<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 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 August 14, 1998, is 7,515,352.
1
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART 1 -- FINANCIAL INFORMATION
________________________________________________________________________________
<TABLE>
<CAPTION>
ITEM 1. Consolidated Financial Statements:
<S> <C>
Balance Sheets -- June 30, 1998 (unaudited) and December 31, 1997. 3-4
Statements of Operations --
Three Month Periods Ended June 30, 1998 and 1997 (unaudited)...... 5
Six Month Periods Ended June 30, 1998 and 1997 (unaudited) ....... 6
Statement of Stockholders' Equity (Deficit) --
Six Month Period Ended June 30, 1998 (unaudited).................. 7
Statements of Cash Flows --
Six Month Periods Ended June 30, 1998 and 1997 (unaudited)........ 8
Notes to the Financial Statements (unaudited)..................... 9-14
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 15-18
PART II OTHER INFORMATION
________________________________________________________________________________
Litigation........................................................ 19
Signature......................................................... 20
</TABLE>
2
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 1998 and December 31, 1997
<TABLE>
<CAPTION>
ASSETS
------
June 30, December 31,
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents $ 467,806 $2,199,036
Accounts receivable, less allowance
for doubtful accounts of $25,743 426,557 412,289
Inventories (Notes 3 and 8) 517,856 247,611
Notes receivable - related party 118,244 10,000
Prepaid expenses and other current assets (Note 4) 374,172 269,268
---------- ----------
Total Current Assets 1,904,635 3,138,204
---------- ----------
Equipment
Manufacturing equipment 290,912 290,912
Furniture and equipment 125,417 105,160
Computer equipment 209,574 193,571
---------- ----------
625,903 589,643
Less accumulated depreciation (406,724) (347,493)
---------- ----------
219,179 242,150
---------- ----------
Other Assets
Intangible assets, net of accumulated amortization
of $123,775 and $73,163 (Notes 2 and 6) 596,254 338,091
Advances to Global International Sourcing (Note 6) 193,818
Other assets 1,475 -
---------- ----------
Total Other Assets 597,729 531,909
---------- ----------
$2,721,544 $3,912,263
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of June 30, 1998 and December 31, 1997
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
<S> <C> <C>
Current liabilities
Notes payable - bank $ 86,582 $ 60,757
Notes payable - others (Note 8) 437,763 283,898
Accounts payable 724,005 909,315
Accrued expenses (Note 5) 235,881 342,437
Current maturities of long-term debt (Note 7) 37,859 37,859
------------ ------------
Total Current Liabilities 1,522,090 1,634,266
------------ ------------
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 9)
Series B, 10% Cumulative Convertible Preferred Stock,
$.01 par value; authorized 1l0,000 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 7,440,350 and 6,683,853 8,939 8,863
shares (Note 9)
Additional paid-in-capital (Note 9) 24,800,058 23,152,312
Accumulated deficit (23,609,571) (20,883,197)
------------ ------------
Total Stockholders' Equity 1,199,454 2,277,997
------------ ------------
$ 2,721,544 $ 3,912,263
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $ 403,158 $ 402,788
Cost of sales 279,743 334,340
----------- -----------
Gross profit 123,415 68,448
----------- -----------
Operating expenses
Research and development 78,225 16,781
Sales and marketing 488,247 359,430
General and administrative 750,240 1,304,656
----------- -----------
Total operating expenses 1,316,712 1,680,867
----------- -----------
Loss from operations (1,193,296) (1,612,419)
Other income (expense)
Other income (expense) (60,000) 16,191
Interest income 5,191 -
Interest expense (50,337) (58,942)
----------- -----------
Total other income (expense) (105,146) (42,751)
----------- -----------
Loss before income tax expense (1,298,442) (1,655,710)
State income tax expense (57) -
----------- -----------
Net loss (1,298,385) (1,655,170)
Deemed dividend to preferred shareholders (Note 9) (279,250) (305,749)
----------- -----------
Net loss allocable to common shareholders (1,577,635) (1,960,919)
=========== ===========
Loss per share $ (0.22) $ (0.34)
=========== ===========
Weighted average number of common shares outstanding 7,132,317 5,731,586
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $ 749,994 $ 1,175,107
Cost of sales 548,315 882,628
----------- -----------
Gross profit 201,679 292,479
----------- -----------
Operating expenses
Research and development 139,584 56,131
Sales and marketing 746,344 739,226
General and administrative 1,473,731 1,890,887
