 1997 to $604,098 for the nine months ended September 30, 1998, an increase
of $185,729. The increase is due to sales of products with higher margins.
Operating Expenses:
Overall operating expenses for the three month period ended September 30,
1998 have increased over the previous year period by $1,026,291 due to the
rollout of new products offset by proceeds received from the Keebler settlement.
16
<PAGE>
Overall operating expenses for the nine month period ended September 30,
1998 have increased over the previous year by $699,706 due to the rollout of
new products offset by proceeds received from the Keebler settlement.
Research and Development:
Total expenses for product development in the quarter ended September 30,
1998 were $140,667 compared to $123,137 for the same period in 1997, an increase
of $17,530. The majority of the increase in expenses was related to the
employment of outside consultants to assist the staff in insuring development of
new formulations and product design. In addition, these consultants were working
with the Company's co-packers to maintain acceptable quality assurance and to
insure that quality control measures are in place during the manufacturing
process of the Company's products. The cost for the three months ended September
30, 1998 for outside consultants was $81,981 compared to $122,512 for the same
period in 1997, a decrease of $40,531 because fewer consultants were used.
Total expenses for product development in the nine months ended September
30, 1998 were $280,251 compared to $179,268 for the same period in 1997, an
increase of $100,983. The majority of the increase in expenses was related to
the employment of outside consultants to continue the effort in new product
development, design and sourcing. The cost for the nine months ended September
30, 1998 for outside consultants was $163,252 compared to $146,883 for the same
period in 1997, an increase of $16,369.
Sales and Marketing:
Total sales and marketing expenses for the quarter ended September 30, 1998
were $621,708 compared to $257,016 for the three months ended September 30,
1997, an increase of $364,692. Global International Sourcing sales and marketing
expenses for the quarter ended September 30, 1998 were $149,268, while Vitafort
sales and marketing expenses were $472,440. Without the acquisition of Global,
the overall sales and marketing expenses for the quarter would have been more
than the previous year period by $215,424. The increase in Vitafort expenses
were primarily in sales promotion expenses, $52,648 and product introduction
fees, $29,776, all of which are related to increased sales efforts.
Total sales and marketing expenses for the nine months ended September 30,
1998 were $1,368,052 compared to $996,242 for the nine months ended September
30, 1997, an increase of $371,810. Global International Sourcing sales and
marketing expenses for the nine months ended September 30, 1998 were $354,271,
while Vitafort sales and marketing expenses were $1,013,781. The increase in
Vitafort expenses were primarily in the areas of sales promotion expenses,
$96,406 and product introduction fees, $36,859 related to increased sales
efforts.
General and Administrative:
For the quarter ended September 30, 1998, total general and administrative
expenses were $647,295 compared to $3,227 for the same quarter ended September
30, 1997 an increase of $644,068. The increase of $644,068 was caused by
proceeds from the Keebler settlement which were received during the 3 months
ended September 30, 1997 being offset to the general and administrative expenses
for that period. Staff increases and related expenses increased by $149,019 for
the three months ended September 30, 1998 compared to the three
17
<PAGE>
months ended September 30, 1997 due to the conversion of certain staff positions
from temporary consulting classifications to permanent employees. The decrease
is in the professional services, especially legal, where the expense level
declined from $333,775 for the three months ended September 30, 1997 to $307,219
for the three months ended September 30, 1998, a decrease of $26,556 which was
accomplished principally through the resolution of certain legal proceedings.
For the nine months ended September 30, 1998, total general and
administrative expenses were $2,121,026 compared to $1,894,114 for the same
period in 1997, an increase of $226,912. Staff increases and related expenses
increased by $496,558 for the nine months ended September 30, 1998 compared to
the nine months ended September 30, 1997, as temporary positions in 1997 were
converted to permanent positions in 1998. The professional expenses were
reduced by $675,278 for the nine months ended September 30, 1997 from $1,710,167
to $1,034,889 for the nine months period ended September 30, 1998.
Other Income (Expense):
The interest income continues to reflect the Company's investment of excess
cash in short term investment instruments. As the amount of the total
investment declines due to cash requirements, the amount of income will also
decline.
The other expense recognizes the effect of the lawsuit settled in the
current quarter.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------------ ---------------
<S> <C> <C>
Net Cash Used for Operations $(2,938,595) $(2,209,621)
Net Cash Used for Investing Activities ( 252,783) (6,912)
Net Cash Provided by Financing Activities 1,219,726 1,206,367
Working Capital (Deficit) 55,407 3,409,076
</TABLE>
The Company continues to expend resources in the product development area
for the scheduled introduction of new products. The Company's financial
condition continues to impair its ability to obtain credit terms with new co-
packers. This will put additional pressure on the liquidity of the Company and
may impede its ability to produce product. Although the Company believes the
new products, which have higher gross profit margins, can allow the Company to
reach an operating profit, there is no guarantee that the Company will be able
to reach such revenue levels. Nor is there any assurance that the Company will
be able to meet its future cash obligations without additional external funding
and improved sales. Neither additional financing nor improved sales can be
guaranteed to occur in the future.
