<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 SEPTEMBER 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-18438
-------
VITAFORT INTERNATIONAL CORPORATION
----------------------------------
Exact name of Registrant as specified in its charter)
DELAWARE 68-0110509
-------- ----------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1800 AVENUE OF THE STARS, SUITE 480, LOS ANGELES, CA 90067
----------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(310) 552-6393
--------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 of during the preceding twelve
months ended December 31, 1995 (or for such shorter period that the Registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past ninety days.
Yes: X No:
-
The number of shares of the Registrant's Common Stock, par value $.0001 per
share outstanding on January 15, 1998 is 7,072,052.
1
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART I - FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ITEM 1. Consolidated Financial Statements:
Balance Sheets - September 30, 1997 (unaudited)
and December 31, 1996........................................ 3
Statements of Operations -
Three Month Periods Ended September 30, 1997 and 1996
(unaudited) and Nine Month Periods Ended September 30, 1997
and 1996 (unaudited) 5
Statement of Stockholders' Equity (Deficit) -
Nine Month Period Ended September 30, 1997 (unaudited)....... 6
Statements of Cash Flows -
Nine Month Periods Ended September 30, 1997 and 1996
(unaudited).................................................. 7
Notes to the Financial Statements............................ 8
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 14
</TABLE>
PART II - OTHER INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ITEM 1. Legal Proceedings............................................ 19
ITEM 4. Submission of Matters of a Vote of Security Holders......... 19
ITEM 6. Exhibits and Reports on Form 8-K............................. 20
Signatures................................................... 21
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $3,597,943 $ 188,867
Accounts receivable-trade, net of allowance for doubtful
accounts of $67,743 at September 30, 1997 and
$79,994 at December 31, 1996 508,852 430,789
Notes receivable 10,000 56,000
Other receivables 33,894 4,464
Inventory, net 268,989 361,196
Prepaid expenses and other assets 262,727 271,731
---------- ----------
Total Current Assets 4,682,405 1,313,047
Fixed Assets:
Manufacturing equipment 290,912 290,912
Furniture and office equipment 105,539 105,160
Computer equipment 179,827 173,294
---------- ----------
Total Fixed Assets 576,278 569,366
Less accumulated depreciation and amortization (316,997) (231,592)
---------- ----------
Net Fixed Assets 259,281 337,774
Other Assets:
Intangible and other assets 411,254 481,254
Less accumulated amortization (64,864) (95,561)
---------- ----------
Net Other Assets 346,390 385,693
========== ==========
Total Assets $5,288,076 $2,036,514
========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
3
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
---------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------- -----------
(unaudited)
<S> <C> <C>
Liabilities and Stockholders' Equity (Deficit)
Current Liabilities:
Notes payable $ 243,349 $ 440,022
Accounts payable 312,727 1,263,250
Accrued expenses 608,431 789,212
Note payable to shareholders 37,859 37,859
---------- ----------
Total Current Liabilities 1,202,366 2,530,343
Stockholders' Equity(Deficit):
Series A, 6% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 750 shares authorized,
750 shares issued and outstanding at September 30, 1997
and none at December 31, 1996; aggregate liquidation
preference of $750,000 at September 30, 1997 8 0
Series B, 10% Cumulative Convertible Preferred Stock
$0.01 par value, cumulative, 110,000 shares authorized,
1,000 shares issued and outstanding at September 30, 1997
and December 31, 1996; aggregate liquidation
preference of $50,000 at September 30, 1997 and
December 31, 1996 10 10
Series C, Convertible Preferred stock, $0.01 par value,
450 shares authorized, 50 shares issued and outstanding
as of September 30, 1997 and December 31, 1996;
aggregate liquidation preference of $50,000 at September 30,
1997 and December 31, 1996 1 1
Common stock, $.0001 par value. Authorized
9,000,000 shares at September 30, 1997 and 9,000,000 at
December 31, 1996, issued and outstanding
6,741,050 shares at September 30, 1997 and
4,908,664 at December 31, 1996, respectively. 8,870 8,686
