<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A2
[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, 1999
[ ] 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, 1998 (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 December 16, 1999 is 18,127,346.
1
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VITAFORT INTERNATIONAL CORPORATION
CONTENTS
PART 1 - FINANCIAL INFORMATION
_____________________________________________________________________________
<TABLE>
<CAPTION>
<S> <C>
ITEM 1. Consolidated Financial Statements:
Balance Sheets - September 30, 1999 and December 31, 1998 3
Statements of Operations -
Three-Month Periods Ended September 30, 1999 and 1998 5
Nine-Month Periods Ended September 30, 1999 and 1998 6
Statement of Stockholders' Equity - 7
Nine Month Period Ended September 30, 1999
Statements of Cash Flows - 8
Nine-Month Periods Ended September 30, 1999 and 1998
Notes to the Financial Statements 9-12
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-17
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 18-19
ITEM 5. Other Information 19
Signature 20
2
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VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1999 and December 31, 1998
</TABLE>
<TABLE>
<CAPTION>
ASSETS
September 30,
1999 December 31,
(Unaudited) 1998
---------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $1,327,033 $ 903,649
Marketable securities 55,000 250,000
Accounts receivable, less allowance
for doubtful accounts of $82,106
and $41,775 538,441 929,006
Other Receivables 96,659 -
Inventories 519,749 196,603
Prepaid expenses and other current assets 544,084 132,509
---------- -----------
Total Current Assets 3,080,966 2,411,767
Equipment
Manufacturing equipment 110,824 19,881
Furniture and equipment 105,160 105,160
Computer equipment 209,574 209,574
---------- -----------
425,558 334,615
Less accumulated depreciation (323,039) (271,411)
---------- -----------
102,519 63,204
Other Assets
Intangible assets, net of accumulated
amortization of $121,224 and $66,236 781,148 911,684
Other assets 875 875
---------- -----------
Total Other assets 782,023 912,559
---------- -----------
$3,965,508 $ 3,387,530
========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
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VITAFORT INTERNATIONAL CORPORATION & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of September 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30,
1999 December 31,
(Unaudited) 1998
------------ -----------
<S> <C> <C>
Current liabilities
Notes payable - bank - $ 283,689
Notes payable - other $1,790,493 958,724
Convertible notes payable 375,000 600,000
Accounts payable 825,868 1,054,079
Accrued expenses 385,756 130,303
------------- -----------
Total Current Liabilities 3,377,117 3,026,795
Long-term debt due to a shareholder - 2,065,000
Minority interest 183,666 -
Stockholders' equity
Series B, 10% Cumulative Convertible
Preferred Stock, $.01 par value; authorized
110,000 shares; issued and outstanding
1,000 shares, aggregate liquidation
preference of $50,000 10 10
Series C, Convertible Preferred Stock, $.01
par value; authorized 450 shares; issued
and outstanding 50 shares, aggregate
liquidation preference of $50,000 1 1
Common stock, $.0001 par value; authorized
30,000,000 shares; issued and outstanding
17,517,288 and 12,056,428 shares 1,752 1,206
Additional paid-in-capital 26,877,859 24,064,868
Accumulated deficit (26,474,897) (25,770,350)
------------- -----------
Total Stockholders' Equity (Deficit) 404,725 (1,704,265)
------------ -----------
Total Liabilities & Stockholders' Equity $ 3,965,508 $ 3,387,530
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
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VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
1999 1998
--------- ----------
<S> <C> <C>
Net revenues $ 738,437 $ 805,511
Cost of sales 524,677 403,092
--------- ----------
Gross profit 213,760 402,419
Operating expenses
Research and development 34,159 140,667
Sales and marketing 496,873 621,708
General and administrative 520,616 647,295
--------- ----------
Total operating expenses 1,051,648 1,409,670
Loss from operations (837,888) (1,007,251)
Other income (expense)
Interest income 6,000 2,834
Litigation recovery, net of costs 60,632 -