The Company has suffered recurring losses from operations as of September
30, 1998. Although the Company has raised additional capital, it has not
generated sufficient revenue-producing activity to sustain its operations. The
Company's independent certified public accountants have included a modification
to their opinion which indicates there is substantial doubt about the Company's
ability to continue as a going concern. See "Note 10" to the consolidated
financial statements for additional information. The Company is attempting to
raise additional capital to meet future working capital requirements, but may
not be able to do so. Should the Company not be able to raise additional
capital, it may have to curtail operations.
18
<PAGE>
ITEM 2. OTHER INFORMATION
VITAFORT INTERNATIONAL CORPORATION
LITIGATION
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 `s losses might be as little as $15,000.
In connection with the acquisition of assets of Auburn Farms, Inc.,
("AFI"), the Company acquired the intellectual property and certain claims of
AFI which it was asserting against AFI's co-packer, New Life Bakers ("New Life")
and against a customer of New Life, Barbara's Bakery ("Barbara's"). In May
1996, the Company filed an action in federal court alleging Lanham Act
violations, misappropriation of trade secrets, unfair competition, conspiracy
and related claims arising out of New Life and Barbara's misappropriation of
Auburn Farms' principal products. Although no trial date has been set, the
Company expects the case to proceed to a jury trial in the first half of 1999.
On March 25, 1998, New Life and Barbara's purported to purchase from AFI's
bankruptcy estate certain claims against Barbara's and New Life for $300,000.
The purchased claims do not include any of the claims previously acquired by the
Company. The Company has been advised by outside litigation counsel that
evidence supports a claim for damages in excess of $3 million for the
destruction of AFI's and Vitafort's business and intellectual property rights.
The Company may be obligated to pay a portion of any recovery against New Life
to AFI's bankruptcy estate and/or its creditors. The Company intends to pursue
this litigation vigorously. There is no assurance given that the Company will
receive any recovery.
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 dismissed the complaint against Mark Beychok without leave to
amend. Mr. Ellis recently filed an amended complaint against the Company. The
Company is defending the action vigorously and trial is imminent. In a related
action, the Company filed a lawsuit against Ellis charging violations of Section
16(b) of the Securities Exchange Act of 1934 (short swing profits). Ellis sold
stock in violation of that section and, therefore, the profits, estimated at
$20,000, belong to the Company. In March 1998, the court ruled in favor of the
Company in this matter and awarded $21,260. Ellis has appealed the ruling. On
June 2, 1998 the parties resolved both the Ellis issues. Under the terms of the
agreement, the settlement is treated as confidential and the public response has
been agreed to as follows: "The matter has been resolved."
19
<PAGE>
On September 25, 1998, a complaint was filed in Superior Court, the County
of Los Angeles, in an action entitled "Jonathan Neil & Associates, Inc., a
California corporation vs. Vitafort International Corporation, a Delaware
corporation and Does 1 through 50 inclusive." The complaint is for "Money for
Goods and Services Sold and Delivered, Account Stated, and Open Book Account."
The plaintiff is the assignor for Stone Container Corporation who are alleging
the defendant is indebted in the amount of $29,476.96 plus interest and
attorneys' fees. The Company is vigorously defending the suit.
On September 29, 1998, a complaint was filed in Superior Court, the County
of Los Angeles, in an action entitled "Kirtland & Packard LLP, a California
Limited Liability Partnership vs. Vitafort, Inc., a Delaware Corporation; and
Does 1-25 inclusive." The complaint alleges Breach of Contract, Fraud,
Negligent Misrepresentation, Common Counts, Breach of Implied Covenant of Good
Faith and Fair Dealing, Negligent Performance of Contract, and Declaratory
Relief, arising out of a contract for legal services. The Complaint seeks
damages in the amount of $85,000.00 plus interest and attorneys fees, and for
such other and further relief as the Court deems just and proper. The Company
is vigorously defending the suit.
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
Date: November 20, 1998
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 233,142
<SECURITIES> 0
<RECEIVABLES> 329,369
<ALLOWANCES> (25,743)
<INVENTORY> 363,865
<CURRENT-ASSETS> 1,158,461
<PP&E> 632,035
<DEPRECIATION> 437,006
<TOTAL-ASSETS> 2,665,624
<CURRENT-LIABILITIES> 2,016,589
<BONDS> 0
0
38
<COMMON> 8,959
<OTHER-SE> 25,160,480
<TOTAL-LIABILITY-AND-EQUITY> 2,665,624
<SALES> 779,414
<TOTAL-REVENUES> 779,414
<CGS> 621,494
<TOTAL-COSTS> 2,995,868
<OTHER-EXPENSES> 21,149
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 145,525
<INCOME-PRETAX> 0
<INCOME-TAX> 3,464
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,068,086)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