Additional paid-in capital 23,246,457 20,547,953
Accumulated deficit (19,169,636) (21,050,479)
------------ ------------
Total Stockholders' Equity(Deficit) 4,085,710 (493,829)
============ ============
Total Liabilities and Stockholders' Equity(Deficit) $ 5,288,076 $ 2,036,514
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ -----------------------------
1997 1996 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 322,116 $ 2,104,314 $ 1,497,223 $ 4,408,665
Cost of sales 196,226 1,912,734 1,078,854 3,988,128
---------- ----------- ----------- -----------
Gross profit 125,890 191,580 418,369 420,537
Operating expenses:
Product development 123,137 247,061 179,268 693,389
Sales and Marketing 257,016 580,798 996,242 1,690,024
General and administrative 3,227 573,929 1,894,114 1,603,775
---------- ----------- ----------- -----------
Total operating expenses 383,380 1,401,788 3,069,624 3,987,188
---------- ----------- ----------- -----------
Operating loss (257,490) (1,210,208) (2,651,255) (3,566,651)
Other income (expense) (3,409) 2,758 19,710 11,793
Interest expense (53,585) (4,423) (153,138) (13,693)
Interest income 47,742 0 47,742 0
Litigation recovery, net of costs 4,886,947 0 4,886,947 0
---------- ----------- ----------- -----------
Income(Loss) before provision
for income taxes 4,620,205 (1,211,873) 2,150,006 (3,568,551)
Provision for income taxes 0 1,105 0 3,159
---------- ----------- ----------- -----------
Net Income(Loss) 4,620,205 (1,212,978) 2,150,006 (3,571,710)
Deemed dividends to preferred shareholders 0 0 (269,164) 0
---------- ----------- ----------- -----------
Net Income (Loss) allocable to
common shareholders $4,620,205 $(1,212,978) $ 1,880,842 $(3,571,710)
========== =========== =========== ===========
Net Income(Loss) per share $0.67 $(0.28) $0.33 $(0.85)
========== =========== =========== ===========
Weighted Average Shares
of Common Stock 6,868,277 4,339,878 5,762,985 4,215,668
========== =========== =========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Nine Months ended September 30, 1997
(unaudited)
<TABLE>
<CAPTION>
Series A Series B Series C
Convertible Convertible Convertible
Preferred Preferred Preferred Subscribed
Stock Stock Stock Stock
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Balance, January 1, 1997 $ - $ 10 $ 1 $ -
Common stock issued in private
placement, net of commissions -
Exercise of stock options -
Common stock issued as settlement
of contract dispute
Exercise of stock options
Series A Preferred issued in
connection with private
placement, net of commissions
and expenses 8
Conversion of debt to equity
Exercise of stock options
Preferred Stock Dividends
Net income
---------- ---------- ---------- ---------
Balance, September 30, 1997 $ 8 $ 10 $ 1 $ -
========== ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
Common Stock
-------------------- Additional Paid Accumulated
Shares Amount In Capital Deficit Total
--------- ------ --------------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 4,908,664 $8,686 $20,547,953 $(21,050,479) $ (493,829)
Common stock issued in private
placement, net of commissions 500,000 50 449,950 450,000
Exercise of stock options 183,100 18 183,082 183,100
Common stock issued as settlement
of contract dispute 70,000 7 78,743 78,750
Exercise of stock options 185,600 19 162,381 162,400
Series A Preferred issued in
connection with private
placement, net of commissions
and expenses 672,992 673,000
Conversion of debt to equity 803,686 81 796,401 796,482
Exercise of stock options 90,000 9 85,791 85,800
Preferred Stock Dividends 269,164 (269,164) -
Net income 2,150,007 2,150,007
--------- ------ ----------- ------------ ----------
Balance, September 30, 1997 6,741,050 $8,870 $23,246,457 $(19,169,636) $4,085,710
========= ====== =========== ============ ==========
</TABLE>
6
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1996
(unaudited)
<S> <C> <C>
Increase (Decrease) In Cash and Cash
Equivalents:
Cash flows from operations:
Net Income(Loss) $2,150,006 $(3,571,710)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Depreciation and amortization 124,708 94,998
Allowance for doubtful accounts (12,250) 0
Inventory reserves (832,296) 0
(Increase) decrease in:
Inventory 924,502 (1,516,839)
Accounts receivable (69,640) (1,150,328)
Prepaids and other current assets 29,403 (477,613)
Increase (decrease) in:
Accounts payable 75,969 1,325,140
Accrued expenses (180,781) (205,668)
---------- -----------
Net cash provided by (used in)
operating activities 2,209,621 (5,502,020)
---------- -----------