Minority interest in net loss
of consolidated subsidiary 6,835
Interest expense (36,871) (50,911)
---------- -----------
Total other income (expense) 36,596 (48,077)
Income (loss) before income tax expense (801,292) (1,055,535)
State income tax expense 207
-------- ----------
Net loss after tax, before extraordinary item (801,292) (1055,535)
Extraordinary item 42,276 -
---------- -----------
Net income (loss) (759,016) (1,055,535)
Deemed dividend to preferred shareholders - (279,250)
---------- -----------
Net income (loss) allocable to common
shareholders (759,016) (1,334,785)
======== ===========
Basic and diluted net income (loss)
per common share:
Loss before extraordinary items (0.06) (0.18)
Extraordinary gain on extinguishment of debt 0.01 -
-------- -----------
Basic and diluted loss per common share $ (0.05) $ (0.18)
======== ==========
Basic and diluted weighted average shares
of common stock 14,359,168 7,547,094
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
5
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VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- ---------
<S> <C> <C>
Net revenues $1,851,685 $1,555,505
Cost of sales 1,161,653 951,407
---------- --------
Gross profit 690,032 604,098
Operating expenses
Research and development 56,315 280,251
Sales and marketing 1,279,950 1,368,052
General and administrative 1,394,384 2,121,027
---------- ----------
Total operating expenses 2,730,649 3,769,330
Loss from operations (2,040,617) (3,165,232)
Other income (expense)
Interest income 6,498 38,851
Litigation recovery, net of costs 1,260,632 (60,000)
Minority interest in net loss of
consolidated subsidiary 6,835
Interest expense (253,723) (149,202)
---------- ----------
Total other income (expense) 1,020,242 (170,351)
Income (loss) before income tax expense (1,020,375) (3,335,583)
State income tax expense - 3,407
----------- ----------
Net loss after tax, before extraordinary item (1,020,375) (3,338,990)
Extraordinary items 315,828 -
---------- ----------
Net income (loss) (704,547) (3,338,990)
Deemed dividend to preferred shareholders - (629,148)
----------- ----------
Net income (loss) allocable to common
shareholders (704,547) (3,968,138)
=========== ==========
Basic and diluted net income (loss) per
common share:
Loss before extraordinary item (0.07) (0.55)
Extraordinary gain on extinguishment of debt 0.02 -
---------- -----------
Basic and diluted loss per common share $(0.05) $(0.55)
========== ==========
Basic and diluted weighted average shares of
of common stock 14,785,893 7,178,791
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements
6
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VITAFORT INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited)
Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Series B Convertible Series C Convertible
Preferred Stock Preferred Stock
Shares Amount Shares Amount
----------- ---------- ----------- ---
<S> <C> <C> <C> <C>
Balance, January 1, 1999 1,000 $ 10 50 $ 1
Exercise of stock options
Contribution to equity of
Hollywood Partners.com
by shareholders
Contribution to paid-in
capital by shareholder
Net Income
---------- ---------- ---------- -----
Balance, September 30, 1999 1,000 $ 10 50 $ 1
</TABLE>
<TABLE>
<CAPTION>
Additional
Common Stock Paid-in
Shares Amount Capital
----------- ----------- ------------
<S> <C> <C> <C>
Balance, January 1, 1999 12,056,428 $ 1,206 $24,064,868
Exercise of stock options 5,460,860 546 974,266
Contribution to equity of
Hollywood Partners.com
by shareholders 317,500
Contribution to paid-in
capital by shareholder 1,521,225
Net Income
------------ ----------- ------------
Balance, September 30, 1999 17,517,288 $ 1,752 $(26,877,859)
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Deficit Total
----------- -----------
<S> <C> <C>
Balance, January 1, 1999 (25,770,350) (1,704,265)
Exercise of stock options 974,812
Contribution to equity of
Hollywood Partners.com
by shareholders 317,500
Contribution to paid-in
capital by shareholder 1,521,225
Net Income (704,547) (704,547)
------------ -----------
Balance, Sept. 30, 1999 $(26,474,897) $404,725
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
VITAFORT INTERATIONAL CORPORTION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents
Cash flows from operating activities:
Net income(loss) $ (704,547) $(3,338,990)