----------- -----------
Total operating expenses 2,359,659 2,686,244
----------- -----------
Loss from operations (2,157,979) (2,393,765)
Other income (expense)
Other income (expense (60,385) 23,119
Interest income 36,017 -
Interest expense (97,906) (99,553)
----------- -----------
Total other income (expense) (122,274) (76,434)
----------- -----------
Loss before income tax expense (2,280,254) (2,470,199)
State income tax expense 3,143 -
----------- -----------
Net loss (2,283,396) (2,470,199)
Deemed dividend to preferred shareholders (Note 9) (442,978) (305,749)
----------- -----------
Net loss allocable to common shareholders (2,726,374) (2,775,948)
=========== ===========
Loss per share $ (0.39) $ (0.51)
=========== ===========
Weighted average number of common shares outstanding 6,994,639 5,390,957
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Six Months Ended June 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 issued as settlement of contract
disputes 115,000 12
Exercise of stock options 192,500 19
Stock issued for acquisition of marketing contract 60,000 6
Stock issued for services 389,000 39
Preferred stock dividends 451 4
Net Loss
------ ------ ------ ------ ------ ------ --------- ------
Balance, June 30, 1998 1,701 $ 17 1,000 $ 10 50 $ 1 7,440,353 $8,939
====== ====== ====== ====== ====== ====== ========= ======
<CAPTION>
Additional
Paid-in Accumulated
Capital Deficit Total
----------- ------------ -----------
<S> <C> <C> <C>
Balance, January 1, 1998 $23,152,312 ($20,883,197) $ 2,277,997
Series A Preferred issued in connection with
a private placement, net of expenses 498,995 499,000
Common stock issued as settlement of contract
disputes 116,738 116,750
Exercise of stock options 166,639 166,658
Stock issued for acquisition of marketing contract 43,118 43,124
Stock issued for services 379,282 379,321
Preferred stock dividends 442,974 -442,978 -
Net Loss -2,283,396 (2,283,396)
----------- ------------ -----------
Balance, June 30, 1998 $24,800,058 $(23,609,571) $ 1,199,454
=========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements
7
<PAGE>
VITAFORT INTERATIONAL CORPORTION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, June 30,
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities:
Net loss $(2,283,396) $(2,470,199)
Depreciation and amortization 111,094 83,138
Stock issued for services 109,336 -
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, trade, net 308,274 46,160
Inventories (265,245) 120,452
Prepaid expenses and other current assets 95,350 54,865
Other assets (1,475) -
Increase (decrease) in:
Accounts payable (130,912) 611,433
Accrued expenses (106,558) (128,936)
----------- -----------
Cash and cash equivalents used in operating activities (2,163,533) (1,683,087)
----------- -----------
Cash flows from investing activities:
Purchase of equipment (22,510) (378)
Advances to related parties (13,954) -
Advances to Global International (285,385)
Cash acquired through acquisition of Global International Sourcing 75,462 -
----------- -----------
Cash and cash equivalents used in investing activities (246,387) (378)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock 499,000 1,542,444
Proceeds from notes payable, short term 400,000 300,000
Repayments of line of credit 25,825 (115,183)
Repayments of notes payable (246,135) -
----------- -----------
Cash and cash equivalents provided by financing activities 678,690 1,727,261
----------- -----------
Increase (decrease) in cash and cash equivalents (1,731,230) 43,796
Cash and cash equivalents, beginning of period 2,199,036 188,867
----------- -----------
Cash and cash equivalents, end of period $ 467,806 $ 232,663
=========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for:
Interest $ 97,906 $ 45,000
Income taxes $ 3,143 -
Supplemental disclosure of non-cash operating, investing, and
financial activities
Stock issued for accounts payable $ 361,504 $ 683,870
Stock issued for prepaid consulting services $ 191,889 -
Stock issued for acquisition of marketing contract $ 43,124 -
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 condensed 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 six months ended June 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 June 30, 1998 and 1997, were not included in the
computation of diluted loss per share, as the effect would be
antidilutive. For the loss at June 30, 1998 and 1997, the numerator in
the computation was adjusted by deducting the preferred deemed
preferred 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 June 30, 1998, and December 31, 1997, the
Company capitalized product introduction costs of $9,500 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>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Finished goods $ 383,770 $ 30,188