Cash flows from investing activities:
Purchase of short-term investment 0 (41,000)
Purchase of property and equipment (6,912) (180,741)
Cash paid for acquisition 0 (183,907)
---------- -----------
Net cash provided by (used in)
investing activities (6,912) (405,648)
---------- -----------
Cash flows from financing activities:
Proceeds from issuance of common and
preferred stock, net 1,633,050 5,118,501
Repayment of notes payable ( 576,683) (75,000)
Proceeds from notes payable 150,000 896,587
Repayment of long-term debt 0 (164,505)
---------- -----------
Net cash provided by financing
activities 1,206,367 5,775,583
---------- -----------
Net increase(decrease) in cash 3,409,076 (132,085)
---------- -----------
Cash and cash equivalents at
beginning of period 188,867 1,316,406
---------- -----------
Cash and cash equivalents at end of period $3,597,944 $ 1,184,321
========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for interest $ 45,000 $ 5,632
========== ===========
Supplemental disclosures of non-cash investing
and financing activities:
Issuance of common stock for conversion of debt $ 796,482 $ 973,207
========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
7
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(1) General:
The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements and, in the
opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation for each of the
periods presented. The results of operations for interim periods are not
necessarily indicative of results to be achieved for full fiscal years.
As contemplated by the Securities and Exchange Commission (SEC) under
item 310(b) of Regulation S-B, the accompanying consolidated financial
statements and related footnotes have been and do not contain certain
information that will be included in the Company's annual consolidated
financial statements and footnotes thereto. For further information, refer
to the consolidated financial statements and related footnotes for the year
ended December 31, 1996.
The Company is presently engaged in formulating, marketing and
distributing fat-free, low fat and reduced fat foods.
(2) Summary of significant accounting policies:
(a) The accompanying consolidated financial statements include the
accounts of the Company and its subsidiaries. All material
intercompany accounts and transactions have been eliminated. The
subsidiaries have had no operations since 1994.
(b) Inventories are stated at the lower of cost (first-in, first-out
basis) or market.
(c) Prepaid assets include product introduction expenses, which are
recorded at cost and amortized over the economic life thereof, but
not in excess of twelve months, 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 are composed of debt issuance costs and
acquisition costs of Auburn Farms and Natures Warehouse trademarks,
prepaid professional services contracts and are recorded at cost. The
acquisition costs associated with trademarks are being amortized on a
straight-line basis over twenty years. All other intangible assets
are being amortized on a straight-line basis over periods not
exceeding five years.
8
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(f) For the purpose of cash flow, the Company considers all highly
liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
(g) Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
(h) For the three and nine months ended September 30, 1997, earnings
per share has been computed using the average number of common
shares outstanding during the period and common stock equivalents,
consisting of stock options, calculated by using the treasury
stock method.
Common stock equivalents are anti-dilutive for the three and nine
months ended September 30, 1996. Dividends on cumulative
preferred stock are not material.
(3) Inventories:
Inventories are stated at the lower of cost (first-in, first-out
basis) or market. Market-based valuations are based upon estimates and
assumptions, and are generally limited to slow moving product offerings.
Inventory consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Finished Goods $ 68,390 $ 1,071,180
Packaging and Raw Material 551,427 473,140
Less: Reserves for slow moving and spoilage (350,828) (1,183,124)
---------- -----------
$ 268,989 $ 361,196
========== ===========
</TABLE>
During the three and nine months ended September 30, 1997 and during
the three and nine months ended September 30, 1996, charges included in
cost of sales related to inventory reserves were $427,345 and $863,109, and
$0, and $0, respectively.