Adjustments to reconcile net income to
Cash and cash equivalents provided
By (used in) operating activities
Extraordinary item (315,827) -
Depreciation and amortization 119,798 136,207
Minority interest in net loss of
consolidated subsidiary (6,835) -
Stock issued for services 206,878 214,706
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable, net 390,566 105,500
Inventories (323,147) (332,522)
Prepaid expenses and other current assets (237,024) 57,983
Other assets (96,659) (875)
Increase (decrease) in:
Accounts payable 54,344 503,584
Accrued expenses 240,453 (284,188)
----------- ------------
Cash and cash equivalents used in operating
activities (672,001) (2,938,595)
Cash flows from investing activities:
Purchase of equipment (90,942) (42,392)
Advances to related parties - (468)
Advances to Global International - (285,385)
Cash acquired through sale of marketable
securities 195,000 -
Cash acquired through acquisition of Global
International Sourcing - 75,462
----------- ------------
Cash and cash equivalents provided (used)
in investing 104,058 (252,783)
</TABLE>
8
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VITAFORT INTERATIONAL CORPORTION & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of stock 125,000 499,000
Proceeds from notes payable, short term 607,517 720,726
Contribution to equity of subsidiary by
Shareholders 500,000 -
Repayments of notes payable (241,190)
----------- -----------
Cash and cash equivalents provided (used) by
financing activities 991,327 1,219,726
Increase (decrease) in cash and cash
equivalents 423,384 (1,971,652)
Cash and cash equivalents, beginning of period 903,649 2,199,036
---------- ------------
Cash and cash equivalents, end of period $1,327,033 $ 227,384
========== ===========
Supplemental disclosure of cash flow
information
Cash paid during the period for:
Interest $ 253,723 $ 149,202
Income taxes $ - $ 3,407
Supplemental disclosure of non-cash operating,
investing, and financing activities
Stock issued for accounts payable $ 150,962 $ 519,692
Stock issued for prepaid consulting services 72,447 $ 102,602
Stock issued for repayment of debt $ 543,775 $ -
Stock issued for acquisition of marketing
contract $ - $ 43,125
Debt transferred to capital $1,521,225
Acquisition of Global International Sourcing:
Assets acquired, net of cash $ - $ 535,786
Liabilities assumed, including $522,328 due
to Vitafort $ - $ 829,461
Contribution to equity of subsidiary by
Shareholders allocated to minority interest $ 182,500 $ -
</TABLE>
See accompanying notes to consolidated financial statements
9
<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 included in the Company's Annual
Report filed on Form 10-KSB for the year ended December 31, 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.
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(g) For the three and nine months ended September 30, 1999, basic loss per
share has been computed using the weighted average number of common shares
outstanding during the period. Dividends on cumulative preferred stock are
not material.
NOTE 3 - INVENTORIES
Inventories are stated at the lower of cost (first in, first out) or
market. Inventory consists of the following:
September 30, 1999 December 31, 1998
------------------ -----------------
Finished goods $ 320,457 $ 118,524
Packaging and raw material 199,292 78,079
--------- ----------
$ 519,749 $ 196,603
======== =========
NOTE 4 - EXTRAORDINARY ITEM
Extraordinary item reflects the forgiveness by vendors and consultants of
$315,828. As of September 29,1999, Terra forgave debt in the amount of
$1,521,225 due to it by the Company. Although forgiveness of debt is normally
presented as an extraordinary item, since Terra is a related party, generally
accepted accounting principles requires the forgiveness be recorded as a
contribution to capital.
NOTE 5 - STOCKHOLDERS' EQUITY
During the nine month period ended September 30, 1999, the holders of stock
options which were granted in 1998 at fair market value to purchase
5,460,860 shares of stock exercised these options as follows:
(a) 1,550,316 shares at prices ranging from $0.085 to $1.00 in settlement of
$150,962 of debts previously recorded as a liability.
(b) 765,500 shares at prices ranging from $0.085 to $0.40 in exchange for
$91,273 of services rendered.