Packaging and raw material 134,086 217,423
---------- -----------
$ 517,856 $ 247,611
========== ===========
</TABLE>
NOTE 4 -- PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Deposits $ - $ 1,100
Product introduction costs 9,500 10,711
Insurance 66,032 36,377
Consulting 246,909 108,080
Other prepaids 51,731 113,000
-------- --------
Total prepaid expenses and other
current assets $374,172 $269,268
======== ========
</TABLE>
10
<PAGE>
NOTE 5 - ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Accrued compensation $154,179 $156,764
Accrued commissions 12,235 -
Accrued legal fees - 40,112
Accrued consulting fees 69,467 4,919
Other accrued expenses - 140,642
-------- --------
Total accrued expenses $235,881 $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 six months ended June 30, 1998, the results
would have been as follows:
Net Sales $ 1,135,799
Gross Profit 246,534
Net Loss (2,398,744)
Net Loss Allocable to Common Shareholders (2,841,752)
Net Loss Per Share ($0.40)
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 -- CURRENT MATURITIES OF LONG-TERM DEBT:
The note consists of a $37,859 14% note payable, due in monthly
installments of $4,033, including interest, through October 1997, secured by
certain of the Company's fixed assets. The agreement with the secured lender,
Coast Business Credit, included a provision that halted payments on this note.
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
expires 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 six month period ended June 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 $1.058 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 future 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.
NOTE 10 GOING CONCERN
The Company has prepared the financial statements included herewith
assuming that the Company will continue as a going concern. Although the
Company received proceeds from the Keebler arbitration in 1997 and has raised
additional capital in 1998, it 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.
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
13
<PAGE>
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."
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<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 Six Months Ended June 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 the steady retail sales of
Toast `N Jammers at Trader Joe's.
At the end of the 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
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<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 June 30, 1998, net sales were $403,158 compared
to $402,788 for the same period in 1997, an increase of $370 or approximately
.09%. The loss of Fudgets and Caketts sales, which in the three months ended
June 30, 1997 were $136,850, 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 this second quarter of 1998
generated sales of $92,736 for the three months ended June 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 June 30, 1998 where sales
were $214,433 compared to $265,867 for the same period in 1997. The loss of
Auburn Farms sales reflects the Company's opinion that consumer tastes are
shifting from the no fat products, which are usually associated with no taste,
to reduced fat products which do provide the consumer with reasonably good
taste. Most of the new products scheduled for introduction are either reduced
fat or low fat. Global International Sourcing contributed $95,989 in sales
during the three month period ended June 30, 1998.
For the six months ended June 30, 1998, net sales were $749,994 compared to
$1,175,107 for the same period in 1997, a decrease of $425,113. The loss of
Fudgets and Caketts sales, which in the six months ended June 30, 1997 were
$518,670, were not replaced by any other of the Company's other products. 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
quarter of $92,736. The Auburn Farms/Natures Warehouse product lines continued
to weaken in the six months ended June 30, 1998 where sales were $430,048
compared to $656,220 for the same period in 1997. The loss of Auburn Farms
sales reflects the Company's opinion that consumer tastes are shifting from the
no fat products, which are usually associated with no taste, to reduced fat
products which do provide the consumer with reasonably good taste. Most of the
new products scheduled for introduction are either reduced fat or low fat.
Gross Profit:
Gross profit increased from $68,448 or 17.0% for the three months ended
June 30, 1997 to $123,415 or 30.6% for the three months ended June 30, 1998, an
increase of $54,967. The increase reflects a shift in product mix for 1998
which should, as the year progresses, assist the Company in reaching the target
margins.