(4) Prepaid Expenses and Other Current Assets:
Prepaid expenses and other current assets as of September 30, 1997 and
December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Deposits $ 1,600 $ 10,000
Product introduction costs 15,653 177,865
Insurance 45,253 14,897
Consulting 151,194 -0-
Other prepaids 49,027 68,969
-------- --------
Total Prepaid and Other Current Assets $262,727 $271,731
======== ========
</TABLE>
9
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(5) Accrued Expenses
Accrued expenses and other current liabilities as of September 30, 1997 and
December 31, 1996 are detailed as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Accrued Compensation $ 0 $ 65,570
Accrued Interest Payable 0 436
Accrued Legal Fees 43,000 70,811
Accrued Consulting Fees 0 22,500
Accrued Commissions 89,276 -0-
Accrued Advertising/Promotion 272,716 407,359
Other Accrued Expenses 203,439 222,536
-------- --------
$608,431 $789,212
======== ========
</TABLE>
(6) Notes Payable - Bank:
The Company is no longer in default with respect to certain financial
covenants under the terms of its agreement with the secured lender. For
financial statement purposes, the entire amount is classified as a current
liability, however, due to the financial uncertainty of the business.
(7) Note Payable to Shareholders:
Note payable to shareholders 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.
(8) Stockholders' Equity:
During the nine-month period ended September 30, 1997, the following
common stock transactions occurred, all of which were valued at fair
market:
a. The Company issued 70,000 shares at a value of $1.125 per share as
settlement for a contract dispute.
b. The Company issued 20,000 shares at a value of $1.125 per share
upon the exercise of an option granted to a former employee as
compensation for consulting services and past unpaid accrued vacation.
10
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
c. The Company issued 183,100 shares at $1.00 per share upon the exercise
of options granted under the Non-Incentive Stock Option Plan. Non-
officers of the Company paid the exercise price of such options
through the application of accrued payroll and other various expenses.
d. The Company entered into a subscription agreement in February, 1997
with an investor who purchased 500,000 shares of common stock at $1.00
per share. At funding, a 10% fee was paid to a facilitator and
warrants were given to that same facilitator to purchase 125,000
shares of common stock at a price of $1.375 per share. During the
period ended September 30, 1997, the Company reduced the exercise
price of these options to $1.00.
e. The Company entered into a subscription agreement in April 1997
with an unrelated investor for $500,000 of 1997 Series A Preferred
Stock. The preferred stock has a cumulative dividend rate of 6% with
no voting rights. The conversion price is the lower of $1.25 per
share or a 30% discount to the market price at the time of conversion.
The preferred stock is convertible at any time. For accounting
purposes, the original issue discount of $214,286 is being treated as
a deemed dividend. The facilitator received a 10% fee from the
proceeds, as well as warrants to purchase 35,000 shares of common
stock at an exercise price of $1.00 per share.
f. The Company issued 185,600 shares at $0.875 per share upon the
exercise of options granted under the Non-Incentive Stock Option Plan.
Non-officers of the Company exercised such options through the
application of accrued payroll and other various expenses.
g. The Company entered into a subscription agreement in May 1997 with
another investor for $250,000 of 1997 Series A Preferred Stock. The
series has a cumulative dividend rate of 6%, no voting rights, and is
convertible at any time at the lower of $1.25 or a 30% discount to the
market price at the time of conversion. For accounting purposes, the
original issue discount of $54,878 is being treated as a deemed
dividend. The facilitator received a 10% fee from the proceeds and a
warrant to purchase 17,500 shares of common stock at an exercise price
of $1.00 per share.
h. The Company issued 10,000 shares of common stock at a value of $1.06
per share upon the exercise of an option granted to a former employee
as compensation for consulting services and related expenses.
i. On July 16, 1997, the Company accepted a cashless exchange of expenses
for options on 30,000 shares of common stock valued at $1.00 per share
to a consultant.