(c) 396,187 shares at prices ranging from $0.10 to $0.25 as prepayment for
$72,447 of future services to be rendered to the Company.
(d) 1,235,857 shares at $0.44 to convert the remaining convertible debt of
$543,775 owed to Terra Healthy Living, Ltd.
(e) The Company issued 1,013,000 shares at prices ranging from $0.085 to
$0.667 as additional compensation of $115,605 to various employees.
(f) A shareholder exercised 500,000 options at a price of $0.25.
NOTE 6 - LINE OF CREDIT
In June 1999, the Company paid off the balance on its line of credit, but the
assets are still collateralized. As of September 30, 1999 the Company does
not have a line of credit.
11
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NOTE 7 - GOING CONCERN
The Company has prepared the financial statements included herewith assuming
that the Company will continue as a going concern. Although the Company
raised additional capital in 1999, it has not generated sufficient revenue
producing activity to sustain its operations. Accordingly, the Company 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, 1998 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.
NOTE 8 - LITIGATION
The Company is subject to pending claims and litigation, the most significant
of which are discussed below.
In December 1994, Lloyd Gauntt, 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, Steve Westlund. 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 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 appealed that ruling and the appellate court
affirmed the lower court ruling. The Company denies any liability to the
plaintiff and intends to vigorously defend this action in the event the
plaintiff seeks to pursue the arbitration. 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 April, 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald
Wohl, a Director of the Company at the time, is the general partner, for a
loan in the amount of $300,000 (the "Loan"), to fund the payment of legal
fees in connection with the Company's arbitration against The Keebler
Company. The loan was evidenced by a note which bears interest at the
lesser of 15% per annum or the highest rate allowed by law with recourse
solely to the net proceeds of the arbitration, if any. If the Company did
not realize any net proceeds from the arbitration, the Loan would be canceled
and the Lender would receive a warrant for the purchase of 400,000 shares of
the Company's Common Stock at $.01 per share. If the Loan was repaid through
the application of the net proceeds of the arbitration, the Lender would
receive warrants for the purchase of 200,000 shares of Common Stock at $.01
per share and a percentage of net proceeds of the arbitration equal to 15% of
the first $1,000,000 of net proceeds, but not less than $100,000; 20% of the
net proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of
net proceeds above $3,000,000. The Loan was approved by the disinterested
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<PAGE>
members of the Company's Board of Directors, and was on terms no less
favorable to the Company than were available from non-affiliated lenders. A
second proposal, from another source, contained terms which would have
required the Company to pay $2,050,000 in fees based on the actual award,
repay the $300,000 advance, and be granted a warrant for 1,000,000 shares of
the Company's common stock at an exercise price of $1.00. The loan amount of
$300,000 was repaid upon settlement of the litigation in June 1997 and
receipt of funds in July 1997, plus $1,236,883 in conformity with the agreed
upon formula, plus a warrant for 200,000 shares of the Company's common stock
at a $0.01 per share.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI")
in 1996, the Company acquired the intellectual property and certain claims of
AFI. 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 misappropriation of Auburn
Farms' principal products by Auburn Farms co-packer, New Life Bakery
("New Life") and a principal competitor, Barbara's Bakery ("Barbara's").
On August 3, 1999, the Company entered into litigation settlement
agreements with Barbara's Bakery, Inc. ("Barbara's Bakery"), New Life Bakery,
Inc. ("New Life"), Gil Pritchard, David Marson, James Marson, and Kim Walters
(collectively the "Defendants") and resolved the Company's disputes with its
insurers over coverage for Defendants' counterclaims against the Company and
Mark Beychok. The lawsuit alleged that Barbara's Bakery had violated the
Federal Lanham Act, and the California Unfair Competition Act, by improperly
marketing toaster pastries, fruit juice sweetened cookies, and fig bars, and
that New Life Bakery had breached an agreement with Auburn Farms, Inc., whose
claims Vitafort purchased in 1996. Barbara's Bakery further agreed to
withdraw from the toaster pastry business by discontinuing its Nature's
Choice Toaster Pastry line by no later than November 30, 1999. Vitafort had
secured up to $800,000 in off balance sheet financing for the litigation
against New Life and Barbara's Bakery, including $600,000 from an investment
partnership, Auburn Farms Vindication Partners, LLC, for the purpose of
paying the legal fees and expenses of the pending litigation. The fee
arrangement included a limited, partial contingency arrangement with the
Chicago-based law firm of Jenner & Block. After paying attorneys' fees and
making payments to outside investors who funded the litigation, the Company
has received approximately $1,260,000. Each party to the litigation denies all
liability and wrongdoing in connection with the claims asserted in the pending
litigation. The Company intends to use the proceeds of the settlement towards
its working capital requirements.