Gross profit decreased from $292,479 for the six months ended June 30, 1997
to $201,679 for the six months ended June 30, 1998, a decrease of $90,800. The
decline is due to the low gross profit margins which are normally generated from
Global.
Operating Expenses:
Overall operating expenses for the three month period ended June 30, 1998
have decreased over the previous year period by $364,212 due to the decrease in
legal expenses from the Keebler arbitration which occurred in May 1997.
Overall operating expenses for the six month period ended June 30, 1998
have decreased over the previous year due to the reduction in legal fees in 1998
compared to 1997 offset by the selling expense
16
<PAGE>
increase due to the Global acquisition. The development and introduction of new
products continues to offset the savings due to the reduction in general and
administrative expenses.
Research and Development:
Total expenses for product development in the quarter ended June 30, 1998
were $78,225 compared to $16,781 for the same period in 1997, an increase of
$61,441. 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 June 30, 1998 for outside consultants was $64,885 compared to $15,199 for
the same period in 1997, an increase of $49,686.
Total expenses for product development in the six months ended June 30,
1998 were $139,584 compared to $56,131 for the same period in 1997, an increase
of $83,453. 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 six months ended June 30,
1998 for staff and outside consultants was $134,899 compared to $53,621 for the
same period in 1997, an increase of $81,278.
Sales and Marketing:
Total sales and marketing expenses for the quarter ended June 30, 1998 were
$488,247 compared to $359,430 for the three months ended June 30, 1997, an
increase of $128,817. Global International Sourcing sales and marketing
expenses for the quarter ended June 30, 1998 were $205,003, while Vitafort sales
and marketing expenses were $283,244. Without the acquisition of Global, the
overall sales and marketing expenses for the quarter would have been less than
the previous year period by $76,186. The decrease in Vitafort expenses were
primarily in sales promotion expenses, $31,176 and product introduction fees,
$75,970, all of which are related to the decline in overall sales volume. These
reductions were offset by the $62,162 increase in staffing costs to support the
introduction of new products and the increase in customer service.
Total sales and marketing expenses for the six months ended June 30, 1998
were $746,344 compared to $739,226 for the six months ended June 30, 1997, an
increase of $7,118. Global International Sourcing sales and marketing expenses
for the six months ended June 30, 1998 were $205,003, while Vitafort sales and
marketing expenses were $541,341. The decrease in Vitafort expenses were
primarily in the areas of sales promotion expenses, $79,199 and product
introduction fees, $171,517 related to the decline in overall sales volume.
General and Administrative:
For the quarter ended June 30, 1998, total general and administrative
expenses were $750,183 compared to $1,304,656 for the same quarter ended June
30, 1997 a decrease of $554,473. Staff increases and related expenses increased
by $48,634 for the three months ended June 30, 1998 compared to the three months
ended June 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 $793,580 for the three months ended June 30, 1997 to $262,505 for the three
months ended June 30, 1998, a decrease of $531,075.
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<PAGE>
For the six months ended June 30, 1998, total general and administrative
expenses were $1,473,731 compared to $1,890,887 for the same period in 1997, a
decrease of $417,156. Staff increases and related expenses increased by $87,490
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997, as temporary positions in 1997 were converted to permanent positions in
1998. The professional expenses were reduced by $524,744 for the six months
ended June 30, 1997 from $1,041,876 to $517,132 for the six months period ended
June 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.
<TABLE>
<CAPTION>
Liquidity and Capital Resources:
Six Months Ended
June 30,
1998 1997
----------- -----------
<S> <C> <C>
Net Cash Used for Operations $(2,163,533) $(1,683,087)
Net Cash Used for Investing Activities (246,387) (378)
Net Cash Provided by Financing Activities 678,690 1,727,261
Working Capital (Deficit) 382,545 1,503,938
</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 June 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.
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<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>
VITAFORT INTERNATIONAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VITAFORT INTERNATIONAL CORPORATION
----------------------------------
(Company)
/s/ Mark Beychok
----------------
Mark Beychok
Chief Executive Officer
/s/ Jack B. Spencer
-------------------
Jack B. Spencer
Chief Operating Officer
Chief Financial Officer
Date: August 17, 1998
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