11
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
j. The Company issued 418,086 shares of common stock at $1.25 per share
to various providers of services under an S-8 filing.
k. 100,000 shares of common stock at $.93 per share was issued to a
professional firm for previous services rendered.
l. On August 28, the Company issued 255,600 shares of common stock at
$.93 per share in compensation for services rendered.
m. The Company issued a cashless option of 60,000 shares of common stock
valued at $.93 per share for consulting services.
(9) 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 $6,750,000 as proceeds from the Keebler arbitration, it
must realize a satisfactory level of profitability from its current and
future operations in order to remain a viable entity. The Company's
auditors have included an explanatory paragraph in their report for the
year ended December 31, 1996, indicating there is substantial doubt
regarding the Company's ability to continue as a going concern. The
Company anticipates losses from operations during the remainder of 1997.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of any uncertainty.
(10) Legal Proceedings
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in
certain of the Company's private placements, initiated an action in
Superior Court, Orange County, California against his stockbroker, two
national brokerage firms, several companies in which he had invested; and,
certain of those company's officers. Included among the defendants were
the Company and its then Chief Executive Officer. The complaint seeks
damages in an unspecified amount in excess of $500,000 and punitive damages
in an unspecified amount in excess of $5,000,000. The Court has dismissed
the class action claims as to the Company and granted a motion that the
claims against the brokerage firms and associated persons must be submitted
to arbitration. The Plaintiff has appealed that ruling. The Company
denies any liability to the plaintiff and intends to vigorously defend this
action. The Company notes that the plaintiff sold a portion of the
securities he purchased from the Company, realizing a profit; that the
balance of the securities
12
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
became salable under Rule 144; and that, if sold, the Plaintiff could
recoup his entire investment on his $75,000 investment.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI)
under the FPA, the Company acquired certain rights of AFI against its co-
packer and against Barbara's Bakery. The Company is pursuing these rights,
and in May 1996, initiated an action alleging Lanham Act violations,
misappropriation of trade secrets, unfair competition and related claims.
The defendants have filed counterclaims against the Company and Auburn
Farms alleging various tort and contract claims. Counsel for Vitafort is
reviewing the case to determine the best course of action to continue
forward.
On October 9, 1996, a complaint was filed in Superior Court, the County of
Los Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a
Delaware Corporation; Mark Beychok and Does 1-50 inclusive." The complaint
alleges Breach of Oral Contract, Breach of Written Contract, and other
similar claims arising out of the consulting relationship that previously
existed between the Company and Mr. Ellis. The Complaint seeks damages in
an unspecified amount. The court has sustained, without leave to amend, a
demurrer to the claims against Mark Beychok and sustained the demur, with
leave to amend, against the Company. Mr. Ellis has filed an amended
complaint against the Company. The Company is in the process of document
discovery and is defending the action vigorously.
(11) Recent Financial Developments
On Friday, June 20, 1997, the Company received notice of the interim award
under the arbitration with the Keebler Company. The award was for
$5,983,923 as well as compensation for all legal fees and costs associated
with the arbitration proceedings. Based on the agreement with ATCOLP
INVESTMENT PARTNERS (the "Lender"), the Company agreed to pay the Lender a
sliding percentage of the proceeds from the settlement in exchange for
advancing $300,000 to the Company to meet the litigation expenses.
On Tuesday, July 15, the Company received $6,750,000 in full and final
settlement. Of that amount, $1,055,608 was paid for legal fees and costs,
plus $1,236,882 to ATCOLP INVESTMENT PARTNERS under the existing agreement.
Additionally, the Company was able to cancel $140,829 in debt due to the
Keebler Company. The amount of the award, $5,983,000, has been reported as
income, under the heading litigation, net of costs, while the difference
between the $6,750,000 award and the $5,983,000 recovery, or $767,000, has
been treated as a reimbursement of expenses in the general and
administrative expenses for the three month period ended, September 30,
1997.