In addition to the items discussed in this note, the Company is a party
to legal proceedings (which generally relate to disputes between the Company
and its suppliers or customers regarding payment for products sold or
supplied) are typical for a company of its size and scope and financial
condition, and that none of these proceedings are believed to be material to
its financial condition or results of operations.
NOTE 9 - SHARE EXCHANGE AND REORGANIZATION
Effective September 13, 1999, pursuant to a share Exchange and Reorganization
Agreement, Vitafort exchanged all of the issued and outstanding shares of
Hollywood Partners, Inc., a California corporation that previously operated
as a wholly owned subsidiary of the Company. In consideration, Vitafort
received an aggregate of 5,000,000 shares of the common stock of Hollywood
Partners and is now the majority
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stockholder of the new company with 62.5% of the company's issued and
outstanding common stock. In connection with the transaction, Hollywood
Partners, Inc. changed its name to Hollywood Partners.com, Inc.
NOTE 10 - SUBSEQUENT EVENTS
On October 12, 1999, the Company retired a convertible note in the amount of
$375,000 plus accrued interest of $6,512.50.
During the months of October and November 1999, the Company received
$1,500,000 from Terra Health Living, Ltd. One million dollars was invested
in Swiss securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, 1999 and 1998
Results of Operations:
In the third quarter, management achieved the objective that it had set in
the second quarter as critical issues to resolve in order to establish a
sound base for the launch of its new products. First, the network of food
brokers was significantly improved with the appointment of Crossmark Sales
and Marketing in several markets in the Midwest, Southeast and Southwest
regions. As such, the Company increased its broker representation to over
85% of U.S. markets. At the beginning of the quarter, the broker coverage
for Vitafort's products was less than 35%. Crossmark is one of the leading
brokerage companies in the food industry and will provide the Vitafort sales
team with the support needed to execute the upcoming distribution initiatives
of the new product introductions.
During the third quarter, the Company introduced its new "Peanut Squeeze"
line, as well as the repackaged "The Wizard of Oz" marshmallows including a new
white marshmallow, to ten major grocery and leading retail chains across the
country. The initial reception of the product in the market place has been
positive and reorders have already been received from Wal-Mart and other
wholesalers.
The new sales force is aggressively continuing its presentations of "Peanut
Squeeze" and the repackaged marshmallows to supermarket chain buyers and is
generating new distribution. The initial response to both the new package
design and the while marshmallow has been very positive, as the Company
recently shipped its initial orders to Albertsons and Save-mart. Management
feels the Company has a tremendous opportunity in this category due to
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<PAGE>
certain competitive advantages and market conditions, superior tasting white
marshmallow, unique shapes and flavors, "the Wizard of Oz" branded
strategy. Management notes that the category leader recently filed for
bankruptcy protection under Chapter 11.
Management believes that, with the combined rollout of "Peanut Squeeze" and
"the Wizard of Oz," the Company will enjoy additional leverage and attention
from both its brokers and retailers.
Management believes that with the settlement of the Barbara's litigation, the
increased logistics efficiencies, the improved broker representation and the
continued rollout of the Company's two key product lines (Peanut Squeeze and
The Wizard of Oz), the Company will experience significant increase in
revenue in the upcoming months. However, no assurance can be given that
difficulties will not be encountered and increases will in fact occur.