13
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995:
EXCEPT FOR HISTORICAL FACTS, ALL MATTERS DISCUSSED IN THIS REPORT WHICH ARE
FORWARD LOOKING INVOLVE A HIGH DEGREE OF RISKS AND UNCERTAINTIES. POTENTIAL
RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, COMPETITIVE PRESSURES
FROM OTHER FOOD COMPANIES AND WITHIN THE GROCERY INDUSTRY, ECONOMIC CONDITIONS
IN THE COMPANY'S PRIMARY MARKETS AND OTHER UNCERTAINTIES DETAILED FROM TIME TO
TIME IN THE COMPANY'S SECURITIES EXCHANGE COMMISSION FILINGS.
Nine Months and Three Months Ended September 30, 1997 and 1996
- --------------------------------------------------------------
Results of Operations:
The net proceeds from the damage award in the Keebler Company arbitration
has eliminated, at least in the short term, the liquidity problem that has
plagued the Company over the past year. Currently, the Company is
negotiating payout terms with certain vendors and reestablishing credit
terms with its current co-packers to improve its inventory levels to meet
customer requirements while at the same time prolonging its current cash
position.
The Company has reduced its cost of sales by centralizing the warehousing
of its products in a single location and negotiated lower rates with
existing manufacturers or by selecting another competent less expensive
producer. In addition, the Company increased prices on the majority of its
products effective August 1 of this year and changed its terms of sale to
F.O.B. the Company's warehouse. The Company also eliminated the cash
discount for prompt payment since most customers were taking the discount
beyond the terms. Finally, the Company will be changing the Vitafort trade
name and the Fudgets and Caketts product names due to the problems in 1996.
These steps, coupled with improvements in subcontract manufacturing quality
control and quality assurance monitoring improvements in Company internal
control and communications with respect to product returns and deductions,
should improve the Company's prospects to achieve profitability.
Although the cash position has improved, the problems associated with the
lack of resources in the past continue to hamper customer relations through
the impact of returned products on the ability of the Company to collect
its trade accounts receivable in full, the position of some customers who
will continue to do business with the Company only after the past amounts
due them for advertising and returns are settled in full, and other
customers who are waiting to see new products introduced by the Company
before agreeing to continue to be a customer of the Company.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
Since the cash infusion, the Company has focused on continuing to repair
the relationships with its customers and vendors by insuring that the
records of both organizations are in agreement, establishing a payment
schedule, if necessary, agreeable to both parties, and using this
communication to open the relationship to future business. In addition,
the Company is using its resources to prepare for the new products that it
will need to launch to maintain its position in the market and improve its
visibility with the ultimate customer, the consumer.
Net Sales:
For the three month period ended September 30, 1997, net sales were
$322,116 compared to $2,104,314 for the same period in 1996, a decrease of
$1,782,198 from the previous year. The lack of customer confidence in some
of the products, mainly Fudgets and Caketts, is reflected in the decline in
sales of those products from $1,342,334 for the three months ended
September 30, 1996 to $151,989 for the same period in 1997. Additionally,
the cash flow constraints imposed upon the Company during the first part of
1997 has contributed to the reduction of sales for the nine month periods
from $4,408,665 in 1996 to $1,497,223 in 1997, a decrease of $2,911,442.
The Toast'N Jammers brand of low fat toaster pastries continues to
represent almost one-half of the total net sales for the three months ended
September 30, 1997 and over one-third for the nine month period ended
September 30, 1997.
Gross Profit:
Gross profit increased from 9.1% of net sales for the three months ended
September 30, 1996 to 39.1% for the same three-month period in 1997.
Absolute dollar amounts, however, declined from $191,580 to $125,890 for
the three-month periods ending September 30, 1996 and 1997 respectively.
The overall increase in the Company's gross profit margin reflects the
continued effort to maintain overall profit targets without major discounts
and allowances. For the nine months ended September 30, 1996 the gross
profit margin was $420,537 or 9.5% of net sales compared to $418,369 or
27.9% for the same period ended September 30, 1997. This increase in gross
margin as a percent of net sales continues to reflect the Company's effort
toward improving this area.
Operating Expenses:
Overall expenses have been reduced due to the cost control procedures
implemented by the Company. In addition, the reimbursement of $767,000 in
this quarter of legal fees and costs associated with the Keebler
arbitration award is reflected in the reduction in general and
administrative expenses. The reduction in both product development and
sales and marketing expenses reflects the effort by the Company in these
areas to increase
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
performance without significant expenditures of resources. The reduction
in general and administrative expenses would have been greater had the
final legal fees and associated costs relating to the Keebler arbitration
not been included. Since the award, the Company is beginning to both
refocus its efforts in the product development area to introduce new
products and in the sales and marketing area as it reestablishes its
customer, broker, and support organizations.
Product Development (Research and Development):
During 1997, the Company has been forced to substantially reduce its
expenditures in this area due to the financial constraints in the first
half of the year. This has resulted in a drop in expenditures of $514,121
for the nine months ended September 30, 1997 compared to the same period of
1996. The drop in expenses are primarily in salaries, travel, and
laboratory research and development where the expenses in 1996 were
$137,665 for the three months ended September 30, 1996 compared to $0 for
the same period in 1997. This was partially offset, however, by the
increase in consulting expenses during the three month period in 1997 which
were $57,925 more than the same period of 1996. As a result of the
Keebler award, the Company is again starting to apply resources to this
area both to improve or modify existing products and to introduce new
products during the end of 1997 and 1998 and 1999. However, in keeping
with its new strategies, it will seek to utilize co-packers and their
resources to improve and develop products so that the Company's costs may
be minimized.
Sales and Marketing:
The Company's expense levels in these disciplines continues to be reduced
as a result of both lower net sales volume and concerted effort by
management to continue to eliminate expenses where appropriate. For the
nine months ended September 30, 1997 expenses were $996,242 compared to
$1,690,024 for the same nine month period in 1996, a decrease of $693,782
from 1997 to 1996. The majority of these cost reductions are in salaries,
consultants and travel, $361,500; freight of $59,335; sales promotions,
$242,708; commissions and royalties of $101,020; and postage and
communication costs of $52,463. These reductions were offset by the
increase in product introduction cost of $197,008. For the three month
period ended September 30, 1997, the total sales and marketing expenses
were $257,016 compared to $580,798 for the same period of 1996, a decrease
of $323,782. The reduction was primarily in the areas directly related to
volume of net sales, such as commissions and royalties, freight out, sales
promotions, and travel. The Company is beginning to reenter the
distribution network by reestablishing relationships with existing
customers, adding new brokers and customers as appropriate, and starting
the process of improving its customer relations with all customers.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
General and Administrative:
For the nine months ended September 30, 1997, expenses were $1,894,114
compared to $1,603,775 for the nine months ended September 30, 1996, an
increase of $290,339. The majority of the increase in expenses are in the
professional services area, particularly legal expenses totaling $1,055,608
less the Keebler arbitration reimbursement of $767,000. The professional
services increase is almost directly related to the litigation defenses of
the Company, primarily for the Keebler arbitration. For the three months
ended September 30, 1997 general and administrative expenses were $770,227
before the award of $767,000 which resulted in a balance of $3,227
compared to $573,929 for the three month period ended September 30, 1996.
The increases in 1997 over 1996 of $192,298 are in the areas of
amortization and depreciation of $30,564; an increase in bad debts of
$45,000 from an employee due to the filing of personal bankruptcy; and the
increase in insurance cost of $65,666.
Other income (expense) including interest and litigation recovery, net of
expenses:
Interest expense reflects the continuing cost of the line of credit with
Coast Business Credit, the primary lender. Upon receipt of the Keebler
arbitration, the Company immediately invested the proceeds in short-term
government securities, with the approval of the Board of Directors. The
interest income for the three months ended September 30, 1997 reflects the
receipts from these short-term investments.
Upon the Keebler arbitration award, the Company has recorded the $5,983,000
as income under the heading "litigation recovery, net of costs." In
addition, the Company was able to cancel outstanding debt in the amount of
$140,829 due to the Keebler Company and incurred and paid $1,236,882 to
ATCOLP INVESTMENT PARTNERS under the existing agreement with them for the
advancement of certain funds to pay the litigation expenses.