Net Revenues:
For the three months ended September 30, 1999, net sales were $738,437
compared to $805,511 for the same period in 1998, a decrease of $67,074, or
approximately 8%. This decrease in revenue was due to delay in the
redesigning of the packaging for "The Wizard of Oz" marshmallows.
For the nine months ended September 30, 1999, net sales were $1,851,685
compared to $1,555,505 for the same period in 1998, an increase of $296,180
or 19%. This was due primarily to sales of "Peanut Squeeze" to new
distribution.
Gross Profit:
Gross profit decreased from $402,419 for the three months ended September 30,
1998 to $213,761 for the three months ended September 30, 1999, a decrease of
$188,658 or 47%. Gross profit was 29% of net revenues for the quarter ended
September 30, 1999, compared to 50% for the same period of 1998. This is due
to start-up costs incurred as a result of the launch of "Peanut Squeeze."
Gross profit increased from $604,098 for the nine months ended September 30,
1998 to $690,033 for the nine months ended September 30, 1999, an increase of
$85,935 or 14%. The increase is due to the favorable mix of selling
marshmallows and "peanut squeeze' which have lower cost of goods ratios.
Operating Expenses:
Research and Development - Total expenses for product development in the
three months ended September 30, 1999 were $34,159 compared to $140,667 for
the same period in 1998, a decrease of $106,508 or 76%. This is in line with
the Company's on-going strategy to source from existing manufacturers and use
their internal research and technical staff to develop the new products.
Research and Development - Total expenses for product development in the nine
months ended September 30, 1999 were $56,315 compared to $280,251 for the same
period in 1998, a decrease of $223,936 or 80%. This decrease was also due to
the Company's on-going strategy to source from existing manufacturers and
use their internal research and technical staff to develop the new product.
15
<PAGE>
Sales and Marketing:
Total sales and marketing expenses for the three months ended September 30,
1999 were $496,873 compared to $621,708 for the three months ended September
30, 1998, a decrease of $124,835 or 20%. This decrease in expenses was
primarily due to lower staffing costs and consultant expenses.
Total sales and marketing expenses for the nine months ended September 30,
1999 were $1,279,950 compared to $1,368,052 for the nine months ended
September 30, 1998, a decrease of $88,102 or 6%. This decrease in expenses
was due to lower staffing costs and consultant expenses.
General and Administrative:
For the three months ended September 30, 1999, total general and administrative
expenses were $520,616 compared to $647,295 for the same quarter ended
September 30, 1998, a decrease of $126,679 or 20%. Significant cost
reductions were primarily achieved in the following areas: wages, $74,000 due
to reduction of staff; consultants, $50,000; legal and accounting, $15,000.
For the nine months ended September 30, 1999, total general and
administrative expenses were $1,394,384 compared to $2,121,026 for the same
period ended September 30, 1998, a decrease of $726,643. Significant cost
reductions were primarily achieved in the following areas: legal, $468,691,
due to off balance sheet financing of a litigation; consultants, $290,810, as
part of the cost reduction program.
Other Income (Expense):
The interest expenses decreased from $50,911 for the same period in 1998 to
$36,871 in the three months ended September 30, 1999, due to the forgiveness
of interest accrued on a note payable to Terra Healthy Living, Ltd.
Interest expenses increased from $149,202 for the same period in 1998 to
$253,723 for the nine months ended September 30, 1999. This increase is due
to higher costs of lines of credit required to fund the Company's working
capital needs.
Other income was $3,110,196 for the nine months ended September 30, 1999 due
primarily to a litigation recovery from Barbara's Bakery of $1,260,632.
Extraordinary Item:
The extraordinary item recorded for the three and nine months ended September
30, 1999 is a forgiveness of debt by vendors and consultants. As of September
29, 1999, Terra forgave debt in the amount of $1,551,225 due to it by the
Company. Although forgiveness of debt is normally presented as an extraordinary
item, since Terra is a related party, generally accepted accounting principles
requires the forgiveness be recorded as a contribution to capital.