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1997 1996
---------- ------------
<S> <C> <C>
Net Cash Generated (Used) for Operations $1,413,139 $(5,502, 020)
Net Cash Used for Investing Activities (6,912) (405,648)
Net Cash Provided by Financing Activities 2,002,849 5,775,583
Working Capital (Deficit) 3,480,039 (875,965)
</TABLE>
17
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AS RESULTS OF OPERATIONS
(Unaudited)
The Keebler award has eliminated the short-term cash requirements of the
Company and has allowed the Company the time to begin increasing its
efforts in the areas of product development and sales and marketing. In
addition, the Company has negotiated long term payment schedules with
certain of its old vendors, which will allow it to further conserve cash.
Although the cash position has improved, the long-term financial viability
still remains in doubt due to the lack of customer acceptance of the
Fudgets and Caketts and the loss of distribution and shelf space due to the
past inability to ship product in a timely manner. While the Company is
now able to ship product timely, the rebuilding of the customer
relationship and the continuing effort in the product development function
will continue to adversely impact the Company's liquidity in the near term.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In December 1994, Lloyd Gaunt, who invested an aggregate of $75,000 in certain
of the Company's private placements, initiated an action in Superior Court,
Orange County, California against his stockbroker, two national brokerage firms,
several companies in which he had invested; and, certain of those company's
officers. Included among the defendants were the Company and its then Chief
Executive Officer. The complaint seeks damages in an unspecified amount in
excess of $500,000 and punitive damages in an unspecified amount in excess of
$5,000,000. The Court has dismissed the class action claims as to the Company
and granted a motion that the claims against the brokerage firms and associated
persons must be submitted to arbitration. The Plaintiff has appealed that
ruling. The Company denies any liability to the plaintiff and intends to
vigorously defend this action. The Company notes that the plaintiff sold a
portion of the securities he purchased from the Company, realizing a profit;
that the balance of the securities became salable under Rule 144; and that, if
sold, the Plaintiff could recoup his entire investment on his $75,000
investment.
In connection with the acquisition of assets of Auburn Farms, Inc., (AFI) under
the FPA, the Company acquired certain rights of AFI against its co-packer and
against Barbara's Bakery. The Company is pursuing these rights, and in May
1996, initiated an action alleging Lanham Act violations, misappropriation of
trade secrets, unfair competition and related claims. The defendants have filed
counterclaims against the Company and Auburn Farms alleging various tort and
contract claims. Counsel for Vitafort is reviewing the case to determine the
best course of action to continue forward.
On October 9, 1996, a complaint was filed in Superior Court, the County of Los
Angeles, in an action entitled "Eloy Louis Ellis vs. Vitafort, Inc., a Delaware
Corporation; Mark Beychok and Does 1-50 inclusive." The complaint alleges
Breach of Oral Contract, Breach of Written Contract, and other similar claims
arising out of the consulting relationship that previously existed between the
Company and Mr. Ellis. The Complaint seeks damages in an unspecified amount.
The court has sustained, without leave to amend, a demurrer to the claims
against Mark Beychok and sustained the demur, with leave to amend, against the
Company. Mr. Ellis has filed an amended complaint against the Company. The
Company is in the process of document discovery and is defending the action
vigorously.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarters ended September 30, 1997, the Company obtained written
consent of the holders of a majority of its issued and outstanding common
shares, which the Company has the authority to issue, from 9,000,000 shares to
30,000,000 shares. The holders of 3,218,102 common shares gave their consent to
the proposal; the holders of 182,761 common shares did not consent; and the
holders of 20,655 common shares abstained from voting based on the written
consents received by the Company's transfer agent through July 7, 1997.
19
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None
(b) Reports on Form 8-K.
Report on Form 8-K dated June 19, 1997, reporting the
interim award in the Keebler Arbitration as an "Item 5.
Other Event."
20
<PAGE>
VITAFORT INTERNATIONAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VITAFORT INTERNATIONAL CORPORATION
----------------------------------
(Company)
/s/ Mark Beychok
-----------------------
Mark Beychok
Chief Executive Officer
/s/ Jack B. Spencer
-----------------------
Jack B. Spencer
Chief Operating Officer
Chief Financial Officer
Date: January 16, 1998
21