16
<PAGE>
Liquidity and Capital Resources:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1999 1998
--------- ------------
<S> <C> <C>
Net Cash Used for Operations $ (672,001) $ (2,938,595)
Net Cash Provided by (Used in)
Investing Activities 104,058 (252,783)
Net Cash Provided by (Used in) Financing
Activities 991,327 1,219,726
Working Capital (Deficit) (296,151) 55,407
</TABLE>
The Company has introduced its new line of "Peanut Squeeze" as well as the
repackaged "The Wizard of Oz" marshmallows. The initial reaction to these
products has been favorable, as new distribution is being achieved and
reorders have been received from existing customers. However, there is no
guarantee that these products, once introduced in the market, will achieve
the anticipated level of sales forecast by the Company nor reach the gross
profit margin targeted by the Company for each of the products. In addition,
while the Company's financial condition has improved over the past twelve
months primarily as a result of a litigation settlement, there is no
guarantee that new co-packers will provide the Company with credit terms.
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. While the Company has made significant improvement in rebuilding
customer relationships, the process has been slow and costly, and there is no
guarantee that these customers will purchase products from the Company
with the same enthusiasm that they have in the past.
The Company continues to suffer recurring losses from operations as of
September 30, 1999 and 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, for the
year ended December 31, 1998 which indicates there is substantial doubt about
the Company's ability to continue as a going concern.
See "Note 5" to the consolidated financial statements for additional
information. The Company is attempting to raise additional capital to meet
future working capital requirements and launch new products, but may not be
able to do so. Should the Company not be able to raise additional capital,
it may have to curtail operations.
In June 1999, the Company paid off the balance on its line of credits, but the
assets are still collateralized. As of September 30, 1999 the Company does not
have a line of credit.
Subsequent Events:
On October 12, 1999, the Company retired a convertible note in the amount of
$375,000 plus accrued interest of $6,512.50.
During the months of October and November 1999, the Company received
$1,500,000 from Terra Health Living, Ltd. One million dollars was invested
in Swiss securities.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In December 1994, Lloyd Gauntt, 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, Steve Westlund. 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 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 appealed that ruling and the appellate court
affirmed the lower court ruling. The Company denies any liability to the
plaintiff and intends to vigorously defend this action in the event the
plaintiff seeks to pursue the arbitration. 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 April, 1997, the Company agreed in principle with ATCOLP INVESTMENT
PARTNERS, a California Limited Partnership (the "Lender), in which Donald
Wohl, a Director of the Company at the time, is the general partner, for a
loan in the amount of $300,000 (the "Loan"), to fund the payment of legal
fees in connection with the Company's arbitration against The Keebler
Company. The loan was evidenced by a note which bears interest at
the lesser of 15% per annum or the highest rate allowed by law with recourse
solely to the net proceeds of the arbitration, if any. If the Company did not
realize any net proceeds from the arbitration, the Loan would be canceled and
the Lender would receive warrant for the purchase of 400,000 shares of the
Company's Common Stock at $.01 per share. If the Loan was repaid through the
application of the net proceeds of the arbitration, the Lender would receive
warrants for the purchase of 200,000 shares of Common Stock at $.01 per share
and a percentage of net proceeds of the arbitration equal to 15% of the first
$1,000,000 of net proceeds, but not less than $100,000; 20% of the net
proceeds greater than $1,000,000 and less than $3,000,000; and, 25% of net
proceeds above $3,000,000. The Loan was approved by the disinterested
members of the Company's Board of Directors, and was on terms no less
favorable to the Company than were available from non-affiliated lenders. A
second proposal, from another source, contained terms which would have
required the Company to pay $2,050,000 in fees based on the actual award,
repay the $300,000 advance, and be granted a warrant for 1,000,000
shares of the Company's common stock at an exercise price of $1.00. The loan
amount of $300,000 was repaid upon settlement of the litigation in June 1997
and receipt of funds in July 1997, plus $1,236,883 in conformity with the
agreed upon formula, plus a warrant for 200,000 shares of the Company's
common stock at a $0.01 per share.
In connection with the acquisition of assets of Auburn Farms, Inc., ("AFI")
in 1996, the Company acquired the intellectual property and certain claims of
AFI. In May 1996, the Company filed an action in federal court alleging
18
<PAGE>
Lanham Act violations, misappropriation of trade secrets, unfair competition,
conspiracy and related claims arising out of misappropriation of Auburn
Farms' principal products by Auburn Farms co-packer, New Life Bakery ("New
Life") and a principal competitor, Barbara's Bakery ("Barbara's").
On August 3, 1999, the Company entered into litigation settlement agreements
with Barbara's Bakery, Inc. ("Barbara's Bakery"), New Life Bakery, Inc. ("New
Life"), Gil Pritchard, David Marson, James Marson, and Kim Walters
(collectively the "Defendants") and resolved the Company's disputes with its
insurers over coverage for Defendants' counterclaims against the Company and
Mark Beychok. The lawsuit alleged that Barbara's Bakery had violated the
Federal Lanham Act, and the California Unfair Competition Act, by improperly
marketing toaster pastries, fruit juice sweetened cookies, and fig bars,
and that New Life Bakery had breached an agreement with Auburn Farms, Inc.,
whose claims Vitafort purchased in 1996. Barbara's Bakery further agreed to
withdraw from the toaster pastry business by discontinuing its Nature's
Choice Toaster Pastry line by no later than November 30, 1999. Vitafort had
secured up to $800,000 in off balance sheet financing for the litigation
against New Life and Barbara's Bakery, including $600,000 from an investment
partnership, Auburn Farms Vindication Partners, LLC, for the purpose of
paying the legal fees and expenses of the pending litigation. The fee
arrangement included a limited, partial contingency arrangement with the
Chicago-based law firm of Jenner & Block. After paying attorneys' fees and
making payments to outside investors who funded the litigation, the Company
will receive approximately $1,260,000. Each party to the litigation denies
all liability and wrongdoing in connection with the claims asserted in the
pending litigation. The Company intends to use the proceeds of the
settlement towards its working capital requirements.
In addition to the items discussed in this note, the Company is a party to
legal proceedings (which generally relate to disputes between the Company and
its suppliers or customers regarding payment for products sold or supplied)
are typical for a company of its size and scope and financial condition, and
that none of these proceedings are believed to be material to its financial
condition or results of operations.
ITEM 5 - Other Information
Effective September 13, 1999, pursuant to a Share Exchange and Reorganization
Agreement, the Company disposed all of the issued and outstanding shares of
Hollywood Partners, Inc. a California corporation ("Operating Company") that
previously operated as a wholly owned subsidiary of Vitafort International
Corporation. In consideration of the shares of the Operating Company, the
Company received an aggregate of 5,000,000 shares of common stock for
Hollywood Partners.com, Inc. ("HP.com"), a publicly traded Delaware
corporation. The Operating Company is now a wholly owned subsidiary of
HP.com and Vitafort is the majority stockholder of HP.com, holding
62.5% of HP.com's issued and outstanding common stock.
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/ Fred Rigaud
Fred Rigaud
Acting Chief Financial Officer
Date: December 20, 1999
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,327,033
<SECURITIES> 55,000
<RECEIVABLES> 620,547
<ALLOWANCES> 82,106
<INVENTORY> 519,749
<CURRENT-ASSETS> 3,080,966
<PP&E> 425,558
<DEPRECIATION> 323,039
<TOTAL-ASSETS> 3,965,508
<CURRENT-LIABILITIES> 3,377,117
<BONDS> 0
0
11
<COMMON> 1,752
<OTHER-SE> 404,725
<TOTAL-LIABILITY-AND-EQUITY> 3,965,508
<SALES> 1,851,685
<TOTAL-REVENUES> 1,851,685
<CGS> 1,161,653
<TOTAL-COSTS> 2,730,649
<OTHER-EXPENSES> (1,273,965)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 253,723
<INCOME-PRETAX> (1,020,375)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,020,375)
<DISCONTINUED> 0
<EXTRAORDINARY> 315,828
<CHANGES> 0
<NET-INCOME> 704,547
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.05)
</TABLE>
